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2016 (11) TMI 545 - SUPREME COURT OF INDIA

2016 (11) TMI 545 - SUPREME COURT OF INDIA - TMI - Constitutional validity of levy of entry tax - power of the state legislature - Article 304(a) of the Constitution - non-obstante clause - interpretation - concept of compensatory tax - Levy of a nondiscriminatory tax may constitute infraction of Article 301 of the Constitution of India if it impedes the freedom of trade, commerce and intercourse. All taxes which contain restrictions to trade, commerce and intercourse, discriminatory or nondiscr .....

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test is left to be determined by the regular benches hearing the matters. - States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State fall equally. Such measures if taken would not contravene Article 304(a) of the Constitution. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters. - T .....

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37-6440/1997 , C.A. NO. 3381-3400/1998, C.A. NO. 4651/1998, C.A. NO. 918/1999, C.A. NO. 2769/2000, C.A. NO. 4471/2000, C.A. NO. 3314/2001, C.A. NO. 3454/2002, C.A. NO. 3455/2002, C.A. NO. 3456-3459/2002, C.A. NO. 3460/2002, C.A. NO. 3461/2002, C.A. NO. 3462-3463/2002, C.A. NO. 3464/2002, C.A. NO. 3465/2002, C.A. NO. 3466/2002, C.A. NO. 3467/2002, C.A. NO. 3468/2002, C.A. NO. 3469/2002, C.A. NO. 3470/2002, C.A. NO. 3471/2002, C.A. NO. 4008/2002, C.A. NO. 5385/2002, C.A. NO. 5740/2002, C.A. NO. 58 .....

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004, C.A. NO. 3144/2004, C.A. NO. 3145/2004, C.A. NO. 3146/2004, C.A. NO. 4953/2004, C.A. NO. 4954/2004, C.A. NO. 5139/2004, C.A. NO. 5141/2004, C.A. NO. 5142/2004, C.A. NO. 5143/2004, C.A. NO. 5144/2004, C.A. NO. 5145/2004, C.A. NO. 5147/2004, C.A. NO. 5148/2004, C.A. NO. 5149/2004, C.A. NO. 5150/2004, C.A. NO. 5151/2004, C.A. NO. 5152/2004, C.A. NO. 5153/2004, C.A. NO. 5154/2004, C.A. NO. 5155/2004, C.A. NO. 5156/2004, C.A. NO. 5157/2004, C.A. NO. 5158/2004, C.A. NO. 5159/2004, C.A. NO. 5160/2 .....

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SLP(C) NO. 9911/2004, SLP(C) NO. 9912/2004, SLP(C) NO. 9950/2004, SLP(C) NO. 9964/2004, SLP(C) NO. 9976/2004, SLP(C) NO. 9989/2004, SLP(C) NO. 9991/2004, SLP(C) NO. 9993/2004, SLP(C) NO. 9998/2004, SLP(C) NO. 9999/2004, SLP(C) NO. 10003/2004, SLP(C) NO. 10007/2004, SLP(C) NO. 10129/2004, SLP(C) NO. 10133/2004, SLP(C) NO. 10134/2004, SLP(C) NO. 10153/2004, SLP(C) NO. 10154/2004, SLP(C) NO. 10156/2004, SLP(C) NO. 10161/2004, SLP(C) NO. 10164/2004, SLP(C) NO. 10167/2004, SLP(C) NO. 10206/2004, SLP( .....

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, SLP(C) NO. 10566/2004, SLP(C) NO. 10567/2004, SLP(C) NO. 10568/2004, SLP(C) NO. 10569/2004, SLP(C) NO. 10571/2004, SLP(C) NO. 10704/2004, SLP(C) NO. 10706/2004, SLP(C) NO. 10708/2004, SLP(C) NO. 10736/2004, SLP(C) NO. 10906/2004, SLP(C) NO. 10907/2004, SLP(C) NO. 10908/2004, SLP(C) NO. 10909/2004, SLP(C) NO. 10910/2004, SLP(C) NO. 10923/2004, SLP(C) NO. 10929/2004, SLP(C) NO. 10977/2004, SLP(C) NO. 11012/2004, SLP(C) NO. 11266/2004, SLP(C) NO. 11271/2004, SLP(C) NO. 11274/2004, SLP(C) NO. 1128 .....

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829/2007, SLP(C) NO. 14830/2007, SLP(C) NO. 14832/2007, SLP(C) NO. 14833/2007, SLP(C) NO. 14835/2007, SLP(C) NO. 14837/2007, SLP(C) NO. 14838/2007, SLP(C) NO. 14839/2007, SLP(C) NO. 14841/2007, SLP(C) NO. 14842/2007, SLP(C) NO. 14845/2007, SLP(C) NO. 14846/2007, SLP(C) NO. 14847/2007, SLP(C) NO. 15082-15085/2007, SLP(C) NO. 15807/2007, SLP(C) NO. Page 3 3 16351/2007, SLP(C) NO. 17589/2007, SLP(C) NO. 17590/2007, SLP(C) NO. 17905/2007, SLP(C) NO. 17906/2007, SLP(C) NO. 17907/2007, SLP(C) NO. 1790 .....

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. 17936/2007, SLP(C) NO. 17937/2007, SLP(C) NO. 17938/2007, SLP(C) NO. 17939/2007, SLP(C) NO. 17941/2007, SLP(C) NO. 17942/2007, SLP(C) NO. 17943/2007, SLP(C) NO. 17944/2007, SLP(C) NO. 17957/2007, SLP(C) NO. 17959/2007, SLP(C) NO. 17960/2007, SLP(C) NO. 17961/2007, SLP(C) NO. 17962/2007, SLP(C) NO. 17963/2007, SLP(C) NO. 17964/2007, SLP(C) NO. 17965/2007, SLP(C) NO. 17972/2007, SLP(C) NO. 17973/2007, SLP(C) NO. 17974/2007, SLP(C) NO. 17975/2007, SLP(C) NO. 17976/2007, SLP(C) NO. 17977/2007, SLP .....

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7, SLP(C) NO. 18053/2007, SLP(C) NO. 18054/2007, SLP(C) NO. 18055/2007, SLP(C) NO. 18056/2007, SLP(C) NO. 18057/2007, SLP(C) NO. 18058/2007, SLP(C) NO. 18059/2007, SLP(C) NO. 18061/2007, SLP(C) NO. 18062/2007, SLP(C) NO. 18063/2007, SLP(C) NO. 18064/2007, SLP(C) NO. 18065/2007, SLP(C) NO. 18066/2007, SLP(C) NO. 18067/2007, SLP(C) NO. 18068/2007, SLP(C) NO. 18069/2007, SLP(C) NO. 18073/2007, SLP(C) NO. 18074/2007, SLP(C) NO. 18075/2007, SLP(C) NO. 18076/2007, SLP(C) NO. 18077/2007, SLP(C) NO. 180 .....

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O. 19059/2007, SLP(C) NO. 19060/2007, SLP(C) NO. 19062/2007, Page 4 4 SLP(C) NO. 19064/2007, SLP(C) NO. 19066/2007, SLP(C) NO. 19068/2007, SLP(C) NO. 19070/2007, SLP(C) NO. 19071/2007, SLP(C) NO. 19072/2007, SLP(C) NO. 19073/2007, SLP(C) NO. 19074/2007, SLP(C) NO. 19076/2007, SLP(C) NO. 19077/2007, SLP(C) NO. 19094/2007, SLP(C) NO. 19095/2007, SLP(C) NO. 19096/2007, SLP(C) NO. 19099/2007, SLP(C) NO. 19100/2007, SLP(C) NO. 19101/2007, SLP(C) NO. 19102/2007, SLP(C) NO. 19103/2007, SLP(C) NO. 19104 .....

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19522/2007, SLP(C) NO. 19523-19528/2007, SLP(C) NO. 19529/2007, SLP(C) NO. 19530/2007, SLP(C) NO. 19531/2007, SLP(C) NO. 19543-19547/2007, SLP(C) NO. 20527/2007, SLP(C) NO. 20529/2007, SLP(C) NO. 20559/2007, SLP(C) NO. 21841/2007, SLP(C) NO. 21843/2007, SLP(C) NO. 21844/2007, SLP(C) NO. 21845/2007, SLP(C) NO. 21846/2007, SLP(C) NO. 21847/2007, SLP(C) NO. 21848/2007, SLP(C) NO. 21849/2007, SLP(C) NO. 21851/2007, SLP(C) NO. 21855/2007, SLP(C) NO. 21864/2007, SLP(C) NO. 21866/2007, SLP(C) NO. 2186 .....

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NO. 5407/2008, SLP(C) NO. 5408/2008, SLP(C) NO. 6148-6152/2008, SLP(C) NO. 6831/2008, SLP(C) NO. 7914/2008, SLP(C) NO. 8053-8077/2008, SLP(C) NO. 8199/2008, SLP(C) NO. 9227/2008, SLP(C) NO. 12424-12425/2008, SLP(C) NO. 13327/2008, SLP(C) NO. 13889/2008, SLP(C) NO. 14232-14252/2008, SLP(C) NO. 14454-14778/2008, SLP(C) NO. 14828/2008, SLP(C) NO. 14829/2008, SLP(C) NO. 14875/2008, SLP(C) NO. 15047/2008, SLP(C) NO. 15078/2008, SLP(C) NO. 15090/2008, SLP(C) NO. 15161/2008, SLP(C) NO. 15164/2008, SLP .....

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15405/2008, SLP(C) NO. 15491/2008, SLP(C) NO. 15492/2008, SLP(C) NO. 15493/2008, SLP(C) NO. 15495/2008, SLP(C) NO. 15496/2008, SLP(C) NO. 15498/2008, SLP(C) NO. 15540/2008, SLP(C) NO. 15551/2008, SLP(C) NO. 15579/2008, SLP(C) NO. 15605/2008, SLP(C) NO. 15618/2008, SLP(C) NO. 15623/2008, SLP(C) NO. 15628/2008, SLP(C) NO. 15629/2008, SLP(C) NO. 15630/2008, SLP(C) NO. 15631/2008, SLP(C) NO. 15632/2008, SLP(C) NO. 15633/2008, SLP(C) NO. 15636/2008, SLP(C) NO. 15643/2008, SLP(C) NO. 15647/2008, SLP( .....

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, SLP(C) NO. 16865/2008, SLP(C) NO. 16885/2008, SLP(C) NO. 16926/2008, SLP(C) NO. 16930/2008, SLP(C) NO. 17187/2008, SLP(C) NO. 17192/2008, SLP(C) NO. 17193/2008, SLP(C) NO. 17203/2008, SLP(C) NO. 17204/2008, SLP(C) NO. 17233/2008, SLP(C) NO. 17267/2008, SLP(C) NO. 17269/2008, SLP(C) NO. 17271/2008, SLP(C) NO. 17272/2008, SLP(C) NO. 17274/2008, SLP(C) NO. 17276/2008, SLP(C) NO. 17277/2008, SLP(C) NO. 17279/2008, SLP(C) NO. 17280/2008, SLP(C) NO. 17282/2008, SLP(C) NO. 17367/2008, SLP(C) NO. 1736 .....

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8, SLP(C) NO. 18379/2008, SLP(C) NO. 18405/2008, SLP(C) NO. 18532/2008, SLP(C) NO. 18533/2008, SLP(C) NO. 18582/2008, SLP(C) NO. 18684-18714/2008, SLP(C) NO. 18850/2008, SLP(C) NO. 18857/2008, SLP(C) NO. 18865/2008, SLP(C) NO. 18870/2008, SLP(C) NO. 18871/2008, SLP(C) NO. 19019/2008, SLP(C) NO. 19026/2008, SLP(C) NO. 19030/2008, SLP(C) NO. 19049/2008, SLP(C) NO. 19120/2008, SLP(C) NO. 19141/2008, SLP(C) NO. 19372/2008, SLP(C) NO. 19421/2008, SLP(C) NO. 19425/2008, SLP(C) NO. 19460/2008, SLP(C) N .....

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21509/2008, SLP(C) NO. 21510/2008, SLP(C) NO. 21819/2008, SLP(C) NO. 22081/2008, SLP(C) NO. 22083/2008, SLP(C) NO. 22084/2008, SLP(C) NO. 22086/2008, SLP(C) NO. 22100-22101/2008, SLP(C) NO. 22195/2008, SLP(C) NO. 22707/2008, SLP(C) NO. 22735/2008, SLP(C) NO. 22931/2008, SLP(C) NO. 23075/2008, SLP(C) NO. 23077/2008, SLP(C) NO. 23270/2008, SLP(C) NO. 23277/2008, SLP(C) NO. 23383/2008, SLP(C) NO. 23609/2008, SLP(C) NO. 23623/2008, SLP(C) NO. 25378/2008, SLP(C) NO. 25498/2008, SLP(C) NO. 26377/2008 .....

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3276/2009, SLP(C) NO. 4720/2009, S.L.P.(C)... /2009 CC NO. 5143, S.L.P.(C)... /2009 CC NO. 5311, SLP(C) NO. 5371/2009, SLP(C) NO. 5376/2009, SLP(C) NO. 5381/2009, SLP(C) NO. 5383/2009, SLP(C) NO. 5384/2009, SLP(C) NO. 5393/2009, SLP(C) NO. 5395/2009, SLP(C) NO. 5396/2009, SLP(C) NO. 5399/2009, SLP(C) NO. 5401/2009, SLP(C) NO. 5403/2009, SLP(C) NO. 5405/2009, SLP(C) NO. 5406/2009, SLP(C) NO. 5408/2009, SLP(C) NO. 5409/2009, SLP(C) NO. 5410/2009, SLP(C) NO. 5411/2009, SLP(C) NO. 5412/2009, SLP(C) .....

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O. 6688/2009, SLP(C) NO. 6689/2009, SLP(C) NO. 6690/2009, SLP(C) NO. 6692/2009, SLP(C) NO. 6693/2009, SLP(C) NO. 6694/2009, SLP(C) NO. 6696/2009, SLP(C) NO. 6698/2009, SLP(C) NO. 6699/2009, SLP(C) NO. 6700/2009, SLP(C) NO. 6701/2009, SLP(C) NO. 6702/2009, SLP(C) NO. 6703/2009, Page 7 7 SLP(C) NO. 6704/2009, SLP(C) NO. 6705/2009, SLP(C) NO. 6708/2009, SLP(C) NO. 6709/2009, SLP(C) NO. 6710/2009, SLP(C) NO. 6711/2009, SLP(C) NO. 6712/2009, SLP(C) NO. 6713/2009, SLP(C) NO. 6714-6715/2009, SLP(C) NO. .....

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11/2009, SLP(C) NO. 11646/2009, SLP(C) NO. 12948/2009, SLP(C) NO. 13270-13274/2009, SLP(C) NO. 13483/2009, SLP(C) NO. 13496/2009, SLP(C) NO. 13517/2009, SLP(C) NO. 13611-13612/2009, SLP(C) NO. 14429/2009, SLP(C) NO. 14484/2009, SLP(C) NO. 14488/2009, SLP(C) NO. 14623/2009, SLP(C) NO. 14856/2009, SLP(C) NO. 14949/2009, SLP(C) NO. 15723/2009, SLP(C) NO. 16253/2009, SLP(C) NO. 16757-16760/2009, SLP(C) NO. 16784/2009, SLP(C) NO. 16789/2009, SLP(C) NO. 16888-16898/2009, SLP(C) NO. 17332-17333/2009, S .....

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NO. 22313/2009, SLP(C) NO. 22316/2009, SLP(C) NO. 22317/2009, SLP(C) NO. 22318/2009, SLP(C) NO. 22320/2009, SLP(C) NO. 22321/2009, SLP(C) NO. 22322/2009, SLP(C) NO. 22323/2009, SLP(C) NO. 22324/2009, SLP(C) NO. 22325/2009, SLP(C) NO. 22408/2009, SLP(C) NO. 22425/2009, SLP(C) NO. 22428/2009, SLP(C) NO. 23990/2009, SLP(C) NO. 24149/2009, SLP(C) NO. 24430/2009, SLP(C) NO. 24822/2009, SLP(C) NO. 25157/2009, SLP(C) NO. 25390/2009, SLP(C) NO. 25399-25400/2009, SLP(C) NO. 25467/2009, SLP(C) NO. 25470/ .....

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665/2009, SLP(C) NO. 33672/2009, SLP(C) NO. 34253/2009, SLP(C) NO. 34859/2009, SLP(C) NO. 35038/2009, SLP(C) NO. 35585/2009, SLP(C) NO. 35587/2009, SLP(C) NO. 35740/2009, SLP(C) NO. 35742/2009, SLP(C) NO. 35743-35746/2009, SLP(C) NO. 35747/2009, SLP(C) NO. 35749/2009, SLP(C) NO. 35750/2009, SLP(C) NO. 35751/2009, SLP(C) NO. 35752/2009, SLP(C) NO. 35753/2009, SLP(C) NO. 35754/2009, SLP(C) NO. 35755/2009, SLP(C) NO. 35756/2009, SLP(C) NO. 35757/2009, SLP(C) NO. 36193/2009, SLP(C) NO. 36196/2009, S .....

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) NO. 4388/2010, SLP(C) NO. 4389/2010, SLP(C) NO. 4390/2010, SLP(C) NO. 4511/2010, SLP(C) NO. 4572/2010, SLP(C) NO. 4720/2010, SLP(C) NO. 5151/2010, SLP(C) NO. 5308/2010, SLP(C) NO. 5309/2010, C.A. NO. 5343-5344/2010, SLP(C) NO. 6037/2010, SLP(C) NO. 6723/2010, SLP(C) NO. 6762/2010, SLP(C) NO. 6763/2010, SLP(C) NO. 6765/2010, SLP(C) NO. 6770/2010, SLP(C) NO. 6811/2010, SLP(C) NO. 7356/2010, SLP(C) NO. 7426/2010, SLP(C) NO. 7776/2010, SLP(C) NO. 7929/2010, SLP(C) NO. 9022/2010, SLP(C) NO. 9077/20 .....

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6/2010, W.P.(C) NO. 31/2011, W.P.(C) NO. 497/2011, C.A. NO. 905/2011, SLP(C) NO. 1308/2011, C.A. NO. 2041/2011, C.A. NO. 2042/2011, S.L.P.(C)... /2011 CC NO. 2103, SLP(C) NO. 3433/2011, SLP(C) NO. 4730/2011, SLP(C) NO. 4743/2011, SLP(C) NO. 4747/2011, SLP(C) NO. 4750/2011, SLP(C) NO. 5094/2011, SLP(C) NO. 5105/2011, SLP(C) NO. 5106/2011, SLP(C) NO. 5110/2011, SLP(C) NO. 5112/2011, SLP(C) NO. 6351/2011, SLP(C) NO. 6492/2011, SLP(C) NO. 8571/2011, SLP(C) NO. 9758/2011, C.A. NO. 9900-9903/2011, SLP .....

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284/2012, C.A. NO. 8286/2012, C.A. NO. 8290/2012, C.A. NO. 8292/2012, C.A. NO. 8294/2012, C.A. NO. 8295/2012, C.A. NO. 8296/2012, C.A. NO. 8297/2012, C.A. NO. 8298/2012, C.A. NO. 8299/2012, C.A. NO. 8300/2012, C.A. NO. 8301/2012, C.A. NO. 8302/2012, C.A. NO. 8303/2012, C.A. NO. 8304/2012, C.A. NO. 8305/2012, C.A. NO. 8306/2012, C.A. NO. 8307/2012, C.A. NO. 8308/2012, C.A. NO. 8309/2012, C.A. NO. 8311/2012, C.A. NO. 8312/2012, C.A. NO. 8313/2012, C.A. NO. 8314/2012, C.A. NO. 8315/2012, C.A. NO. 8 .....

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9148/2012, C.A. NO. 9149/2012, C.A. NO. 9150/2012, C.A. NO. 9151/2012, C.A. NO. 9152/2012, C.A. NO. 9153/2012, C.A. NO. 9154/2012, C.A. NO. 9155/2012, C.A. NO. 9156/2012, C.A. NO. 9157/2012, C.A. NO. 9158/2012, C.A. NO. 9159/2012, C.A. NO. 9160/2012, C.A. NO. 9161/2012, C.A. NO. 9162/2012, C.A. NO. 9163/2012, C.A. NO. 9164/2012, C.A. NO. 9165/2012, C.A. NO. 9166/2012, C.A. NO. 9167/2012, C.A. NO. 9168/2012, C.A. NO. 9169/2012, C.A. NO. 9170/2012, C.A. NO. 9292/2012, C.A. NO. 9293/2012, SLP(C) N .....

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543/2013, C.A. NO. 544/2013, C.A. NO. 545/2013, C.A. NO. 546/2013, C.A. NO. 547/2013, C.A. NO. 548/2013, SLP(C) NO. 1426/2013, SLP(C) NO. 8939/2013, SLP(C) NO. 9844/2013, SLP(C) NO. 10466/2013, SLP(C) NO. 10516/2013, SLP(C) NO. 10879/2013, SLP(C) NO. 11060/2013, SLP(C) NO. 16744-16746/2013, SLP(C) NO. 16867/2013, SLP(C) NO. 16869/2013, SLP(C) NO. 16870/2013, SLP(C) NO. 27001-27002/2013, SLP(C) NO. 30986/2013, SLP(C) NO. 32256/2013, SLP(C) NO. 33600/2013, C.A. NO. 1838/2014, C.A. Page 10 10 NO. 9 .....

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2015, SLP(C) NO. 664/2015, SLP(C) NO. 662/2015, SLP(C) NO. 669/2015, SLP(C) NO. 668/2015, SLP(C) NO. 671/2015, SLP(C) NO. 672/2015, SLP(C) NO. 675/2015, SLP(C) NO. 674/2015, SLP(C) NO. 683/2015, SLP(C) NO. 690-691/2015, SLP(C) NO. 684-686/2015, SLP(C) NO. 693-694/2015, SLP(C) NO. 712/2015, SLP(C) NO. 1270/2015, SLP(C) NO. 1424/2015, SLP(C) NO. 1596/2015, SLP(C) NO. 1631/2015, SLP(C) NO. 1714/2015, SLP(C) NO. 1851-1852/2015, SLP(C) NO. 1943-2001/2015, SLP(C) NO. 2038/2015, SLP(C) NO. 2054/2015, S .....

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. 5007/2015, SLP(C) NO. 6728/2015, SLP(C) NO. 6754-6755/2015, SLP(C) NO. 6823/2015, SLP(C) NO. 6907/2015, SLP(C) NO. 6909-6910/2015, SLP(C) NO. 6939/2015, SLP(C) NO. 6956/2015, SLP(C) NO. 4386/2015, SLP(C) NO. 7319/2015, SLP(C) NO. 7957-7958/2015, SLP(C) NO. 8089/2015, SLP(C) NO. 2483/2015, SLP(C) NO. 8248/2015, SLP(C) NO. 8325/2015, SLP(C) NO. 8350-8351/2015, SLP(C) NO. 8527/2015, SLP(C) NO. 9585/2015, SLP(C) NO. 11830/2015, SLP(C) NO. 8798/2015, SLP(C) NO. 9584/2015, SLP(C) NO. 5311-5329/2015, .....

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/2015, SLP(C) NO. 11592/2015, SLP(C) NO. 13200/2015, SLP(C) NO. 13201/2015, SLP(C) NO. 4219-4227/2015, SLP(C) NO. 2966-2999/2015, SLP(C) NO. 11888/2015, SLP(C) NO. 11203/2015, SLP(C) NO. 14828/2015, SLP(C) NO. 14854/2015, SLP(C) NO. 15856/2015, SLP(C) NO. Page 11 11 15857/2015, SLP(C) NO. 15858/2015, SLP(C) NO. 11458-11465/2015, SLP(C) NO. 18213/2015, SLP(C) NO. 18333/2015, SLP(C) NO. 16312/2015, SLP(C) NO. 18334/2015, SLP(C) NO. 18335/2015, SLP(C) NO. 15855/2015, SLP(C) NO. 18338/2015, SLP(C) N .....

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C) NO. 2392/2015, SLP(C) NO. 2499/2015, SLP(C) NO. 2502/2015, SLP(C) NO. 2538-2543/2015, SLP(C) NO. 2426/2015, SLP(C) NO. 2358/2015, SLP(C) NO. 2401/2015, SLP(C) NO. 2389/2015, SLP(C) NO. 2485/2015, SLP(C) NO. 2495/2015, SLP(C) NO. 3163-3164/2015, SLP(C) NO. 3666/2015, SLP(C) NO. 3679/2015, SLP(C) NO. 3723/2015, SLP(C) NO. 3321/2015, SLP(C) NO. 4198-4199/2015, SLP(C) NO. 3325/2015, SLP(C) NO. 3466/2015, SLP(C) NO. 3635/2015, SLP(C) NO. 3318/2015, SLP(C) NO. 30396/2015, C.A. NO. 110/2016, C.A. NO .....

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15, SLP(C) NO. 8197-8198/2015, SLP(C) NO. 4197/2015, C.A. NO. 5538/2016, C.A. NO. 5533/2016, SLP(C) NO. 14539-14541/2016, SLP(C) NO. 16820/2016, C.A. NO. 4642-4643/2016 For The Parties : Mr. A.T.M.Sampath, Adv., Mr. K.V.Mohan, Adv., Mr. G.Prakash, Adv., Mr. K.R.Sasiprabhu, Adv., Mr. Rajan Narain, Adv., Mr. L.R.Singh, Adv., M/s. S.Narain & CO., Mr. Milind Kumar, Adv., MS. Priya Puri, Adv., Mr. Rajesh Kumar, Adv., Ms. Suruchi Aggarwal, Adv., Ms. Indira Sawhney, Adv., Mr. Ejaz Maqbool, Adv., Mr .....

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/s.ArputhamAruna & CO., Mr. Sibo Sankar Mishra, Adv., Mr. R.P.Mehrotra, Adv., Mr. Ashok Mathur, Adv., Mr. Gopal Prasad, Adv., Mr. Gopal Singh, Adv., Mr. Ramesh Babu M.R., Adv., Ms. Bina Madhavan, Adv., Mr. B.Balaji, Adv., Mr. Anil K.Jha, Adv., Mr. R.Gopalakrishnan, Adv., Ms. Ruchi Kohli, Adv., M/s. Corporate Law Group, Adv., Mr. Kamal Mohan Gupta, Adv., Mr. S.Udaya Kumar Sagar, Adv., Mr. Mohan Pandey, Adv., Mr. Sunil Kumar Jain, Adv., MS. Kirti Renu Mishra, Adv., MS. Sharmila Upadhayay, Adv. .....

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Mr. A.P.Medh, Adv., Ms. Manik Karanjawala, Adv., Mr. K.K.Mani, Adv., Mr. Gaurav Kejriwal, Adv., Mr. Arvind Minocha,Adv., Mr. Shadan Farasat, Adv., Mr. G.V.Rao, Adv., Ms. Prerna Mehta, Adv., Mr. C.D.SIngh, Adv., MR. Sanjay Kumar Visen, Adv., Mr. Jai Prakash Pandey, Adv., Mr. Vivek Jain, Adv., Mr. S.S.Shroff, Adv., Mr. Vipin Kumar Jai, Adv., Mr. Anil Shrivastav, Adv., Mr. Parmanand Pandey, Adv., Mr. Krishnanad Pandeya, Adv., Mr. Abhijit Sengupta, Adv., Ms. Sushma Suri, Adv., Mr. P.V. Dinesh, Adv. .....

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, Adv., Dr. Rajeev Sharma, Adv., Mr. Kishore Kunal, Adv., Mr. R.Chandrachud, Adv., Mr. S.S.Hussain Rizvi, Adv., Mr. C.K.Ganguli, Adv., M/s. Mitter & Mitter CO., Ms. C.K.Sucharita, Adv., Mr. Vikash Singh, Adv., Mr. SenthilJagadeesan, Adv., Mr. Shibashish Misra, Adv., MS. Anil Katiyar, Adv., Mr. S.S.Baghel, Adv., M/s. Karanajwala & CO.,, Adv., Mr. Pramit Saxena, Adv., Ms. Shally Bhasin, Adv., Mr. Mukul Kumar, Adv., Mr. Harish Pandey, Adv., Mr. Rajiv Shankar Dwivedi, Adv., Mr. P.D.Tyagi, Ad .....

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an Singh Rawat, Adv., Mr. Vishwa Pal Singh, Adv., Mr. Kush Chaturvedi, Adv., Mr. Amarjit Singh Bedi, Adv., Mr. Pawanshree Agrawal, Adv., Mr. Brajesh Kumar, Adv., Mr. Sudhansu Palo, Adv., Mr. Anuj Bhandari, Adv., Mr. R.Nedumaran, Adv., Mr. S.Thananjayan, Adv., Mr. M.P.Vinod, Adv., Ms. Baby Krishnan, Adv., Mr. B.V.Deepak, Adv., Mr. Rajiv Mehta, Adv., Mr. M.T.George, Adv., Mr. R.Satish, Adv., Mr. K.R.Nambiar, Adv., Mr. C.N.Sree Kumar, Adv., Mr. Sushil Kumar Jain, Adv., Mr. Aruneshwar Gupta, Adv., M .....

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,Adv., Mr. Sanjay Jain,Adv., Mr. Rajan Narain,Adv., Mr. Prabhakara Rao,Adv., M/s. Arputham Aruna & CO., Mr. M.K. Michael,Adv., Mr. A. Raghunath,Adv., Mr. Rajesh Kumar,Adv., Mr. K. Rajeev,Adv., Mrs.Prabha Swami,Adv., Mr. Deba Prasad Mukherjee,Adv., Mr. R.V. Kameshwaran,Adv., Mr. T.G. Narayanan Nair,Adv., Mr. V.K. Sidharthan,Adv., Ms. Srikala Gurukrishna Kumar,Adv., Mr. C.K. Sasi,Adv., Ms. S. Janani,Adv., Ms. Malani Poduval,Adv., Mr. Shree Pal Singh,Adv., Mr. Vijay Kumar,Adv., Mr. E.M.S. Anam, .....

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armanand Pandey,Adv., Mr. Ejaj Maqbool,Adv., Mr. Prem Prakash,Adv., Mr. A.V. Rangam,Adv., Mr. Y. Raja Gopala Rao,Adv., Mr. Abhijat P. Medh,Adv., Ms. T. Anamika,Adv., Mr. Vipin Nair,Adv., Mr. Sunil Kumar Jain,Adv., Mr. Praveen Kumar,Adv., Ms. Bina Gupta,Adv., Mr. Rajeev Maheswaranand Roy,Adv., Mr. Gaurav Kejriwala,Adv., Mr. V.N. Raghupathy,Adv., Mr. Ejaz Maqbool,Adv., Mr. Shibashish Misra,Adv., M/s. Gagrat & CO., Ms. Indra Sawhney,Adv., Mr. Lakshmi Raman Singh,Adv., Mr. Pranab Kumar Mullick,A .....

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& CO., Mr. Sibo Sankar Mishra,Adv., Mr. Shuvodeep Roy,Adv., Mr. H.K. Puri,Adv., Ms. C.K. Sucharita,Adv., Mr. P.K. Manohar,Adv., Mr. M.T. George,Adv., Mr. R. Chandrachud,Adv., Mr. Abhisht Kumar,Adv., Mr. Neeraj Sharma,Adv., Mr. Akshat Shrivastava,Adv., M/s. Corporate Law Group Mr. Anil Shrivastav,Adv., Mr. P.V. Yogeswaran, Adv., Mr. B.S. Banthia, Adv., Mr. Rajesh Prasad Singh, Adv., Ms. Anita Shenoy, Adv., Mr. Ranjith K.C., Adv., Ms. Shally Bhasin, Adv., Ms. Bhaskar Y. Kulkarni, Adv., Mr. An .....

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dv., Mr. Kaushik Poddar, Adv., Ms. Rashmi Singh, Adv., Mr. Ajay Kumar, Adv., Mr. Adarsh Upadhyaya, Adv., Mr. S.K. Verma, Adv., Mr. N. Ganapathy, Adv., Mr. Abhinav Mukerji, Adv., Ms. Archana Pathak Dave, Adv., Mr. Sridhar Pottaraju, Adv., Mr. Ardhendumauli Kumar Prasad, Adv., Ms. Patibha Jain, Adv., Ms. Ruchi Kohli, Adv., Ms. Nilofar Khan, Adv., Mr. Shreekant N. Terdal, Adv., ORDER By majority the Court answers the reference in the following terms: 1. Taxes simpliciter are not within the contempl .....

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d. 5. The compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal s case has no juristic basis and is therefore rejected. 6. Decisions of this Court in Atiabari, Automobile Transport and Jindal cases (supra) and all other judgments that follow these pronouncements are to the extent of such reliance over ruled. 7. A tax on entry of goods into a local area for use, sale or consumption therein is permissible although similar goods are not produced within the .....

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atters. 9. States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State fall equally. Such measures if taken would not contravene Article 304(a) of the Constitution. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters. 10. The questions whether the entire State can be notified as a local area a .....

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ecided by majority. The questions assume in a great measure considerable public importance not only because the same deal with the powers of the State legislatures to levy taxes but also because any pronouncement of this Court is bound to impact the federal character of our polity and the Centre-State relationship in legislative and fiscal matters. There is no gainsaying that it is the importance of the questions that lies at the bottom of the present reference to a larger Bench made in the foll .....

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re violative of the constitutionally recognised right to free trade commerce and intercourse guaranteed under Article 301 of the Constitution of India. The levies were also assailed on the ground that the same were discriminatory and, therefore, violative of Article 304(a) of the Constitution of India. Absence of Presidential sanction in terms of Article 304(b) of the Constitution of India was also set-up as a ground of challenge to the levies imposed by the respective State legislatures. Writ P .....

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nd State of Bihar and Ors. v. Bihar Chamber of Commerce and Ors. (1996) 9 SCC 136, a Division Bench of the High Court of Punjab and Haryana dismissed the said petition and connected matters on the ground that the levy was compensatory in character hence outside the purview of Article 301. 3. The correctness of the said order was assailed before this Court in Jindal Stripe Ltd. and Anr. v. State of Haryana and Ors. (2003) 8 SCC 60. A two-Judge Bench of this Court, however, referred the matter to .....

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lity planned to be provided to the traders is compensatory tax and that it is implicit in such a levy that it must, more or less, be commensurate with the cost of the service or facility. The decisions emphasized that the imposition of tax must be with the definite purpose of meeting the expenses on account of providing or adding to the trading facilities either immediately or in future provided the quantum of tax sought to be generated is based on a reasonable relation to the actual or projecte .....

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tate can be legitimately brought within the concept of compensatory tax, the nexus between the tax known as compensatory tax and the trading facilities not being necessarily either direct or specific. 27. Since the concept of compensatory tax has been judicially evolved as an exception to the provisions of Article 301 and as the parameters of this judicial concept are blurred, particularly by reason of the decisions in Bhagatram and Bihar Chamber of Commerce we are of the view that the interpret .....

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erence order by holding that the working test propounded by seven Judges in Automobile Transport case (supra) was incompatible with the test of some connection enunciated by the three Judge Bench in Bhagatram s case (supra). The Court held that the test of some connection as propounded in Bhagatram s case (supra) had no application to the concept of compensatory tax. The Court, accordingly, overruled the decisions rendered in Bhagatram and Bihar Chamber of Commerce cases and held that the doctri .....

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ciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan for deciding whether a tax is compensatory or not vide para 19 of the Report (AIR), will continue to apply and the test of some connection indicated in para 8 (of SCC) of the judgment in Bhagatram Rajeevkumar v. CST and followed in State of Bihar v. Bihar Chamber of Commerce is, in our opinion, not good law. Accordingly, the constitutional validity of various local enactments which are the subject-matters of pending appeals, s .....

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s bound by the view taken in Bhagatram and Bihar Chamber of Commerce cases (supra). The Court further found that in the absence of relevant data before the High Courts, the issue whether the levies were compensatory could not have been considered and accordingly referred the matter back to the High Courts to decide the said aspect. The appeals were, in the meantime, adjourned to await the finding from the High Courts on the question whether the levies were indeed compensatory in nature having re .....

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own. The High Courts of Assam, Arunachal Pradesh, Jharkhand, Kerala and Tamil Nadu struck down the levies imposed by their respective States also on the ground that they were discriminatory in nature hence violative of Article 304(a) of the Constitution. 7. All these judgments and orders of the High Courts, passed after the remand, then, came to be challenged by the States concerned in the appeals filed against the same. These appeals initially came-up before a two-Judge Bench of this Court comp .....

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all the cases on which the parties had placed reliance related to entry tax in the context of tax on vehicles in contradiction to taxes on entry of goods. The Court was of the view that while the Constitution Bench in Jindal Stainless Ltd. (2) (supra) had dealt with some aspects of the matter, certain other important constitutional issues remained to be examined especially because a conceptually and contextually different approach may be required vis-à-vis transport cases on the one hand .....

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of Entry 52 List II of the Schedule VII is violative of Article 301 of the Constitution? If the answer is in the affirmative whether such levy can be protected if entry tax is compensatory in character and if the answer to the aforesaid question is in the affirmative what are the yardsticks to be applied to determine the compensatory character of the entry tax? (3) Whether Entry 52 List II, Schedule VII of the Constitution like other taxing entries in the Schedule, merely provides a taxing fiel .....

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which it was collected? (4) Will the principles of quid pro quo relevant to a fee apply in the matter of taxes imposed under Part XIII? (5) Whether the entry tax may be levied at all where the goods meant for being sold, used or consumed come to rest (standstill) after the movement of the goods ceases in the local area ? (6) Whether the entry tax can be termed a tax on the movement of goods when there is no bar to the entry of goods at the State border or when it passes through a local area with .....

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directly impedes the trade and thus violates Article 301 of the Constitution can be saved by reference to Article 304 of the Constitution alone or can be saved by any other article? (10) Whether a levy under Entry 52 List II, even if held to be in nature of a compensatory levy, must, on the principle of equivalence demonstrate that the value of the quantifiable benefit is represented by the costs incurred in procuring the facility/services (which costs in turn become the basis of reimbursement/r .....

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1636) and a few others and referred the matters to a larger Bench for reconsideration of the judgment of this Court in Atiabari and Automobile Transport (supra). The Court noted that the correctness of the view taken in the said two cases had been doubted as early as in the year 1975 in G.K. Krishnan v. State of Tamil Nadu (1975) 1 SCC 375. The reference order briefly set out some of the questions that required consideration by a larger Bench. The Court said: 11. Some of these aspects which need .....

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articularly in the context of movement of trade and commerce. 12. Whether Article 304(a) and Article 304(b) deal with different subjects? Whether the impugned taxation law to be valid under Article 304 (a) must also fulfil the conditions mentioned in Article 304(b), including Presidential assent? Whether the word restrictions in Article 302 and in Article 304(b) includes tax laws? Whether validity of a law impugned as violative of Article 301 should be judged only in the light of the test of non .....

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rticle 301? Interrelationship between Article 19(1)(g) and Article 301 of the Constitution? These are some of the questions which warrant reconsideration of the judgments in Atiabari Tea Co. Ltd. and Automobile Transport (Rajasthan) Ltd. by a larger Bench of this Court. 9. At the hearing before us learned counsel for the parties agreed after a day -long exploratory exercise that the questions that fall for determination by this Court could be re-framed as under: 1. Can the levy of a non-discrimi .....

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elating to entry tax to be tested with reference to both Articles 304(a) and 304(b) of the Constitution for determining their validity? 10. We have heard learned counsel for the parties at considerable length on the above questions which we shall now take up for discussion ad-seriatim. Re: Question No. 1 11. Whether non-discriminatory fiscal measures also impede free trade, commerce and intercourse and thereby fall foul of Article 301 of the Constitution can be answered only if one keeps in view .....

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rigid nor wooden or pedantic. Being a living and dynamic document, the Constitution ought to receive an equally dynamic and pragmatic interpretation that harmonizes and balances competing aims and objectives and promotes attainment of national goals and objectives. It must, as observed by this Court, in Kihoto Hollohan v. Zachillhu (1992) Supp 2 SCC 651 be read as a logical whole. The Constitutional provisions cannot be read in isolation, nor can they be interpreted in a manner that renders ano .....

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eved and the consequence flowing from the adoption of one in preference to the other possible interpretation observed this Court in Chief Justice of Andhra Pradesh and others. v. L.V. A. Dixitulu and others (1979) 2 SCC 34. Reference may also be made to the decision of this Court in Kesavananda Bharati v. State of Kerala (1973) 4 SCC 225 where this Court quoted with approval Lord Greene s observations in the following words: 56. ……It is not right to construe words in vacuum and the .....

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their meaning is entirely independent of their context. The method of construing statutes that I prefer is not to take particular words and attribute to them a sort of prima facie meaning which you may have to displace or modify. It is to read the statute as a whole and ask oneself the question: In this state, in this context, relating to this subject-matter, what is the true meaning of that word. 57. I respectfully adopt the reasoning of Lord Green in construing the expression the amendment of .....

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e question, then, is one of construction and in the ultimate resort must be determined upon the actual words used, read not in vacua but as occurring in a single complex instrument, in which one part may throw light on another. The Constitution has been described as the federal compact, and the Construction must hold a balance between all its parts. (Per Lord Wright - James v. Commonwealth of Australia, 1936 AC 578 at 613.) 12. It is trite that a narrow interpretation that may have the potential .....

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ake to avoid confusion and resultant negation of the Constitutional objectives. 13. Having said so, we must sail smooth on certain fundamentals before we address the question whether levy of taxes per se operate as an impediment or restriction on the right to free trade, commerce and intercourse. That is because a true and correct answer to Question No.1 can be found only if we constantly keep those fundamentals in mind while attempting to resolve what has been found to be somewhat difficult to .....

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enuding the States of their sovereignty in the matter of levy of taxes and in the process affect the federal structure of the polity envisaged by the Constitution. If levy of taxes is always presumed to be reasonable and in public interest, whether such levies could be said to be within the contemplation of Article 304(b) when it provided for imposition of reasonable restrictions in public interest is yet another aspect that must be explored especially when the reasonableness of any restriction .....

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een universally acknowledged as an essential attribute of sovereignty. Cooley in his Book on Taxation - Volume-1 (4th Edn.) in Chapter-2 recognises the power of taxation to be inherent in a sovereign State. The power, says the author, is inherent in the people and is meant to recover a contribution of money or other property in accordance with some reasonable rule or apportionment for the purpose of defraying public expenses. The following passage from the book is apposite: 57. Power to tax as a .....

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other property, in accordance with some reasonable rule or apportionment, from the property or occupations within its jurisdiction for the purpose of defraying the public expenses. Constitutional provisions relating to the power of taxation do not operate as grants of the power of taxation to the government but instead merely constitute limitations upon a power which would otherwise be practically without limit. This inherent power to tax extends to everything over which the sovereign power exte .....

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The power of taxation is, no doubt, the sovereign right of the State; as was observed by Chief Justice Marshall in M Culloch v. Maryland [4 Law Edn.579 p.607] : The power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the Government may choose to carry it. In that sense, it is not the function of the court to enquire whether the power of taxation has .....

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bhai Prabhudas Parekh & Co. (2000) 5 SCC 694 where this Court held: 8. The principle of priority of government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of State debts rests on the well-recognised principle that the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sovereign Government at all. It is essential that as a sovereign, .....

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SCC 755 where this Court reiterated the legal position in the following words: 21. Tax , duty , cess or fee constituting a class denotes to various kinds of imposts by State in its sovereign power of taxation to raise revenue for the State. Within the expression of each specie each expression denotes different kind of impost depending on the purpose for which they are levied. This power can be exercised in any of its manifestation only under any law authorising levy and collection of tax as env .....

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eneral or local or special and tax shall be construed accordingly. Impost means compulsory levy. The well-known and well-settled characteristic of tax in its wider sense includes all imposts. Imposts in the context have following characteristics: (i) The power to tax is an incident of sovereignty. (ii) Law in the context of Article 265 means an Act of legislature and cannot comprise an executive order or rule without express statutory authority. (iii) The term tax under Article 265 read with Art .....

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taxes is an attribute of sovereignty, exercise of that power is controlled by the Constitution. This is evident from the provisions of Article 265 which forbids levy or recovery of any tax except by the authority of law. It reads: 265. Taxes not to be imposed save by authority of law - No tax shall be levied or collected except by authority of law. The authority of law referred to above must be traceable to a provision in the Constitution especially where the legislative powers are shared by the .....

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he whole or any part of the State. (2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. 246. Subject-matter of laws made by Parliament and by the Legislatures of States - (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the Union List ). (2) Notwithstanding anything .....

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d to as the State List ). (4)Parliament has power to make laws with respect to any matter for any part of the territory of India not included [in a State] notwithstanding that such matter is a matter enumerated in the State List. 19. Interpreting Articles 245 and 246, a three-Judge Bench of this Court in M/s. Hoechst Pharmaceuticals Ltd and Ors. v. State of Bihar and Ors. (1983) 4 SCC 45, held on a review of the available decisions that the Constitution effects a complete separation of taxing po .....

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a Constitution Bench of this Court in State of West Bengal v. Kesoram Industries Ltd. (2004) 10 SCC 201. The propositions stated in the two decisions must therefore be treated to be fairly well settled. Reference may also be made to the decision of this Court in State of Kerala and ors. v. Mar Appraem Kuri Co. Ltd. and Anr. (2012) 7 SCC 106 where this Court explained the sweep and purport of Articles 245 and 246: 35. Article 245 deals with extent of laws made by Parliament and by the legislature .....

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whole or any part of the territory of India, the legislature of a State can make laws only for the State or part thereof. Thus, Article 245 inter alia indicates the extent of laws made by Parliament and by the State Legislatures. 36. Article 246 deals with the subject-matter of laws made by Parliament and by the legislatures of States. The verb made once again finds place in the Head Note to Article 246. This article deals with distribution of legislative powers as between the Union and the Sta .....

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ar v. Muttuswami Goundan) 37. Article 246, thus, provides for distribution, as between Union and the States, of the legislative powers which are conferred by Article 245. Article 245 begins with the expression subject to the provisions of this Constitution . Therefore, Article 246 must be read as subject to other provisions of the Constitution . 38. For the purposes of this decision, the point which needs to be emphasised is that Article 245 deals with conferment of legislative powers whereas Ar .....

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y in a federal system like ours where the States also to the extent permissible exercise the power to make laws including laws that levy taxes, duties and fees. That the power to levy taxes is subject to constitutional limitations is no longer res-integra. A Constitution Bench of this Court has in Synthetics and Chemicals Ltd. and Ors. v. State of U.P. and Ors. (1990) 1 SCC 109 recognised that in India the Centre and the States both enjoy the exercise of sovereign power, to the extent the Consti .....

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to the limitation as to the division of powers between the Centre and the States and also subject to the fundamental rights guaranteed under the Constitution. The Indian States, between the Centre and the States, has sovereign power. The sovereign power is plenary and inherent in every sovereign State to do all things which promote the health, peace, morals, education and good order of the people. Sovereignty is difficult to define. This power of sovereignty is, however, subject to constitutiona .....

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tations appears in Article 13 of the Constitution of India which declares that all laws in force in the territory of India immediately before the commencement of the Constitution are void to the extent they are inconsistent with the provisions of Part III dealing with the fundamental rights guaranteed to the citizens. It forbids the States from making any law which takes away or abridges, any provision of Part III. Any law made in contravention of the said rights shall to the extent of contraven .....

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owers the Parliament to legislate with respect to a matter in the State List for national interest provided the Council of States has declared by a resolution supported by not less than two-thirds of the members present and voting that it is necessary or expedient in national interest to do so. The power is available till such time any resolution remains in force in terms of Article 249 (2) and the proviso thereunder. 23. Article 250 is yet another provision which empowers the Parliament to legi .....

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Parliament is regulated by Article 252, while Article 253 starting with a non-obstante clause empowers Parliament to make any law for the whole country or any part of the territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision made at any international conference, association or other body. 25. Article 285 exempts the property of the Union from all taxes imposed by the States save in so far as the Parliament may by law provide. .....

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se of goods being a tax of the nature referred to in the relevant sub-clauses of clause 29(A) of Article 366 subject to such restrictions and conditions as to the system of levy, rates and other incidents of tax as the Parliament may by law specify. 26. Article 287 places a Constitutional limitation on the State s legislative power to enact laws in so far as imposition of tax on consumption or sale of electricity consumed by the Government of India or sold to the Government of India for consumpt .....

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cle 246(2) and (3) confers exclusive power on the State legislatures to make laws with respect to matters in the Seventh Schedule such legislative power is exercisable subject to constitutional limitations referred to above. What is significant is that the power of the State legislatures to levy taxes is also subject to the limitations of Article 304(a) of the Constitution appearing in Part XIII thereof, which part regulates trade, commerce and intercourse within the territory of India and compr .....

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a Nine-Judge Bench to once again examine the very same issues as have been debated and determined in the previous judgments of this Court only shows that the task of interpreting the provisions is by no means easy and has in fact become more and more difficult on account of the pronouncements of this Court taking different views not many of which have been unanimous. The marked difference in the approach adopted by learned counsel for the parties in these appeals is also a measure of the complex .....

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y propounded by the Seven Judges Bench of this Court in Automobile case (supra) had no legal basis or constitutional sanction and was neither acceptable nor workable. That is particularly so because the State legislatures had taken umbrage under the Compensatory Tax Theory and declared the fiscal levies imposed by them to be compensatory in character and claimed the same to be outside the mischief of Article 301 and consequently immune from any challenge on the ground that these taxes and levies .....

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aracter of our polity. Suffice it to say that except a feeble attempt made by some Counsel, there has been a general consensus that the compensatory tax theory deserves to be rejected and the issues examined afresh on a true and correct interpretation of the relevant constitutional provisions. We are mentioning all this only to show that even after fifty years and several illuminating pronouncements of this Court, the cleavage in the judicial opinion as to the true and correct legal position on .....

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ower controlled only by the Constitution, any limitation on that power must be express. That proposition is well settled by the decisions of this Court in Maharaj Umeg Singh v. State of Bombay, AIR 1955 SC 540 and Firm Bansidhar Premsukhdas v. State of Rajasthan AIR 1967 SC 40. In Umeg Singh s case (supra) this Court stated the legal position in the following words: 12…….The legislative competence of the State Legislature can only be circumscribed by express prohibition contained i .....

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gislation within the ambit of the legislative heads specified in the Lists II & III of the Seventh Schedule to the Constitution could only be imposed by the Constitution itself and not by any obligation which had been undertaken by either the Dominion Government or the Province of Bombay or even the State of Bombay. Under Article 246 the State Legislature was invested with the power to legislate on the topics enumerated in Lists II & III of the Seventh Schedule to the Constitution and th .....

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lation was comprised within any of the entries in the Lists II & III of the Seventh Schedule to the Constitution the fetter or limitation on such legislative power had to be found within the Constitution itself and if there was no such fetter or limitation to be found there the State Legislature had full competence to enact the impugned Act no matter whether such enactment was contrary to the guarantee given, or the obligation undertaken by the Dominion Government or the Province of Bombay o .....

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s prohibition contained in the Constitution itself and unless and until there is any provision in the Constitution expressly prohibiting legislation on the subject either absolutely or conditionally, there is no fetter of limitation on the plenary powers which the Legislature is endowed with for legislating on the topics enumerated in the relevant lists. This view is borne out by the decision of the Judicial Committee in Thakur Jagannath Baksh Singh v. The United Provinces [1946 FCR 111] in whic .....

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herefore, it be found that the subject-matter of a Crown grant is within the competence of a Provincial legislature nothing can prevent that legislature from legislating about it unless the Constitution Act itself expressly prohibits legislation on the subject either absolutely or conditionally. Accordingly, in the absence of any such express prohibition, the United Provinces Tenancy Act, 1939, which in consolidating and amending the law relating to agricultural tenancies and other matters conne .....

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le has been reiterated by this Court in Maharaj Umeg Singh and others v. The State of Bombay [1955 2 SCR 164]. It was pointed out that in view of Art. 246 of the Constitution, no curtailment of legislative competence can be spelt out of the terms of clause 5 of the Letters of Guarantee given by the Dominion Government to the Rulers of "States" subsequent to the agreements of Merger, which guaranteed, inter alia, the continuance of Jagirs in the merged States . This principle also under .....

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he Constitution is the federal structure envisaged by it. Whether or not the Constitution of India is truly federal in character has been the subject matter of debate not only in the Constituent Assembly but also in Courts for over 60 years. The character of the Constitutional scheme described in the Constituent Assembly Debates was that there were doubts expressed whether the Constitution really provided a federal structure in the governance of the country. The criticism was that the scheme und .....

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ort to which I propose to make a reference. A serious complaint is made on the ground that there is too much of centralisation and that the States have been reduced to municipalities. It is clear that this view is not only an exaggeration, but is also founded on a misunderstanding of what exactly the Constitution contrives to do. As to the relation between the Centre and the States, it is necessary to bear in mind the fundamental principle on which it rests. The basic principle of federalism is .....

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oo large a field for the operation of its legislative and executive authority than is to be found in any other federal Constitution. It may be that the residuary powers are given to the Centre and not to the States. But these features do not form the essence of federalism. The chief mark of federalism as I said lies in the partition of the legislative and executive authority between the Centre and the units by the Constitution. This is the principle embodied in our Constitution. 31. To the same .....

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ution centralising power in Delhi? Is there any way provided by means of which the position of people in various areas could be safeguarded, their voices heard in regard to matters of their local administration? I think it is a very big charge to make that this Constitution is not a federal Constitution, and that it is a unitary one. We should not forget that this question that the Indian Constitution should be a federal one has been settled by our Leader who is no more with us, in the Round Tab .....

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and the third is the most important and that is that the activity of the State must not be completely circumscribed by orders handed down for execution by the superior unit. The important words are must not be completely circumscribed , which envisages some powers of the State are bound to be circumscribed by the exercise of federal authority. Having all these factors in view, I will urge that our Constitution is a federal Constitution. I will urge that our Constitution is one in which we have g .....

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s the Centre. The pronouncements recognised the proposition that even when Constitution may not be strictly federal in its character as the United States of America, where sovereign States came together to constitute a federal union, where each State enjoins a privilege of having a Constitution of its own, the significant feature of a federal Constitution are found in the Indian Constitution which makes it a quasi federal Constitution, if not truly federal in character and in stricto sensu feder .....

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e of the Constitution. Sikri CJ. summed up the basic feature of the Constitution in the following words: 292. ... ... ...The true position is that every provision of the Constitution can be amended provided in the result the basic foundation and structure of the Constitution remains the same. The basic structure may be said to consist of the following features: (1) Supremacy of the Constitution. (2) Republican and Democratic form of Government. (3) Secular character of the Constitution. (4) Sepa .....

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ect are the views expressed by Shelat and Grover JJ. who declared that the federal character of the Constitution is a part of its basic structure. 33. In S.R. Bommai v. Union of India 1994 (3) SCC 1, this Court had yet another occasion to examine whether the Constitution was federal in nature. Speaking for himself and Justice Kuldeep Singh, Sawant J. while referring to H.M Seervai s commentary on Constitutional Law of India held that the principle of federalism has not been watered down so as to .....

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ment under Article 356 inconsistent with the federal character of the Constitution. The Court, in particular, dealt with the question whether List II contains unimportant matters thereby denuding the Constitution of its federal character. The Court observed that List II contains very important subjects assigned to the State including the power to levy taxes which powers are made mutually exclusive so that ordinarily the States have independent source of revenue of their own. The following passag .....

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e to the States are substantial and would increasingly become more substantial. In addition to the exclusive taxing powers of the States, the States become entitled either to appropriate taxes collected by the Union or to a share in the taxes collected by the Union. 99. The above discussion thus shows that the States have an independent constitutional existence and they have as important a role to play in the political, social, educational and cultural life of the people as the Union. They are n .....

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it is really not necessary to determine whether, in spite of the provisions of the Constitution referred to above, our Constitution is federal, quasi-federal or unitary in nature. It is not the theoretical label given to the Constitution but the practical implications of the provisions of the Constitution which are of importance to decide the question that arises in the present context, viz., whether the powers under Article 356(1) can be exercised by the President arbitrarily and unmindful of i .....

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ary structure, the President has unrestricted power of issuing Proclamation under Article 356(1). If the Presidential powers under the said provision are subject to judicial review within the limits discussed above, those limitations will have to be applied strictly while scrutinising the concerned material. (Emphasis Supplied) 34. What is important is that B.P. Jeevan Reddy, J. speaking for himself and Aggarwal J., while holding the Constitution to be federal in character cautioned that the Cen .....

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eld that nature of federalism in the Indian Constitution is no longer res integra. Relying upon the Constituent Assembly Debates to which we have referred earlier. The Court declared: 50. A lot of energy has been devoted on behalf of the petitioners to build up a case that the Constitution of India is federal. The nature of federalism in the Indian Constitution is no longer res integra. 51. There can be no quarrel with the proposition that the Indian model is broadly based on federal form of gov .....

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eature of a Federal Constitution. In England, Parliament is sovereign; and in the words of Dicey, the three distinguishing features of the principle of Parliamentary Sovereignty are that Parliament has the right to make or unmake any law whatever; that no person or body is recognised by the law of England as having a right to override or set aside the legislation of Parliament, and that the right or power of Parliament extends to every part of the Queen s dominions (1). On the other hand, the es .....

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nion, but not prepared to merge their individuality in a unity. This supremacy of the constitution is protected by the authority of an independent judicial body to act as the interpreter of a scheme of distribution of powers. Nor is any change possible in the Constitution by the ordinary process of federal or State legislation (2). Thus the dominant characteristic of the British Constitution cannot be claimed by a Federal Constitution like ours. 37. Before we turn to the provisions of Articles 3 .....

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of the Court have gone into great details while examining the history of Part XIII. It will, therefore, be presumptuous for us to suggest that the historical basis of Part XIII is a virgin area being traversed for the first time. In fairness to the scholarly pronouncements that have preceded the present batch of cases, we must acknowledge with gratitude the usefulness of the in-depth study and understanding of the Judges who have examined and traced the evolution of Part XIII while drawing their .....

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nce is the Constitution Bench decision in M.P.V. Sunderaramier v. State of Andhra Pradesh, AIR 1958 SC 468. That was a case filed under Article 32 of the Constitution of India for a Writ of Prohibition restraining the State of Andhra Pradesh from imposing a tax on inter-State trade of sale and purchase of yarn. The levy and collection of any such tax was according to the petitioner contrary to the provision contained in Article 282 (6) of the Constitution of India. One of the questions that fell .....

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ities. It overlooks that our Constitution was not written on a tabula-rasa, that a Federal Constitution had been established under the Government of India Act, 1935, and though that has undergone considerable change by way of repeal, modification and addition, it still remains the framework on which the present Constitution is built, and that the provisions of the Constitution must accordingly be read in the light of the provisions of the Government of India Act. (Emphasis supplied) 39. Three ye .....

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levied taxes on certain goods carried by road and inland waterways in the State of Assam. The levy under the legislation was challenged primarily on the ground that the same was ultra vires of the Constitution inter aila because of their repugnance with the provision of Article 301 of the Constitution. This Court by a majority struck down the Constitutional validity of the enactment holding that the impugned levy operated directly and immediately as a restriction on free trade, commerce and inte .....

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acted. In Para 9 of the Report, Sinha, CJ., as His Lordship then was, traced the evolution of Part XIII in the following words: 9. In order to fully appreciate the implications of the provisions of Part XIII of the Constitution, it is necessary to bear in mind the history and background of those provisions. The Constitution Act of 1935 (Government of India Act, 26 ( Geo. 5, Ch. 2) which envisages the federal constitution for the whole of India, including what was then Indian India in contradisti .....

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any executive action prohibiting or restricting the entry into, or export from the Province of goods of any class or description; or (b) By virtue of anything in this Act have power to impose any tax, cess, toll or due which, as between goods manufactured or produced in the Province and similar goods not so manufactured or produced, discriminates in favour of the former, or which, in the case of goods manufactured or produced outside the Province, discriminates between goods manufactured or pro .....

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commodities. That section dealt with prohibitions or restrictions in respect of import into or export from a Province, of goods generally. It also dealt with the power to impose taxes etc. and prohibited discrimination against goods manufactured or produced outside a Province or goods produced in different localities. Part XIII of the Constitution has introduced all those prohibitions, not only in respect of State Legislatures, but of Parliament also. …. 11. In this connection it has got .....

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rse. It is a notorious fact that many of them had erected trade barriers seriously impeding the free flow of trade, commerce and intercourse, not only shutting out but also shutting in commodities meant for mass consumption. Between the years 1947 and 1950 almost all the Indian States entered into engagements with the Government of India and ultimately merged their individualities into India as one political unit, with the result that what was called British India, broadly speaking, became, unde .....

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nd custom posts, even inter se. But even after the merger, the Constitution had to take notice of the existence of trade barriers and therefore had to make transitional provisions with the ultimate objective of abolishing them all. Most of those Native States, big or small, had their own taxes, cesses, tolls and other imposts and duties meant not only for raising revenue, but also as trade barriers and tariff walls. It was in the background of these facts and circumstances that the Constitution .....

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n offered by Gajendragadkar J., also traced the history of Part XIII in the following words: 33. Let us first recall the political and constitutional background of Part XIII. It is a matter of common knowledge that, before the Constitution was adopted, nearly two-thirds of the territory of India was subject to British Rule and was then known as British India, while the remaining part of the territory of India was governed by Indian Princes and it consisted of several Indian States. A large numbe .....

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r to refer during the course of this judgment. Thus, prior to 1950 the flow of trade and commerce was impeded at several points which constituted the boundaries of Indian States. After India attained political freedom in 1947 and before the Constitution was adopted the historical process of the merger and integration of the several Indian States with the rest of the country was speedily accomplished with the result that when the Constitution was first passed the territories of India consisted of .....

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object of Article 301 obviously was to allow the free flow of the stream of trade, commerce and intercourse throughout the territory of India. 41. Then came the decision of this Court in Automobile case (supra) wherein, this Court examined the challenge to the Rajasthan Motor Vehicles Act, inter aila, on the ground that levy of taxes imposed under the said Act were offensive to Article 301 of the Constitution of India. S.K. Das, J. speaking for the majority also traced the historical background .....

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onstitution. This Court pointed out in the Atiabari Tea Co. case (1961) 1 SCR 809 : (AIR 1961 SC 232), that it would not be always safe to rely upon the American or Australian decisions in interpreting the provisions of our Constitution. Valuable as those decisions might be in showing how the problem of freedom of trade, commerce and intercourse was dealt with in other federal constitutions, the provisions of our Constitution must be interpreted against the historical background in which our Con .....

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ovinces, each with its own administrative set up. There were differences of language, religion etc. Some of the Provinces were economically more developed than the others. Even inside the same Province, there were under developed, developed and highly developed areas from the point of view of industries, communications etc. The problem of economic integration with which the Constitution-makers were faced was a problem with many facets. Two questions, however, stood out; one question was how to a .....

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er India attained political freedom in 1947 and before the Constitution was adopted, the process of merger and integration of the- Indian States with the rest of the country had been accomplished so that when the Constitution was first passed the territory of India consisted of Part A States, which broadly stated, represented the Provinces in British India, and Part B States which were made up of Indian States. There were trade barriers raised by the Indian States in the exercise of their legisl .....

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the historical evolution of not only the federal structure of the Government of India Act, 1915 but also the recommendations made by the Simon Commission and the Joint Parliamentary Committee on the Evolution of such Federalism and for the protection of trade, commerce and intercourse. His Lordship referred to the backdrop in which the Government of India Act, 1935 was enacted, including the recommendations made by the Butler Committee, the Round Table Conference, the Federal Structure Committee .....

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enactment of Government of India Act, 1935, his Lordship concluded: 95. The detailed examination of the history lying at the back of the Government of India Act, 1935 lays bare some fundamental facts and premises. It shows that the process through a whole century was the breakup of a highly centralized Government and the creation of autonomous Provinces with distinct and separate political existence, to be combined inter se and with the Indian States, at a later period, in a federation. To achie .....

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uality. The most important fact was that unlike the American and the Canadian Constitutions the commerce power was divided between the Centre and the Provinces as the Entries quoted by us clearly show. The commerce power of the Provinces was exercisable within the Provinces. The fetter on the commercial power of the Provinces was placed by Section 297. This was in two directions. Clause (a) of sub-section (1) banned restrictions at the barriers of the Provinces on the entry and export of goods, .....

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ructive: 96. When drafting the Constitution of India, the Constituent Assembly being aware of the problems in various countries where freedom of trade, commerce and intercourse has been provided differently and also the way the Courts of those countries have viewed the relative provisions, must have attempted to evolve a pattern of such freedom suitable to Indian conditions. The Constituent Assembly realised that the provisions of Section 297 and the Chapter on Discriminations in the Government .....

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lified, by whom was the restriction to be imposed and to what extent; (e) whether the freedom should be to the individual or also to trade and commerce as a whole; (f) what to do with the existing laws in British India and more so, in the acceding Indian States; (g) whether any special provisions were needed for emergencies; (h) what should be the special provisions to enable the States to levy taxes on sale of goods, which taxes were to be the main source of income for the States according to t .....

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nd led to what Prof. Coupland described as Provincial-patriotism , for which the reason, according to the learned Professor was: In the course of the last few years, moreover, the sense of Provincial patriotism has been strengthened by the advent of a full Provincial self-government. The people took a new pride in Governments that were now in a sense theirs. (The Constitutional Problem in India, part III p. 40). 44. The historical backdrop painted by the decisions of this Court referred to above .....

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d of the country was ruled by the British while the remaining 1/3rd was ruled by the Princes also known as native States that enjoyed varying degrees of sovereignty over their respective territories. These rulers had the power to impose taxes and to regulate the flow of trade, commerce and intercourse. Some of them had erected trade barriers thereby impeding free flow of trade, commerce and intercourse. With the merger of these Princely States into the dominion of India to constitute one single .....

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the entire geographical boundaries of India being knit into one political unit. The whole object underlying the removal of such barriers was to facilitate free trade, commerce and intercourse in the interest of national solidarity and economic unity of the country. The evolution of Articles 301 to 307 comprising Part XIII of the Constitution is also punctuated by several events, twists and turns to which we may briefly refer at this stage, but, while we may do so, we need to remember that Sectio .....

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de the observation that the Constitution was not written on a tabula rasa. 45. The first germ plasma for Article 301 was located in what was introduced as Clause 13 in the draft submitted by the Sub-Committee on fundamental rights comprising Mr. K.M. Munshi, Sir Alladi Krishnaswami Ayyar and Sir B.N. Rau amongst others. The clause was in the following words: Subject to regulation by the law of the Union, trade, commerce and intercourse among the units, whether by means of internal carriage or by .....

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clear that: (1) goods from other parts of India than in the units concerned coming into the units cannot escape duties and taxes to which the goods produced in the units in themselves are subject. (2) It must also be open to the unit in an emergency to place restrictions on the rights declared by the clause. 47. The above suggestions were accepted and it was modified and incorporated as Clause 14 in the following words: 14. (1) Subject to regulation by the law of the Union trade, commerce and i .....

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one unit over another. [N.B. - A proviso will have to be added to meet the difficulty pointed out in para 6 of our report.] (2) Trade, commerce or intercourse within the territories of the Union by or with any person other than the citizens shall be regulated and controlled by the law of the Union. 48. The above clause then came up for consideration before the Advisory Committee where an elaborate debate ensued. What is of considerable importance is the statement of Sir Alladi Krishnaswami Ayya .....

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I am adding it. Alladi Krishnaswami Ayyar: Subject to regulation by the law of the Union, trade, commerce, and intercourse among the units by and between the citizens shall be free. That is the general principle. Then come the exceptions, Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or in an emergency. Suppose there is a general famine, and people are starved, that is what is meant here to be dealt with. And then Provided t .....

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, kindly read paragraph 6 of the report, regarding adding a proviso. K.M. Panikkar: Rajaji (C. Rajagopalachari) has raised the question of the right of the units to raise taxes, and says this right should not be denied. I, however, think this is a dangerous power to be given to the units. This may result in the creation of so many competing units. We have allowed for two things. We have allowed the unit to tax its own industries. We also allow things brought in to be taxed, for the sake of parit .....

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taxes and duties for revenue, cannot the provinces also do so? Alladi Krishnaswami Ayyar: We do not give a carte blanche to the States. It has been pointed out that certain condition of things obtain at present in the States, and … K.M. Panikkar: Let me explain the position. The position with regard to the internal customs in the States is complicated. In a large number of States these customs or duties do not exist. For example for the whole of the Punjab States there is no right for in .....

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made with them by agreement and contract for setting this matter. Alladi Krishnaswami Ayyar: The Union Powers Committee s attention was drawn to this matter and it was suggested by Sir V.T. Krishnamachari and Sir B.L. Mitter that some reference should be made to it in their report. We wanted to permit the States to enjoy the indulgence they have been enjoying. But we should guard against converting the country into competing units; that will be against the federation idea. Chairman: What shall w .....

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ging with their existing resources; but others may have to increase their revenue for managing their affairs. If you impose so many limitations on them, how can they do that? It is all very well to say free trade is necessary; but how are the provinces to live? Alladi Krishnaswami Ayyar: So far as the provincial legislatures are concerned, there is provision in Sec. 297 of the present Government of India Act itself: (Reads) No Provincial Legislature or Government shall by virtue of entry *** hav .....

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end upon one another. Govind Ballabh Pant: There is unanimity about the body of this clause and it is clear that there should not be any discrimination against one unit by another unit. Otherwise we will be going against the very sense of a Union or a Federal Constitution. If the units are to be discriminated against, we will come to blows more often than otherwise. Therefore this should be avoided. The only thing to be considered is how to give effect to the suggestion made in para 6 of the Pre .....

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n-citizens was dropped as being vague and unnecessary. The Advisory Committee in its report submitted on 23rd April, 1947 incorporated the above provision as Clause 10. Certain amendments to the said clause were suggested and adopted by the Constituent Assembly. 50. In the first Draft Constitution of October, 1947, Clause 17 underwent further amendments and eventually appeared in the Draft Constitution of 1948 as Clause 16 incorporated in the Fundamental Rights Chapter in the following words: 16 .....

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r by any law or regulation relating to trade or commerce, whether carried by land, water or air. 244. Notwithstanding anything contained in article 16 or in the last preceding article of this Constitution, it shall be lawful for any State - (a) to impose on good imported from other States any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) to impose by land .....

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e provisions of Articles 243 and 244 of this Constitution and confer on the authority so appointed such powers and such duties as it thinks necessary. 52. The Ministry of Industry and Supply expressed some reservation regarding clause (b) of Article 244 and demanded abolition of the said clause altogether. The Ministry appears to have argued that it was not possible to foresee the circumstances in which the freedom of trade, commerce or intercourse with a State will need to be interfered with by .....

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as appended by Sir B.N. Rau was in the following words: Note: During a period of depression owing to destruction by flood or otherwise of crops in any particular State, it may be necessary for the State to impose restrictions on the export of any crop from such State in the public interests. Similarly on the outbreak of any epidemic disease, like plague, in a State it may be necessary for a neighbouring State to impose restrictions on the freedom of intercourse between the inhabitants of that St .....

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s could get a holistic idea regarding trade and commerce. Article 274-A was a repetition of Article 16 and laid down the general principle. Article 274-B empowered Parliament to impose restrictions in public interest. Article 274-C prohibited Parliament and the State legislatures from making any law giving any preference to one State over another, or making any discrimination between one State and another, except when Parliament found it necessary to do so to deal with a situation arising from s .....

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e same were rejected and Articles 274-A to 274-E including Articles 274 DD and 274 DDD were adopted without any modification. These Articles are now renumbered and appear as Articles 301 to 307 of the Constitution of India. 56. It is in the above backdrop that question No.1shall have to be answered which turns on a true and correct interpretation of Article 301 of the Constitution. We must at the threshold say that while attempting to answer the question we are not on virgin ground, for this Cou .....

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n of India, Sinha, CJ., held that taxes per se were totally outside the purview of Article 301 and could never constitute a restriction except where the same operated as a fiscal barrier that prevented free trade, commerce and intercourse. The view taken by Justice Shah, J. was not supported by any one of the counsel appearing for the parties for it was candidly accepted that the same was an extreme view that was legally unsupportable. What was all the same argued on behalf of the dealers/assess .....

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n of the relevant provisions of Part XIII as a whole as well as the principle of economic unity which it is intended to safeguard by making the said provisions, the conclusion appears to us to be inevitable that the content of freedom provided for by Article 301 was larger than the freedom contemplated by Section 297 of the Constitution Act of 1935, and whatever else it may or may not include, it certainly includes movement of trade which is of the very essence of all trade and is its integral p .....

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that trade shall be free throughout the territory of India primarily it is the movement part of the trade that it has in mind and the movement or the transport part of trade must be free subject of course to the limitations and exceptions provided by the other Articles of Part XIII. That we think is the result of Article 301 read with the other Articles in Part XIII. 51. Thus the intrinsic evidence furnished by some of the Articles of Part XIII shows that taxing laws are not excluded from the op .....

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es complex and difficult. However, in interpreting the provisions of the Constitution we must always bear in mind that the relevant provision has to be read not in vacuo but as occurring in a single complex instrument in which one part may throw light on another . (Vide: James v. Commonwealth of Australia - 1936 A.C. 578 at pg. 613). In construing Article 301 we must, therefore, have regard to the general scheme of our Constitution as well as the particular provisions in regard to taxing laws. T .....

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onstitutional limitation on the power of the Parliament and State Legislatures to levy taxes, and generally, but for such limitation, the power of taxation would be presumed to be for public good and would not be subject to judicial review or scrutiny. Thus considered we think 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. Tax .....

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ustrial employees may fall under Part XIII because in an economic sense an additional wage bill may indirectly affect trade or commerce. We are, therefore, satisfied that in determining the limits of the width and amplitude of the freedom guaranteed by Article 301 a rational and workable test to apply would be: Does the impugned restriction operate directly or immediately on trade or its movement? It is in the light of this test that we propose to examine the validity of the Act under scrutiny i .....

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ttorney General for India and learned Counsel appearing for the States, the correct view which ought to be accepted in preference to the other two contrary views propounded in the judgment. Reliance, in particular, was placed by Mr. Rohatgi and learned Counsel for the respondent-States upon the following passages appearing in Sinha, CJ. s judgment: 14. Viewed in this all comprehensive sense taxation on trade, commerce and intercourse would have many ramifications and would cover almost the entir .....

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304 (b) would make it necessary that all Bills or Amendments of pre-existing laws shall have to go through the gamut prescribed by that proviso. That will be putting too great an impediment to the power of taxation vested in the States and reduce the States limited sovereignty under the Constitution to a mere fiction. That extreme position has, therefore, to be rejected as unsound. 15. In this connection, it is also pertinent to bear in mind that all taxation is not necessarily an impediment or .....

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the transport of this commodity has to be imposed, and has been known in some parts of India to have been imposed at a certain rate per md. or ton of sugarcane transported to sugar factories. Such an imposition is a tax on transport of sugarcane from one place to another, either intra-State or inter-State. It is the tax thus realised that makes it feasible for opening new means of communication or for improving old ones. It cannot, therefore, be said that taxation in every case must mean an impe .....

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d commerce. That is another good reason in support of the conclusion that taxation is not ordinarily included within the terms of Article 301 of the Constitution. 16. In my opinion, another very cogent reason for holding that taxation simpliciter is not within the terms of Article 301 of the Constitution is that the very connotation of taxation is the power of the State to raise money for public purposes by compelling the payment by persons, both natural and juristic, of monies earned or possess .....

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speaks of imposition of reasonable restrictions in public interest, it could not have intended to include taxation within the generic term reasonable restrictions . This Court has laid it down in the case of Ramjilal v. Income Tax Officer, Mohindargarh(1951 SCR 127 at page 136) (AIR 1951 SC 97 at page 100), that imposition and collection of taxes by authority of law envisaged by Article 265 is outside the scope of the expression deprivation of property in Article 31(1) of the Constitution. Reaso .....

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nt to the free flow of trade, commerce and intercourse, for example, by imposing a high tariff wall, or by preventing imports into or exports out of a State, such a law is outside the significance of taxation, as such, but assumes the character of a trade barrier which it was the intention of the Constitutionmakers to abolish by Part XIII. The objections against the contention that taxation was included within the prohibition contained in Part XIII may thus be summarised: (1) Taxation, as such, .....

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elds. The legislative entries in the three Lists referred to above empowering the Union Government and the State Governments to impose certain taxations with reference to movement of goods and passengers would be rendered ineffective, if not otiose, if it were held that taxation simpliciter is within the terms of Article 301. (3) If the argument on behalf of the appellants were accepted, many taxes, for example, sales tax by the Union and by the States, would have to go through the gamut prescri .....

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goods and passengers is not necessarily an impediment. 17. That conclusion leads to a discussion of the other extreme position that taxation is wholly out of the purview of Article 301. That extreme position is equally untenable in view of the fact that Article 304 contains, and Article 306, before it was repealed in 1956, contained, reference to taxation for certain purposes mentioned in those Articles. But Article 306, which now stands repealed, contained references to tax or duty on the impo .....

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ut the clear distinction between taxation as such for the purpose of revenue and taxation for purposes of making discrimination or giving preference, both of which are treated by the Constitution as impediments to free trade and commerce. In other words, so long as the impost was not in the nature of an impediment to the free flow of goods and commodities between one State and another, including in this expression Union territories also, its legality was not subject to an attack based on the pro .....

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ce, and intercourse throughout the territory of India are not absolutely free, but are subject to certain powers of legislation by Parliament or the Legislature of a State; (2) the freedom declared by Article 301 does not mean freedom from taxation simpliciter, but does mean freedom from taxation which has the effect of directly impeding the free flow of trade, commerce and intercourse; (3) the freedom envisaged in Article 301 is subject to non-discriminatory restrictions imposed by Parliament i .....

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produced or manufactured in that State [Article 304(a)]; and lastly (7) restrictions imposed by existing laws have been continued, except insofar as the President may by order otherwise direct (Article 305). 59. Before we examine the rival submissions, we must also refer to the decision of this Court in Automobile case (supra) which added a new dimension to the legal exposition in Atiabari case (supra) by declaring that taxes that were compensatory in nature fell outside Part XIII and could neve .....

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as been very lucidly discussed in the dissenting opinion which Fullagar, J. wrote in McCarter v. Brodie (1950) 80 CLR 432 an opinion which was substantially approved by the Privy Council in Hughes and Vale Proprietary Ld. v. State of New South Wales 1955 AC 241. The learned Judge gave several examples to show the distinction between what was merely permitted regulation and what was true interference with freedom of trade and commerce. He pointed out that in the matter of motor vehicles most coun .....

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more than a certain speed. The weight of the load which may be carried on a motor vehicle on a public highway is limited. Such examples may be multiplied indefinitely. Nobody doubts that the application of rules like the above does not really affect the freedom of trade and commerce; on the contrary they facilitate the free flow of trade and commerce. The reason is that these rules cannot fairly be said to impose a burden on a trader or deter him from trading: it would be absurd, for example, to .....

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Another class of examples relates to making a charge for the use of trading facilities, such as, roads, bridges, aerodromes etc. 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. Such compensatory taxes are no hindrance to anybody s freedom so long as they remain reasonable; but they could of .....

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e 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 between that which would really be a charge for a facility provided and that which would really be a deterrent to a trade; but the distinction, if it has to be drawn, is real and clear. For the tax to become a prohibited tax it has to be a direct tax the effect of which .....

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eventh Schedule. But we must advert here to one exception which we have already indicated in an earlier part of this judgment. Such regulatory measures as do not impede the freedom of trade, commerce and intercourse and compensatory taxes for the use of trading facilities are not hit by the freedom declared by Article 301. They are excluded from the purview of the provisions of Part XIII of the Constitution for the simple reason that they do not hamper trade, commerce and intercourse but rather .....

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es need not comply with the requirements of the proviso to Article 304(b) of the Constitution. 60. Hidayatullah, J. in his dissenting judgment, however, took the view that even when a tax may be compensatory in character it would be a valid levy only if it goes through the process of presidential assent in terms of Article 304(b) of the Constitution of India and the proviso thereto. The following passage in this regard is relevant: 125. That a tax is a restriction when it is placed upon a trade .....

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d to restrict it; the second may burden the trader, but it is not a restriction of the trade. To refuse to draw such a distinction would mean that there is no taxing entry in Lists I and II which is not subject to Articles 301 and 304, however general the tax and however non-discriminatory its imposition. To bring all the taxes within the reach of Article 301 and thus to bring them also within the reach of Article 304 is to overlook the concept of a Federation, which allows freedom of action to .....

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ercourse should be rendered unfree . Trade and commerce remain free even when general taxes are paid by tradesmen in common with non-tradesmen. The question whether a tax offends Part XIII can only arise when it seeks to tax trade, commerce and intercourse. Support for the contrary proposition is not to be found in 1936 AC 578 James v. Commonwealth. The Privy Council in James v. Commonwealth did not lay down: Every step in the series of operations which constitutes particular transaction is an a .....

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n others not so engaged cannot normally be within the reach of Part XIII. A motor transport owner cannot claim that he will not pay property tax in respect of his garage buildings or electricity tax for the electricity he consumes in lighting them, or income tax on his profits. Part XIII has nothing to do with such taxes even though they fall upon tradesmen. xx xxx xxx xxx 132. In our judgment, the first test to apply is what is the object and scope of the legislation? A regulation of trade and .....

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and remains only a regulation incidentally touching trade and commerce, the regulation is outside the operation of Articles 301 and 304. It is on this ground that laws prescribing the rule of the road and like provisions already referred to as well as a regulation that the height to which trucks may be loaded must be such as not to endanger the overhead bridges or wires, do not have to go before the President, since they do not affect the freedom guaranteed. The object of such laws cannot be re .....

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art of regulation. Such licensing and fees fall outside Article 301, because they cannot be viewed as restrictions, and therefore do not need to be processed under Article 304. Such regulations are designed to give equal opportunity to everyone, subject to a certain standard. The object being a public object, such regulations cannot be questioned unless they amount to restrictions. A tax, however, which is made the condition precedent of the right to enter upon and carry on business at all is a .....

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ecise definition, but it can be stated what would infringe or detract from the said freedom. Before a particular law can be said to infringe the said freedom, it must be ascertained whether the impugned provision operates as a restriction impeding the free movement of trade or only as a regulation facilitating the same. Restrictions obstruct the freedom, whereas regulations promote it. Police regulations, though they may superficially appear to restrict the freedom of movement, in fact provide t .....

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ctice 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. To say all these is not to say that every provision couched in the form of regulation but in effect and substance a restriction can pass off as a permissible regulation. It is for the Court in a given case to decide whether a provision purporting to regulate trade is in fact a restric .....

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d free in Article 301 of our Constitution. xxx xxx xxx 39. But the more difficult question is, what does the word restrictions mean in Article 302? The dictionary meaning of the word restrict is to confine, bound, limit . Therefore, any limitation placed upon the freedom is a restriction on that freedom. But the limitation must be real, direct and immediate, but not fanciful, indirect or remote. In this context, the principles evolved by American and Australian decisions in their attempt to reco .....

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ement of trade, it would be restriction on the said freedom. But a law which may have only indirect and remote repercussions on the said freedom cannot be considered to be a restriction on it. Taking the illustration from taxation law, a law may impose a tax on the movement of goods or persons by a motor-vehicle; it directly operates as a restriction on the free movement of trade, except when it is compensatory or regulatory. On the other hand, a law may tax a vehicle as property, or the garage .....

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he burden may be so high that it may indirectly affect the free flow of trade. In the former case, the court may have to scrutinize the provisions of a particular statute to ascertain whether the tax is on the movement. If the provisions disclose a tax on the movement, it will be a restriction within the meaning of Article 302. In the latter case, if the provisions show that the tax is on property, the reasonableness of the tax may have to be tested against the provisions of Article 19 of the Co .....

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rticle 301 declares a right of free movement of trade without any obstructions by way of barriers, inter-State or intra-State, or other impediments operating as such barriers. (2) The said freedom is not impeded, but, on the other hand, promoted, by regulations creating conditions for the free movement of trade, such as, police regulations, provision for services, maintenance of roads, provision for aerodromes, wharfs etc., with or without compensation. (3) Parliament may by law impose restricti .....

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nd another, by virtue of any entry in the Lists, infringing the said freedom. (6) This ban is lifted in the case of Parliament for the purpose of dealing with situations arising out of scarcity of goods in any part of the territory of India and also in the case of a State under Article 304(b), subject to the conditions mentioned therein. And (7) the State can impose a non-discriminatory tax on goods imported from other States or the Union territory to which similar goods manufactured or produced .....

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tainless Steel case (supra), where this Court while overruling the decisions in Bhagatram and Bihar Chamber of Commerce cases (supra) declared that it is not just a remote benefit to the tax payer but only a direct and substantial benefit that would justify levy of compensatory taxes without offending Article 301 of the Constitution of India. Speaking for the Court, Kapadia, J. observed: 49. The concept of compensatory taxes was propounded in Automobile Transport in which compensatory taxes were .....

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ree Judges enunciated the test of some connection saying that even if there is some link between the tax and the facilities extended to the trade directly or indirectly, the levy cannot be impugned as invalid. In our view, this test of some connection enunciated in Bhagatram case is not only contrary to the working test propounded in Automobile Transport case but it obliterates the very basis of compensatory tax. We may reiterate that when a tax is imposed in the regulation or as a part of regul .....

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eevkumar v. CST and State of Bihar v. Bihar Chamber of Commerce stand overruled. xxx xxx xxx xxx 52. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram case followed by the judgment in Bihar Chamber of Commerce was well founded. 53. We reiterate that the doctrine of direct and immediate effect of the impugned law on trade and commerce under Article 301 as propounded in Atiabari Tea Co. Ltd. v. State of Assam and the working test enunciat .....

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al leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment. 63. The legal position that today holds the field in light of the above is that compensatory taxes would fall outside Part XIII of the Constitution only if tax payers receive benefits and facilities commensurate to the levy. Any and every benefit howsoever remote or distant, would not save the levy from an attack on the ground of violation of Article 301. Having said that we must mention .....

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g for the dealers/assessees also did not support the compensatory tax theory propounded in Automobile case (supra). Mr. Rohatgi, learned Attorney General for India and M/s. Rakesh and Dinesh Dwivedi who appeared for some of the States also argued that the Compensatory Tax Theory has no basis whatsoever and that the same ought to be abandoned not only because of lack of any juristic support but also because of the problems that beset the application of the said theory in practice. It may, in the .....

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pt of compensatory taxes is not recognised by the Constitution. A tax is a compulsory exaction of money for general public good and is defined as under by Thomas M Cooley in his book The Law of Taxation at page 61(Clark A. Nichols ed., 4th ed. 1924) as: Taxes are the enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government and for all public needs. This definition of taxes, often referred to as Cooley s definiti .....

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g words: The term tax and taxes have been defined as a rate or sum of money assessed on the person or property of a citizen by government for the use of the nation or state; burdens or charges imposed by the legislative power upon persons or property to raise money for public purposes, and the enforced proportional contribution of persons and property levied by authority of the state for the support of government and for all public needs. xxx xxx xxx xxx xxx xxx xxx xxx Taxes are public burdens, .....

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or charges imposed by the legislative power upon persons or property to raise money for public purposes. Black s Law Dictionary, 7th Edn., P. 1469 defines tax as under: A monetary charge imposed by government on persons, entities or property to yield public revenue, If taxes are eventually meant to serve larger public good and for running the governmental machinery and providing to the people the facilities essential for civilized living, there is no question of a tax being non-compensatory in .....

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of Sri Shirur Mutt (AIR 1954 SC 282), Mahant Sri Jagannath Ramanuj Das & Anr. v. State of Orissa & Anr. (AIR 1954 SC 400), The Hingir-Rampur Coal Co. Ltd. v. State of Orissa (AIR 1961 SC 459), Corporation of Calcutta and anr. v. Liberty Cinema (AIR 1965 SC 1107), Kewal Krishna Puri and Anr. v. State of Punjab (1980) 1 SCC 416, Krishi Upaj Mandi Samiti and Ors. v. Orient Paper and Industries Ltd. (1995) 1 SCC 655), State of Gujarat and Anr. v. Akhil Gujarat Pravasi V.S. Mahamendal (2004) .....

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ief of Article 301 of the Constitution. The question however is whether tax amount collected in terms of the said legislation is really used by the State for the purpose of providing or maintaining services and benefits to the tax payers and whether the Courts can follow the money trail to determine whether the State concerned has actually used the amount for the avowed purpose underlying the legislation. This process is fraught with serious difficulties, a fact that was not disputed by learned .....

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atory Tax Theory no longer found acceptable, we are left with only two competing view points, one expressed by Gajendragadkar, J. and the other by B.P. Sinha, CJ. Which one is the correct view is the critical question that falls for our determination having regard to the Constitutional scheme and the language employed in Articles 301 to 307 to which we must now turn for a closer look. Article 301 is as under: 301. Freedom of trade, commerce and intercourse.- Subject to the other provisions of th .....

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to in Article 301 exercisable. Article 302 reads thus: 302. Power of Parliament to impose restrictions on trade, commerce and intercourse.- Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India as may be required in the public interest. 67. The above leaves no manner of doubt that Parliament is empowered to impose such restrictions on the freedom of trade, commerce and intercours .....

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public interest. Article 303, in turn, places restrictions on the legislative powers of the Parliament and of the States, when it says : 303. Restrictions on the legislative powers of the Union and of the States with regard to trade and commerce.-(1) Notwithstanding anything in article 302, neither Parliament nor the Legislature of a State shall have power to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorising the making of, any .....

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a. 68. A careful reading of the above would show that notwithstanding the power vested in the Parliament under Article 302, it shall not make any law giving, or authorising the giving of any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. From Clause (2) of Article 303 (supra) it is manifest that the restriction on the .....

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l have no power to make a law imposing restriction on trade, commerce and intercourse, by giving or authorizing the giving of any preference to one State over the other, such limitation on the legislative power of Parliament shall not extend to giving of any preference or making or authorizing any discrimination if it is declared by law that a situation has arisen out of scarcity of goods that makes it necessary to do so. In other words, while the Parliament may impose restrictions in public int .....

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ong States.-Notwithstanding anything in Article 301 or Article 303, the Legislature of a State may by law- (a) impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required .....

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obstante clause in Article 304. We shall turn to that aspect a little later. What we wish to examine is whether Article 304(a) treats taxes as a restriction so that any such levy may fall foul of Article 301. The answer to that question, we say without any hesitation is in the negative. Article 304(a) far from treating taxes as a restriction per se, specifically recognises the State legislature s power to impose the same on goods imported from other States or Union Territories. The expression t .....

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pose is certainly not a restriction on the power to tax. That does not, however, mean that the power to tax goods imported from other States or Union Territories is unqualified or unrestricted. There are, in our opinion, two restrictions on that power. The words to which similar goods manufactured or produced in that State are subject impose the first restriction on the power of the State legislature to levy any such tax. These words would imply that a tax on import of goods from other States wi .....

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on goods imported from others State and Union territories is clearly recognised as Constitutionally permissible, the exercise of such power is subject to the two restrictive conditions referred to above. That does not however detract from the proposition that levy of taxes on goods imported from other States is constitutionally permissible so long as the State legislatures abide by the limitations placed on the exercise of that power. To put it differently, levy of taxes on import of goods from .....

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ng non-discriminatory does not mean that the levy of such a tax is not a restriction on the freedom of trade, commerce and intercourse. It was contended that while a discriminatory tax must be treated as a restriction by itself the reasonableness of a non-discriminatory tax will have to be seen by the President in terms of the Proviso to Clause (b). It was argued that Article 304(a) does not exhaust the universe in so far as levy of taxes is concerned for even when the law complies with the requ .....

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imported from other States, Clause (b) deals with imposition of reasonable restriction in public interest. It is trite that levy of a tax in terms of Article 304(a) may or may not be accompanied by the imposition of any restriction whether reasonable or unreasonable. There is, in our opinion, no rationale in the contention that the legislature of a State cannot levy a tax without imposing one or more reasonable restrictions or that a law that is simply imposing restrictions in terms of Clause ( .....

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h reasonable restriction as may be considered necessary in public interest. All the three situations are fully covered and permissible under Article 304 in view of the phraseology used therein. The word and can mean or as well as and depending upon the context in which the law enacted by the legislature uses the same. Suffice it to say that levy of taxes do not constitute a restriction under Part XIII except in cases where the same are discriminatory in nature. Once Article 304 (a) is understood .....

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301, 302, 303 & 304 may be summarized as under: 1. Freedom of trade, commerce and intercourse in terms of Article 301 is not absolute but is subject to the Provisions of Part XIII. 2. Article 302 which appears in Part XIII empowers the Parliament to impose restrictions on trade, commerce and intercourse in public interest. 3. The restrictions which Parliament may impose in terms of Article 302 cannot however give any preference to one State over another by virtue of any entry relating to tr .....

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so being found in Articles 245 and 246 of the Constitution. 6. Such power to levy taxes is however subject to the condition that similar goods manufactured or produced in the State levying the tax are also subjected to tax and that there is no discrimination on that account between goods so imported and goods so manufactured or produced. 7. The limitation on the power to levy taxes is entirely covered by Clause (a) of Article 304 which exhausts the universe in so far as the State legislature s p .....

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erpretation of the provisions of Article 301 to Article 304. An interpretation which is both textual and contextual has always been found to be more acceptable. That is so because it is only when both the text and the context are kept in view that the statutory provisions can be best understood. An interpretation that makes the textual match the contextual meaning of the provision is preferred by Courts over one that prefers one at the cost of the other. 74. In Reserve Bank of India v. Peerless .....

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owing passage of Constitutional Law of India (4th Edition) by H.M. Seervai where the distinguished author has adverted to the golden rule of interpretation applicable to Constitutional provisions in the following words: 2.12. The golden rule of interpretation is that words should be read in their ordinary, natural and grammatical meaning subject to the rider that in construing words in a Constitution conferring legislative power the most liberal construction should be put upon the words so that .....

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he said passages over again, we need to remember that Part XIII had a historical precursor in the form of Section 297 of the Government of India Act, 1935 that governed what was then called the British India comprising the territory of India subject to British Rule. The rest of the territories were at that time Princely States who claimed sovereign rights within the limitations imposed by the paramount power. The power to levy taxes was one such power wielded by the Princely States which led to .....

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any tax, cess, toll or due which discriminated between goods manufactured or produced in the provinces and goods not so manufactured or produced or between goods manufactured or produced outside the province discriminated between goods manufactured or produced in one locality and similar goods manufactured or produced in another locality. With India attaining its freedom, Part XIII of the Constitution adopted by it, was aimed at bringing about economic unity. The object underlying Part XIII was .....

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and intercourse as recognized in the 1935 Act and in the Constitution under Part XIII remained the same. It was for that reason that Justice Venkatarama Iyer had in M.P.V. Sunderaramier s case (Supra) observed and if we may say so rightly that the Constitution of India was not written on a tabula rasa. The common feature which the two provisions share is that the provincial legislature s power to impose taxes is recognized subject only to the limitation that there is no discrimination between go .....

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edom of trade, commerce and intercourse then what was envisaged under Section 297. The Court said : 42. … … …That is why we are inclined to hold that the broad and unambiguous words used in Article 301 are intended to emphasize that the freedom of trade, commerce and intercourse guaranteed was richer and wider in content than was the case under Section 297; how much wider and how much richer can be determined only on a fair and reasonable construction of Article 301 read alo .....

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tion against discrimination to the Union Government and the Parliament and (b) making the provision applicable to the territory of India as defined by the Constitution, has not impressed us. The textual interpretation placed by us upon Articles 301-304 instead gets considerable support from the contextual and the historical perspective of Part XIII. 79. We may now turn to yet another contextual feature that has a bearing on the true and correct interpretation of Part XIII namely the sovereign ch .....

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s can be circumscribed only by express provisions of the Constitution and unless there is an express limitation on the plenary taxing power of the States, there is no other fetter on the exercise of that power. 80. Applying the above principle to the case at hand, we do not see any specific limitation on the State s power to levy taxes on the import of goods from other States except the one referred to in Article 304(a) of the Constitution. That limitation we have sufficiently explained is confi .....

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exercise of such power whether for the sake of free trade, commerce and intercourse or otherwise simply means that the State legislatures are free to levy taxes that are non-discriminatory in nature. 81. That brings us to the third contextual feature relevant to the interpretation of Part XIII. We have in the earlier part of this judgment referred to the decisions of this Court in Kuldip Nayyar s case and S.R. Bommai s case apart from the decisions of this Court in Special Reference No. 1 of 19 .....

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Rao, Mr. AK Sinha and Mr. Devdatt Kamath strenuously argued, and in our opinion rightly so that the provisions of our Constitution are aimed at vesting and maintaining with the States substantial and significant powers in the legislative and executive fields so that States enjoy their share of autonomy and sovereignty in their sphere of governance. This can in turn be done by interpreting the provisions of the Constitution including those found in Part XIII in a manner that preserves and promot .....

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this Court in S.R. Bommai s case (supra) where this Court cautioned against adoption of an interpretation that has the effect of whittling down the powers reserved to the States. This Court said: 276. The fact that under the scheme of our Constitution, greater power is conferred upon the Centre vis-a-vis the States does not mean that States are mere appendages of the Centre. Within the sphere allotted to them, States are supreme. The Centre cannot tamper with their powers. More particularly, th .....

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in favour of the States. All this must put the court on guard against any conscious whittling down of the powers of the States. Let it be said that the federalism in the Indian Constitution is not a matter of administrative convenience, but one of principle - the outcome of our own historical process and a recognition of the ground realities. This aspect has been dealt with elaborately by Shri M.C. Setalvad in his Tagore Law Lectures "Union and State relations under the Indian Constitution .....

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Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan. It is equally necessary to emphasise that courts should be careful not to upset the delicately-crafted constitutional scheme by a process of interpretation. (emphasis supplied) 82. Reference may also be made to Kesavananda Bharati s case (supra) where a Bench of thirteen Judges cautioned that the process of interpretation should not diminish or whittle down the provisions of the original contract upon which the federation was founded n .....

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islature must be clearly established. Entry 97 itself is specific that a matter can be brought under that entry only if it is not enumerated in List II or List III and in the case of a tax if it is not mentioned in either of those lists. In a Federal Constitution like ours where there is a division of legislative subjects but the residuary power is vested in Parliament, such residuary power cannot be so expansively interpreted, as to whittle down the power of the State legislature. That might af .....

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nd promotes the concept of federalism preferred by the courts while interpreting the provisions of the Constitution. 84. Dealing in particular with the scope and meaning of Article 304 (b) of the Constitution on a true and correct interpretation Seervai in his treatise Constitutional Law of India (supra) sounded a note of caution and observed that if Article 304(b) was interpreted in a manner that would include levy of taxes as a restriction within the meaning of that Article, it would totally d .....

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take place in the garb of making Union executive s concurrence an essential pre-requisite for any taxing legislation. The following passage from Seervai s book (Vol. 3, Page 2607) is in this regard instructive: 23.43. Thirdly, the whole scheme of taxation in our Constitution would be completely dislocated if Article 304(b) included a tax. The taxing powers of the Union and the States have been made mutually exclusive so that Parliament cannot deprive the States of their taxing powers as has happ .....

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a discriminatory tax. It is not clear from the article that a tax simpliciter can be treated as a restriction on the freedom of internal trade. Article 304(a) is intended to prevent discrimination against imported goods by imposing on them tax at a higher rate than that borne by goods produced in the State. A discriminatory tax against outside goods is not a tax simpliciter but is a barrier to trade and commerce. Articled 304 itself makes a distinction between tax and restriction. That apart, t .....

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the Constitutional scheme constantly reminding itself of the need for a harmonious construction lest interpretation placed on a given provision has the effect of diluting or whittling down the effect or the importance of any other provision or feature of the Constitution. So interpreted Article 301 appearing in Part XIII does not, in our opinion, work as an impediment on the States taxing powers except in situations where such taxes fall foul of Article 304(a) of the Constitution. The contextua .....

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ere was no need for the framers of the Constitution to start Article 304 with a non-obstante clause inasmuch as a non-obstante clause is meant to be only an exception to the generality of the provision. Similar contentions urged in the past have been noticed by this Court and by jurists alike while attempting interpretation of Part XIII. This is evident from the passages which have dealt with the anomaly arising out of the use of the expression subject to in Article 301 and the non-obstante clau .....

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very difficult to understand them and I think the comment is absolutely justified that this is going to be a lawyers' constitution, a "paradise for lawyers" where there will be so many innumerable loopholes that we will be wasting years and years before we could come to the final and correct interpretation of many clauses. If we read this article 274, you will find, Sir, that this is one of the most wonderful articles in the whole Constitution. This is not the only one; there are m .....

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sari. Shri T.T. Krishnamachari : There is no bar to that. Dr. P.S. Deshmukh : Then, notwithstanding the fact that you are considered a man, and notwithstanding the fact that you wear nothing else but saris, you will wear a Gandhi cap also. Then we have another 'notwithstanding'. Notwithstanding that you are a man, notwithstanding that you shall wear nothing but a sari, notwithstanding that you shall also wear a Gandhi cap, you will be at liberty to describe yourself as a woman. (Laughte .....

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I think there is a better method of drafting. Even if it is necessary to cope with complex situations and to provide something on the lines proposed, there should be a simpler and more direct way of drafting and making a provision which is not so ununderstandable that only supermen could read this constitution, even assuming that only supermen are to be born in India hereafter. If this Constitution is made for the average man, if it is going to affect the rights and privileges of the ordinary c .....

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respect of article 274 itself. It is, therefore, better to have simpler provisions and I have given them the simplest form. I hope that this will appeal to the drafters of the Constitution and if they accept it, I can tell them that they will be out of much of the trouble. But if they insist upon the draft that they have produced, it will be very difficult for trade and commerce not only to prosper but even to exist. 88. In Automobile Transport case (supra), S K Das, J. speaking for the majority .....

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hough Article 304 relates only to the Legislature of a State. Article 303 relates to both the State Legislature and Parliament and again the non obstante clause in Article 304 is somewhat inappropriate. The fact of the matter is that there is such a mix up of exception upon exception in the series of articles in Part XIII that a purely textual interpretation may not disclose the true intendment of the articles. 89. Subba Rao, J., as His Lordship then was, in a separate judgment delivered in Auto .....

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far as Article 301 is concerned, for it enables the Legislature of a State to impose an impediment on the free movement of trade in spite of the freedom declared under Article 301. But it has no relevance to Article 303, which only prohibits the State Legislature from making a discriminatory law and it does not in any way prohibit the State Legislature from imposing a non-discriminatory tax permitted under Art. 304(a). But, with reference to Art. 304(b), the non-obstante clause has significance .....

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f taxation in that regard would infringe the freedom declared under Art. 301. 90. Hidayatullah, J. also found the non-obstante clause in Article 304 to be somewhat anomalous and described the same as inaccurate drafting of the Constitution . 91. Suffice it to say that the use of the non-obstante clause in Article 304 has had its share of criticism from the very inception which criticism has to an extent been prophetic for the interpretation of Part XIII has indeed been a lawyer s paradise over t .....

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(a) and (b) do not subtract anything from Article 301. That appears to us to be the correct view on the subject. While it is true that legislature does not waste words and that no part of a legislation can be rendered a surplusage, the only rational meaning that can be attributed to the non-obstante clause appearing in Article 304 is that the same was used only as a manner of abundant caution and a possible reassurance that Article 301 is indeed subordinate to Article 304 which it was even other .....

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a) recognizes the power of the State Legislatures to tax goods imported from other State, it also imposes limitations on the exercise of that power. On the other hand clause (b) to Article 304 permits imposition of reasonable restrictions subject to the proviso appearing below that clause. We have thus no hesitation in rejecting the argument that the use of the non-obstante clause in Article 304 is suggestive of the Constitution recognizing taxes as restrictions under Article 301 or that the pow .....

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riction upon the freedom of trade, commerce and intercourse guaranteed under Part XIII, a citizen whose right under that Part is affected may have no redress against such levies. Relying upon the decision of this Court in Ramjilal v. Income Tax Officer, Mohindargarh, AIR 1951 SC 97, it was contended that a challenge to a fiscal statute shall not be maintainable even under Part III of the Constitution, thereby, not only violating the citizen s constitutional rights of free trade and commerce but .....

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file return and pay income tax for the income earned by him during the previous years. Aggrieved, the petitioner challenged the proceedings inter alia on the ground that the assessment of tax for previous year violated his right guaranteed under Article 14. This Court repelled the contention founded on Article 14 holding that there was reasonable classification of assessee under the relevant statute and that the petitioner s challenge to the proceedings under Article 14 was untenable. Having sai .....

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than by imposition of tax for otherwise Article 265 would become wholly redundant. The Court declared that the Constitution had treated taxation as distinct from compulsory acquisition of property and has made independent provisions giving protection against taxation. 94. Then came Kunnathat Thathunni Moopil Nair v. The State of Kerala & Anr., AIR 1961 SC 552, where again one of the questions that fell for consideration was whether Article 265 of the Constitution was a complete answer to the .....

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clause in Article 14. The Court declared that the guarantee of equal protection of laws must extend even to taxing statutes. It clarified that every person may not be taxed equally but property of the same character has to be taxed, the taxation must be by the same standard so that the burden of taxation may fall equally on all persons holding that kind and extent of property. If the taxation, generally speaking, imposes similar burden on everyone with reference to that particular kind and exte .....

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ent way or a way that the Court might think would have been more equitable in the interest of equity. 95. To the same effect is the decision in Laxmanappa Hanumantappa Jamkhandi v. Union of India, AIR 1955 SC 3. Reference may also be made to Smt. Ujjam Bai v. State of Uttar Pradesh, AIR 1962 SC 1621 which took note of the pronouncements of this Court in the three cases mentioned above to examine whether there was any conflict between the view taken in Moopil Nair case on the one hand and Ramjila .....

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cause the legislature that imposed the tax was competent to levy the tax in terms of Article 265. This Court summed up the legal position in the following words: The result of the authorities may thus be summed up: (1) A tax will be valid only if it is authorized by a law enacted by a competent legislature. That is Article 265. (2) A law which is authorized as aforesaid must further be not repugnant to any of the provisions of the Constitution. Thus, a law which contravenes Articles 14 will be b .....

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me when the law is a colourable piece of legislation. (5) Where assessment proceedings are taken without the authority of law, or where the proceedings are repugnant to rules of natural justice, there is an infringement of the right guaranteed under Article 19(1) (f) and Article 19(1)(g); Tata Iron & Steel Co. Ltd; Moopil Nair s case and Shri Madan Lal Arora s case. 96. The above statement of law in our view is legally unexceptionable. The argument that Ramjilal and Laxmanappa s cases place .....

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the matter of quantum of tax that may be levied as also the subjects and individuals upon whom the same may be levied. Just because room for challenge to a fiscal statute is limited is in our view no reason to hold that levy of taxes otherwise within the competence of the legislature imposing the same should be seen as a restriction on free trade and commerce guaranteed under Article 301 which Article does not either textually or contextually recognize levy of taxes as impediments except in case .....

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ns may not be helpful while interpreting the provisions of our Constitution, yet the Court had referred to and relied upon those decisions to buttress its conclusions. The Australian decisions relied upon by the majority have, it was contended, been reversed by subsequent pronouncements of the Australian High Court, which pronouncements are now gravitating towards the theory that discriminatory taxes alone will operate as restrictions against free trade, commerce and intercourse. It was in that .....

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n and Australian decisions observed: 59…. … … We have deliberately not referred to these decisions earlier because we thought it would be unreasonable to refer to or rely on the said section or the decisions thereon for the purpose of construing the relevant Articles of Part XIII of our Constitution. It is commonplace to say that the political and historical background of the federal polity adopted by the Australian Commonwealth, the setting of the Constitution itself, the d .....

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; Co. The same caution was expressed by Gwyer, C.J., as early as 1939 when he observed in The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938. In the matter of AIR 1939 F.C. 1 at P.5; there are few subjects on which the decisions of other Courts require to be treated with greater caution than that of federal and provincial powers, for in the last analysis the decision must depend upon the words of the Constitution which the Court is interpreting; and since no .....

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isdiction responding to similar challenges posed by interpretation of what His Lordship described as sister constitutions . He said: 59. … … …When you are dealing with the problem of construing a constitutional provision which is none-too-clear or lucid you feel inclined to inquire how other judicial minds have responded to the challenge presented by similar provisions in other sister Constitutions. It is in that spirit that we propose to refer to two Privy Council decisions .....

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icable even to our Constitution including interpretation of Article 301 thereof. The Court said: Commonwealth of Australia v. Bank of New South Wales 61. … … … In deciding the said question one of the tests which was applied by Lord Porter was: Does the act not remotely or incidentally (as to which they will say something later) but directly restrict the inter-State business of banking , and he concluded that two general propositions may be accepted, (1) that regulation of t .....

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s case (supra) also Das, J. while speaking for the majority followed the direct and immediate effect test relying upon the pronouncements of the High Court of Australia in Commonwealth of Australia and Ors. v. Bank of New South Wales and Ors. [1950] A.C. 235. This is evident from the following passage: 10. … … …In Section 92 of the Australian Constitution the expression used was absolutely free and repeatedly the question was posed as to what this freedom meant. We do not pr .....

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tible with its absolute freedom, and (ii) that Section 92 of the Australian Constitution is violated only when a legislative or executive act operates to restrict such trade, commerce and intercourse directly and immediately as distinct from creating some indirect or inconsequential impediment which may fairly be regarded as remote. … … … 102. On behalf of the States it was contended and, in our opinion, rightly so that the direct and immediate effect test evolved by the pro .....

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lian Constitution was interpreted to be forbidding only discriminatory burdens it would have the effect of denying the freedom of trade, commerce and intercourse. The Court said: … .. ..Plainly, however, the construction which treats Section 92 as being concerned to guarantee the freedom of inter-State trade and commerce from discriminatory burdens does not involve the consequence that the grant of legislative power with respect to inter-State trade and commerce is deprived of its essenti .....

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is favoured by history and context. In doing so, we must say something about the resolution of cases in which no impermissible purpose appears on the face of the impugned law, but its effect is discriminatory in that it discriminates against inter-State trade and commerce and thereby protects intra-State and commerce of the same kind. We mention first Commonwealth laws enacted under Section 51(i) which govern the conduct of inter-State trade and commerce. Such laws will commonly not appear to d .....

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imate, depend upon judicial impression. (emphasis supplied) 104. The Court also held that it is only if the discrimination is of a protectionist character that Section 92 of the Australian Constitution would stand violated. The Court said: In the case of a State law, the resolution of the case must start with a consideration of the nature of the law impugned. If it applies to all trade and commerce, inter-State and intra-State alike, it is less likely to be protectionist than if there is discrim .....

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reference to an object which is not protectionist, discriminates against inter-State trade or commerce in pursuit of that object in a way or to an extent which warrants characterization of the law as protectionist, a court will be justified in concluding that it nonetheless offends Section 92. (emphasis supplied) 105. The above passage signifies a paradigm shift in the judicial opinion in Australia as regards the interpretation of Section 92 of the Australian Constitution. The earlier view that .....

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e may, at this stage, deal with yet another contention urged on behalf of the dealers in support of their case that taxes were, in the scheme of Part XIII, treated as restrictions. It was argued that the presence of Article 306 of the Constitution which now stands repealed by Constitution 7th Amendment Act, 1956 was itself suggestive of the fact that taxes were intended to be restrictions on free trade, commerce and intercourse, for otherwise, there was no reason why a provision like Article 306 .....

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uty on the import of goods into the State from other States or on the export of goods from the State to other States may, if an agreement in that behalf has been entered into between the Government of India and the Government of that State, continue to levy and collect such tax or duty subject to the terms of such agreement and for such period not exceeding ten years from the commencement of this Constitution as may be specified in the agreement. Provided that the President may at any time after .....

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er States or on the export of goods from the State to other States, if an agreement in that behalf has been entered into between the Government of India and the Government of that State for such period not exceeding ten years as has been stipulated in the agreement. 108. The historic rationale behind incorporation of Article 306 lay in the fact that some States were imposing taxes/duties on the import of goods into their territory and on the export of goods from their territory, which taxes and .....

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while the States had no power under the Constitutional Scheme to levy customs duties on the import and export of goods to and from a State and even when such taxes and levies were discriminatory vis-a-vis goods produced/manufactured from outside the State, the discriminatory duties and levies were in larger interest of stability of revenue of the concerned States permitted, but, conditionally for a limited period. The marginal note of Article 306, therefore, rightly mentions such levies and duti .....

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e States, which became Part B States, to continue to levy any tax or duty on the import of goods into such States from other States and to impose a duty on the export of goods out of such States for a limited period of time. The reason for enacting this provision is simple. First, Part B States claimed to be sovereign States vis-à-vis British India, and vis-à-vis other Native States so that the provinces of British India were in relation to Native States, and the Native States were .....

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prevent goods going out of the State by making them unsaleable in States where goods bear no such tax or bear a very much smaller tax. This scheme of taxation is basically opposed to the scheme of our Constitution because the States of India are not foreign States to one another, and no State can levy a duty or customs on goods imported from another, for no State has power to levy a duty of customs. That power belongs exclusively to Parliament in relation to foreign countries. Secondly, such du .....

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rgued on behalf of the dealers that an unreasonably high rate of tax could by itself constitute a restriction offensive to Article 301 of the Constitution. This was according to learned counsel for the dealers acknowledged even in the minority judgment delivered by Sinha, CJ in Atiabari s case (supra). If that be so, the only way such a restriction could meet the constitutional requirements would be through the medium of the proviso to Article 304(b) of the Constitution. There is, in our opinion .....

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d commerce. Any such excessive tax burden may be open to challenge under Part III of the Constitution but the extent of burden would not by itself justify the levy being struck down as a restriction contrary to Article 301 of the Constitution. 110. Secondly because, levy of taxes is both an attribute of sovereignty and an unavoidable necessity. No responsible government can do without levying and collecting taxes for it is only through taxes that governments are run and objectives of general pub .....

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are defined to be burdens or charges imposed by the legislative power upon persons or property, to raise money for public purposes. The power to tax rests upon necessity, and is inherent in every sovereignty. The legislature of every free State will possess it under the general grant of legislative power, whether particularly specified in the constitution among the powers to be exercised by it or not. No constitutional government can exist without it, and no arbitrary government without regular .....

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n the structure of the government itself. The court said: 43. … .. ..It is admitted that the power of taxing the people and their property is essential to the very existence of government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the government may choose to carry it. The only security against the abuse of this power is found in the structure of the government itself. In imposing a tax, the legislature acts upon its constitue .....

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the decision of this Court in State of Madras v. N.K. Nataraja Mudaliar (AIR 1969 SC 147) where this Court recognized that political and economic forces would operate against the levy of an unduly high rate of tax. The Court said: 16.… … …Again, in a democratic constitution political forces would operate against the levy of an unduly high rate of tax. The rate of tax on sales of a commodity may not ordinarily be based on arbitrary considerations, but in the light of the fac .....

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at elasticity of rates consistent with economic forces is clearly intended to be maintained. 113. Also apposite is the following passage from the said decision where this Court held that free flow of trade does not necessarily depend upon the rate of taxes but upon a variety of factors which the Court identified in the following words: 14. … … … The flow of trade does not necessarily depend upon the rates of sales tax: it depends upon a variety of factors, such as the source .....

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that low rate is offset by the freight which a merchant in another State may have to pay for carrying that commodity over a long distance, the merchant would be willing to purchase the goods from a nearer State, even though the rate of tax in that State may be higher. Existence of long standing business relations, availability of communications, credit facilities and a host of other factors - natural and business - enter into the maintenance of trade relations and the free flow of trade cannot .....

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n its true nature and effect is meant to impose an impediment to the free flow of trade, commerce and intercourse, for example, by imposing a high tariff wall, or by preventing imports into or exports out of a State, such a law is outside the significance of taxation, as such, but assumes the character of a trade barrier which it was the intention of the Constitution makers to abolish by Part XIII. 115. A careful reading of the above would show that Sinha, CJ had two situations in mind. One, whe .....

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do so, but, in the second case, viz. legislature imposing a high tariff wall so as to operate as an impediment to free flow of trade, commerce and intercourse, there are considerable difficulties. That is so because the judgment does not elaborate as to what would constitute a high tariff wall for the tax to operate as a restriction/impediment. 116. Counsel for the parties were, in the course of arguments, repeatedly asked whether any objective standards and norms can be evolved to determine th .....

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ay constitute a fiscal wall or barrier for one category of traders may not be so for other categories. So also, the tax at a given rate may be high on a particular commodity but reasonable qua another. Suffice it to say that the fiscal wall theory gets into serious difficulties when it comes to enforcement or effectuating the same. The logic behind the theory in fact cracks and gives-up. Such being the position, we have little hesitation in holding that the fiscal wall theory propounded in Sinha .....

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ksh Singh v. State of UP AIR 1962 SC 1563; Federation of Hotel & Restaurant Assn. of India etc. v. Union of India & ors. (1989) 3 SCC 634; Y V Srinivasamurthy and ors. v. State of Mysore and Anr. AIR 1959 SC 894; D G Gose & Co. (Agents) (P) Ltd. v. State of Kerala and anr. (1980) 2 SCC 410; A Suresh and others v. State of TN and another (1997) 1 SCC 319 have declared that just because a tax is heavy is no reason for it to be contrary to Part III, but we leave that question open to be .....

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y so as to include not only Entry 42 in List I, Entry 26 in List II and Entry 33 in List III but also other entries that empower the Parliament and State Legislatures to levy taxes. By that logic it was contended that levy of taxes is also treated as a restriction within the contemplation of Part XIII making it necessary for the legislature to resort to Article 304(b) and the proviso for doing so. There is in our opinion no merit in that contention also. 118. We say so for two precise reasons. F .....

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rt has declared: 51. In List I, Entries 1 to 81 mention the several matters over which Parliament has authority to legislate. Entries 82 to 92 enumerate the taxes which could be imposed by a law of Parliament. An examination of these two groups of Entries shows that while the main subject of legislation figures in the first group, a tax in relation thereto is separately mentioned in the second. Thus, Entry 22 in List I is Railways , and Entry 89 is Terminal taxes on goods or passengers, carried .....

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to incorporation, regulation and winding up of corporations. Entry 85 provides separately for corporation tax. Turning to List II, Entries 1 to 44 form one group mentioning the subjects on which the States could legislate. Entries 45 to 63 in that List form another group, and they deal with taxes. Entry 18, for example, is Land and Entry 45 is Land revenue . Entry 23 is Regulation of mines and Entry 50 is Taxes on mineral rights . The above analysis - and it is not exhaustive of the Entries in .....

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rliament to legislate on inter-State trade and commerce under Entry 42 does not include a power to impose a tax on sales in the course of such trade and commerce. xxx xxx xxx 55. To sum up: (1) Entry 54 is successor to Entry 48 in the Government of India Act, and it would be legitimate to construe it as including tax on inter-State sales unless, there is anything repugnant to it in the Constitution and there is none such. (2) Under the scheme of the Entries in the Lists, taxation is regarded as .....

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n or understanding of Article 303. As explained by us earlier, Article 303 is an exception to Article 302, inasmuch as it limits the power conceded to the Parliament under Article 302 to impose restrictions on freedom of Trade, commerce and intercourse in public interest. The power exercised by Article 302 cannot be so exercised as to give preference to one state over another except under a situation covered by Article 303(2) namely situation arising from scarcity of goods in any part of the ter .....

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ing to the learned counsel, implied that the tax was recognised as a restriction which could be levied only if found to be in public interest as stipulated in Article 302. We have no difficulty in rejecting that contention. In Mudaliar s case, this Court was bound by and followed the pronouncement of the larger bench in Atiabari s case holding that taxes could also be restrictions on free trade and commerce if they directly and immediately impeded their free flow. We have, in the preceding part .....

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ly will be true in respect of every other pronouncement where benches of smaller strength have dealt with similar other legislations and taken a view following the ratio in Atiabari s case. 121. We may at this stage deal with yet another contention urged on behalf of the assesses who argued that while Article 304(a) forbids discriminatory fiscal legislation in respect of goods coming from another state there was no provision which prevented the States from levying discriminatory taxes within its .....

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the States but the fact that there is no such prohibition does not necessarily mean that if such discriminatory taxation does indeed take place the same is constitutionally permissible. Whether or not there is hostile discrimination between goods from one part of the State and those from another part is a matter which will have to be judged on a case to case basis and on the touchstone of Article 14. Having said that we need to remind ourselves that Part XIII of the Constitution was aimed at ad .....

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levy of discriminatory intra-State taxes. 122. On behalf of the assessees-dealers, it was next argued that levy of entry tax on import of goods from outside the local area in the State will be per se discriminatory if goods so imported or similar are not produced or manufactured within the State. That is, argued the learned counsel, because the levy will fall unequally thereby violating the guarantee against discrimination contained in Article 304(a). We have no difficulty in rejecting that sub .....

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roduced or manufactured within the State levying the tax. Our answer is in the negative. This is because there is no question of any discrimination if goods from outside the State are not at a disadvantage vis-a-vis goods produced or manufactured within that State. It is true that a levy on goods that are not produced or manufactured in the State is likely to make such goods costlier but that is not enough for the levy to be considered unconstitutional. A responsive Government aware of the needs .....

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R 1966 SC 1686 does not, in our opinion, help the assessees. The majority judgment in that case looked at Article 304(a) as the source of power to levy a tax or duty. We have in the earlier parts of the judgment explained that the source of power to levy taxes/duties lies in Articles 245 and 246 of the Constitution read with the entries in the three lists contained in Schedule VII. Article 304(a), in that view, only places a constitutional restriction on the power to levy taxes or duties while r .....

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for some of the assessees Mr. Venkatraman argued that the Central Sales Tax Act was a classic example of the Union exercising its power under Article 302 of Part XIII. He contended that the restrictions so imposed signify that tax and restrictions are synonymous within the contemplation of part XIII. 124. The Central Sales Tax Act, 1956 was enacted pursuant to the Sixth Amendment Act, 1956 whereby taxes on sale and purchase of goods in the course of inter-state trade and commerce were expressly .....

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ke the taxes on the sale and purchase of goods subject to Entry 92-A of List I. The two entries read as under: 92-A. Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. 54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List-I. 125. The States power it is evident is made subservient to the powers of the Parliament under Entry 92-A. Section 15 .....

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trictions on the State s power of taxation in regard to declared goods is not, in our opinion, suggestive of taxes themselves being restrictions for purposes of Part XIII of the Constitution. Not only that, Article 286(3) provides the source of power for the Parliament to impose any restriction on the State authority to levy a tax on goods of special importance declared by Parliament. Article 286 (3) reads as : 286.Restriction as to imposition of tax on the sale or purchase of goods: (1)… .....

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her incidents of the tax as Parliament made by law specify. 126. In the light of what we have said above, we answer Question No.1 in the negative and declare that a non-discriminatory tax does not per se constitute a restriction on the right to free trade, commerce and intercourse guaranteed under Article 301. Decisions taking a contrary view in Atiabari s case (supra) followed by a series of later decisions shall, therefore, stand overruled including the decision in Automobile Transport (supra) .....

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n Nos. 1 and 2, this question also does not survive for consideration. 129. Re. Question No.4 This question touching the constitutional validity of the impugned State enactments can be split into two parts. The first part which can be briefly dealt with at the outset is whether the constitutional validity of the impugned legislations has to be tested by reference to both Articles 304(a) and 304(b) as contended by learned counsel for the assessees or only by reference to Article 304(a) as argued .....

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thout the legislation having to go through the test or the process envisaged by Article 304(b). Should, however, the statute fail the test of non-discrimination under Article 304(a) it must be struck down for the same cannot be sustained even if it had gone through the process stipulated by Article 304(b). That is because what is constitutionally impermissible in terms of Article 304(a) cannot be validated and sanctioned through the medium of Article 304(b). Suffice it to say that a fiscal statu .....

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hile we have at some length heard learned counsel for the parties on that aspect, we do not propose to deal with all the dimensions of that challenge based on Article 304(a) except two of them that were argued at great length by learned counsel for the parties. The first of these two dimensions touches upon the State s power to promote industrial development by granting incentives including those in the nature of exemptions or reduced rates of levy on goods locally produced or manufactured. On b .....

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ptions in favour of locally produced goods from payment of taxes was constitutionally impermissible and offensive to article 304(a). That was a case where the State Government had totally exempted goods manufactured by small scale industries within the State from payment of sales tax even when the sales tax payable by other industries including manufacturers of goods in adjoining States was in the range of 8%. This exemption was questioned by manufacturers of edible oils from other States on the .....

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ption by moulding the reliefs to suit the exigencies of the situation. The Court no doubt noticed a three-Judge Bench decision in Video Electronics vs. State of Punjab (1990) 3 SCC 87 in which notifications issued by the States of U.P and Punjab providing for exemptions to new units established in certain areas for a prescribed period of 3 to 7 years were assailed as discriminatory. The challenge to the exemption was in that case also based on the alleged violation of Articles 301 and 304. This .....

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e same to be distinguishable on the ground that the Punjab and U.P notifications were qualitatively different from the one issued by the Government of Jammu and Kashmir in as much as while the former benefitted only specified units and limited the benefit to a specified period, the latter was not subject to any such limitations. This declared the Court resulted in discrimination vis-a-vis. outside goods. What is important is that in Video Electronics (supra) this Court recognized the difference .....

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ustries in their growth, development and progress did not constitute discrimination. 132. We respectfully agree with the line of reasoning adopted in Video Electronics (supra). The expression discrimination has not been defined in the Constitution though the same has fallen for interpretation of this Court on several occasions. The earliest of these decisions was rendered in Kathi Raning Rawat v. The State of Saurashtra AIR 1952 SC 123, where a seven-Judge Bench of this Court held that all legis .....

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inguish unfavourably from others . Discrimination thus involves an element of unfavourable bias and it is in that sense that the expression has to be understood in this context. If such bias is disclosed and is based on any of the grounds mentioned in Articles 15 and 16, it may well be that the statute will, without more, incur condemnation as violating a specific constitutional prohibition unless it is saved by one or other of the provisos to those articles. But the position under Article 14 is .....

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hink that a distinction should be drawn between discrimination without reason and discrimination with reason . The whole doctrine of classification is based on this distinction and on the well-known fact that the circumstances which govern one set of persons or objects may not necessarily be the same as those governing another set of persons or objects, so that the question of unequal treatment does not really arise as between persons governed by different conditions and different sets of circum .....

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ide. If the answer be in the affirmative, the differentiation would fall foul of Article 304(a) and may tantamount to discrimination. Conversely, if the Court were to find that there is no such element of intentional bias favouring the locally produced goods as against those from outside, it may have to go further and see whether the differentiation would be supported by valid reasons. In the words of Fazl Ali, J. discrimination without reason would be unconstitutional whereas discrimination wit .....

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ally and industrially backward on account of several factors must have the opportunity and the freedom to pursue and achieve development in a measure equal to other and more fortunate regions of the country which have for historical reasons, developed faster and thereby acquired an edge over its less fortunate country cousins. Economic unity from the point of view of such underdeveloped or developing states will be an illusion if they do not have the opportunity or the legal entitlement to promo .....

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pose taxes and duties. The conceptual foundation on which such exemptions and incentives have been held permissible and upheld by this Court in Video s case is, in our opinion, juristically sound and legally unexceptionable. Video Electronics, therefore, correctly states the legal position as regards the approach to be adopted by the Courts while examining the validity of levies. So long as the differentiation made by the States is not intended to create an unfavourable bias and so long as the d .....

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guishable in as much as the manufactures of edible oil were exempt totally and unconditionally while other manufacturers from outside the State were not so exempt. Whether or not the impugned enactments in the present batch of cases satisfy the tests referred to above and elaborated in Video Electronics case is a matter on which we do not propose to express any opinion for that aspect is best left open to be considered by the regular benches hearing these matters after the reference is disposed .....

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ely by the bench hearing the matter after the reference has been answered. What we propose to examine is whether grant of exemption or adjustment/ setoff/ credit to goods produced or manufactured within the taxing State can vis a vis goods coming from outside the State constitute discrimination against such outside goods. According to the assessee it does constitute discrimination against such outside goods while according to the State any provision which is aimed at equalizing the impact of tax .....

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n the rate of VAT/ Sales Tax and entry tax adjustment/credit of the amount paid towards VAT/ Sales tax has the effect of reducing the entry tax liability proportionately. It is argued that so long as similar credit/adjustment/setoff is made admissible to goods coming from another state there is no question of any discrimination qua them. The rate of tax paid on such goods in the state from where they are brought including the Central Sales Tax, if any payable on the same may be equal to the entr .....

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cussion of the same. Courts have almost universally accepted the principle that keeping in view the inherent complexities of fiscal adjustments and the diverse elements and inputs that go into such exercise a greater latitude is due to the legislature in taxation related legislations. It is unnecessary to refer to all the decisions in which this Court has conceded such play at the joints to the legislature. Reference to some of the decision of this Court should in our opinion suffice. In Mafatla .....

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. AIR 1962 SC 316; Khyerbari Tea Company Ltd. and Anr. v. State of Assam and Ors. AIR 1964 SC 925; R.K. Garg v. Union of India and Ors. AIR 1981 SC 2138; Gauri Shanker and Ors v. Union of India and Ors. (1994) 6 SCC 349 and Union of India and Anr. v. A. Sanyasi Rao and Ors. (1996) 3 SCC 465]etc. 138. Reference may also be made to the Constitution bench decision of this Court in Khandige Sham Bhat v. Agrl. ITO, AIR 1963 SC 591 where this Court declared that a law may facially appear to be non dis .....

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d, it may be said that the law offends the equality clause. It will then be the duty of the court to scrutinise the effect of the law carefully to ascertain its real impact on the persons or property similarly situated. Conversely, a law may treat persons who appear to be similarly situate differently; but on investigation they may be found not to be similarly situate. To state it differently, it is not the phraseology of a statute that governs the situation but the effect of the law that is dec .....

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s, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the legislature to classify is of wide range and flexibiliy so that it can adjust its system of taxation in all proper and reasonable ways. 139. In V. Guruviah Naidu and Sons and ors. v. State of Tamil Nadu and ors, (1977) 1 SCC 234 the Court was ex .....

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ate in respect of both raw hides and skins as well as dressed hides and skins, even though the price of dressed hides and skins was much higher. The position was worse in the case of Hajee Abdul Shukoor because in that case the sales tax was found to have been charged at a higher rate in respect of dressed hides and skins than that on the sale of raw hides and skins in spite of the fact that the price of dressed hides and skins was higher than that of raw hides and skins. The position in the pre .....

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es and skins, the imported hides and skins are being subjected to discrimination. The onus to show that there would be discrimination between the hides and skins which were purchased locally in the raw form and thereafter tanned and the hides and skins which were imported from other States was upon the appellant. The appellant, we find, has failed to discharge such onus. 9. Article 304(a) does not prevent levy of tax on goods; what it prohibits is such levy of tax on goods as would result in dis .....

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n a variety of factors including the rate of tax and the item of goods in respect of the sale of which it is levied. The scheme of Items 7(a) and 7(b) of the Second Schedule to the State Act is that in case of raw hides and skins which are purchased locally in the State, the levy of tax would be at the rate of 3 per cent at the point of last purchase in the State. When those locally purchased raw hides and skins are tanned and are sold locally as dressed hides and skins, no levy would be made on .....

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atory as it takes into account the higher price of dressed hides and skins compared to the price of raw hides and skins. It also further takes note of the fact that no tax under the State Act has been paid in respect of those hides and skins. The legislature, it seems, calculated the price of hides and skins in dressed condition to be double the price of such hides and skins in raw state. To obviate and prevent any discrimination or differential treatment in the matter of levy of tax, the legisl .....

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ntended by the petitioners that the Act by levying ₹ 35,000 as the annual tax on a motor vehicle used as a stage carriage but only ₹ 1500 per year on a motor vehicle used as a goods carrier suffers from the vice of hostile discrimination and is, therefore, liable to be struck down. There is no dispute that even a fiscal legislation is subject to Article 14 of the Constitution. But it is well settled that a legislature in order to tax some need not tax all. It can adopt a reasonable c .....

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s or persons may not result in its invalidity. As observed by this Court in Khandige Sham Bhat v. Agricultural Income Tax Officer in respect of taxation laws, the power of legislature to classify goods, things or persons are necessarily wide and flexible so as to enable it to adjust its system of taxation in all proper and reasonable ways. The Courts lean more readily in favour of upholding the constitutionality of a taxing law in view of the complexities involved in the social and economic life .....

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n this judgment with citations. Applying these principles it is seen that stage carriages which travel on an average about 260 kilometres every day on a specified route or routes with an almost assured quantum of traffic which invariably is overcrowded belong to a class distinct and separate from public carriers which carry goods on undefined routes. Moreover the public carriers may not be operating every day in the State. There are also other economic considerations which distinguish stage carr .....

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ngers and public carriers which transport goods. The petitioners have not placed before the court sufficient material to hold that the impugned levy suffers from the vice of discrimination on the above ground. 141. Seen in the context of the above, we are inclined to accept the submission made on behalf of the State that so long as the intention behind the grant of exemption/adjustment/credit is to equalize the fall of the fiscal burden on the goods from within the State and those from outside t .....

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attempted to raise certain other issues like whether the entire State can be treated as a local area and whether entry tax can be levied on goods imported from outside the country. We do not, however, consider it necessary in the present reference to address all those issues which are hereby left open to be decided by the regular bench hearing the matter. 143. With that observation the reference is answered. The Registry shall now place the matters before regular benches for an expeditious dispo .....

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ade, commerce and intercourse. On the contrary it seems that a tax, such as the one we are concerned with is predicated on the freedom of trade and commerce. This is particularly true of an entry tax. It is an impost levied on transactions which are entered into in the course of that freedom. In fact, but for such freedom of trade there would be no transaction and no occasion for the levy of a tax. The levy of a tax is a distinct event from the transaction. Trade and commerce must take place to .....

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ed that the charge of a bus ticket impedes the freedom of movement. 3. The other related contentions have been adequately dealt with by the Judgment of the Chief Justice and I fully subscribe to the same. I would also agree in this regard with the view of Sinha, CJ, in Atiabari that a tax is not a restriction. Sinha, CJ, observed that …….if a law is passed by the Legislature imposing a tax which in its true nature and effect is meant to impose an impediment to the free flow of trad .....

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rinciple, a tax cannot constitute a restriction on the freedom of trade, commerce and intercourse as held by Sinha, CJ. Therefore, it would not be possible to construe a tax as a trade barrier merely because the rates are high. As regards apprehensions expressed regarding high rates of taxation, it would be apposite to rely on the observations of Marshall, CJ, in McCulloch v. Maryland, 17 US 316 (1819), that the only security against the abuse of such power lies in the structure of the governmen .....

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n, J., in this regard. Article 304 reads as follows: Restrictions on trade, commerce and intercourse among States.- Notwithstanding anything in Article 301 or Article 303, the Legislature of a State may by law- (a) impose on goods imported from other States [or the Union territories] any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) impose such reasonable .....

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try relating to trade and commerce; the other is Article 304 (a) which (unlike Section 297 of the erstwhile Government of India Act, 1935 which prohibited - through a negative mandate, discriminatory treatment) empowers State Legislatures to impose non-discriminatory taxes on goods. Thus, Article 304 (a) differentiates between discriminatory and non-discriminatory taxes. The premise underlying this provision is the paramount aim of Part XIII to establish and foster economic unity of the country. .....

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nizes the power of a Legislature to a State to impose the tax on the imported goods so, however, as not to discriminate between goods so imported and goods so manufactured or produced. While there is no doubt that this Article recognizes the power to legislate on a State, it equally qualifies that power with the condition that such a law must comply with. That condition is that the law which imposes a tax on imported goods cannot discriminate between goods so imported and the goods so manufactur .....

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ing State and are subjected to tax. In other words, (a) the goods imported from other States must be similar to (b) the goods manufactured or produced in the importing State and (c) the goods so locally manufactured or produced must be subject to tax. The second condition is the tax that is imposed on imported goods should not discriminate between the imported goods and goods manufactured or produced in the importing State. 7. The intention of the Article thus, clearly is that where a tax exists .....

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here similar goods are not manufactured or produced in the importing State and are therefore, not subjected to similar tax and that seems to be the clear intention of this Article. 8. In the normal course, a State in which certain goods are not manufactured would rely on the supply of such goods from other States and the effect of this provision would be to make the goods so imported available without the additional burden of tax. In sum, the premise on which tax can be imposed is the existence .....

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er economic progress and the unhindered availability of goods in states which do not have manufacturing capacities and may not be able to develop it, having regard to lack of natural resources or other geographical limitations. It also furthers the aims underlying Article 301 of the Constitution of India. Conclusion 9. I answer Question No.1 in the negative and I agree with the conclusions drawn by the Chief Justice. I would also answer Question Nos. 2, 3 and 4 in agreement with the Chief Justic .....

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of T.S. Thakur, CJI and other similar views, in the light of some of the differing judgments, I feel it necessary to underline my understanding of the core issues and why they need to be answered in a particular way. 4. The basic issue which has generated the present litigation arises out of a challenge to various taxing statutes enacted by several States to impose Entry Tax on goods in exercise of specific power available to the State legislature under Entry 52 of List II in the 7th Schedule of .....

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nd compensatory taxation was advanced as a permissible exception, by the majority view in Automobile Transport case. The purpose was to reconcile the freedom of trade and commerce stipulated by Article 301 with the need of resources for the States through imposition of taxes on trade and commerce. Such tax was held permissible if it was to provide facilities which would improve and help freedom of trade and commerce through activities such as construction and upkeep of roads and other similar fa .....

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tinction between compensatory tax and regular tax. On the other hand, the States comprising the Indian Union are clearly unhappy with the law settled in Atiabari s case as well as in Automobile Transport case which permits them to impose taxes affecting freedom of trade and commerce but on the condition that it is actually by way of a fee, justified by some sort of quid pro quo. 6. In the above factual background the heavy burden that has befallen on this nine Judges Bench is to interpret Articl .....

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ound only in Article 304(a) of Part XIII of the Constitution. 7. Answering the question No. 1 in the negative or in other words declaring that levy of a non-discriminatory tax per-se does not violate Article 301, in my opinion means that the majority view in respect of limits in imposition of tax through legislation in Atiabari case (supra) as well as in Automobile Transport case is no longer a good law. Since, in the matter of levy of taxes the compensatory theory is no more relevant, the State .....

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lar tax and (ii) such state action should not attract the vice of discrimination between the two varieties of goods. 8. The entire discussion in my view leads to a fair conclusion that the views summarized by Sinha, CJI in paragraph 18 of his judgment in Atiabari case depict the law emanating from Part XIII of the Constitution in the correct perspective. However same cannot be said of observations in paragraph 16 where His Lordship used the expression - If a law is passed by the legislature &hel .....

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supplied). For Part XIII there can be no real impediment through tax unless the so called wall or barrier is one of hostile discrimination between local goods and outside goods. WITH CONNECTED MATTERS JUDGMENT N.V. RAMANA , J . Table Of Contents Part-I : Introduction Para 1.1 - 1.3 Part-II : Case history Para 2.1 - 2.3 Part-III : Arguments canvased Para 3.1 - 3.10 Part-IV : Need for review Para 4.1 - 4.2 Part-V : Constitutional Interpretation Para 5.1 - 5.9 Part-VI : Introduction to taxation an .....

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arned Chief Justice would in the usual course may not have warranted another concurring judgment. But when a Bench of nine judges of this Court has been assembled to consider the seminal issues that have been bothering the nation for about fifty years and such issues have been debated in the Court over a period of four weeks, many aspects having a bearing, canvassed about a constitutional question, a concurring judgment cannot be treated as a repetitive burden or a superfluous legal exercise. Jo .....

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Bihar Chamber of Commerce and Otr., (1996) 9 S.C.C 136 [hereinafter Bihar Chamber of Commerce ]. Further went back to old formulation in Jindal Stainless Ltd. And Anr. V. State of Haryana and Ors., A.I.R 2006 S.C 2550 [hereinafter Jindal (2)]. Referred to larger Bench in JaiprakashAssosiates v. State of MP, 2009 (7) S.C.C 339 [hereinafter Jaiprakash ]; further Constitution Bench has referred the matter before us in Jindal Stainless Ltd. And Anr. V. State of Haryana, 2010 (4) S.C.C 595 [hereinaf .....

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y Story, p. 207 (1999) He said- …I avoid long sentences like the plague: because they lead to obscurity. It is no good if the hearers cannot follow them… I refer sometimes to previous authorities. I have to do so because I know people are prone not to accept my views unless they have support from the books. But never at much length. Only a sentence or two… I finish with a conclusion - and epilogue - again as the chorus does in Shakespeare. In it, I gather the threads togethe .....

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301 of the Constitution of India? 2. If the answer to Question No.1 is in the affirmative, can a tax which is compensatory in nature also fall foul of Article 301 of the Constitution of India? 3. What are the tests for determining whether the tax or levy is compensatory in nature? 4. Is the entry tax levied by the states in the present batch of cases is violative of Article 301 of the Constitution and in particular have the impugned State enactments relating to entry tax to be tested with refer .....

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y and collection of tax on entry of goods into local area. The validity of the said Act was challenged on the ground that it violated Articles 301 and 304 of the Constitution. C.W.P. No. 6630 of 2000 (Jindal Strips Limited v. State of Haryana) and connected petitions were dismissed by the High Court on December 21, 2001Jindal Strips Ltd. v. State of Haryana, [2003] 129 S.T.C 534. Following the judgments of this Court, inter alia, in Bhagatram and Bihar Chamber of Commerce, the High Court upheld .....

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Bench delivered its judgment in Jindal (2), and reversed the earlier judgments in Bhagatram and Bihar Chamber of Commerce. The Constitution Bench laid down the ingredients of compensatory tax as being value of direct, measurable and quantifiable special benefits provided by the State to tax-payers on the basis of equivalence. The matter was thereafter placed before a Division Bench of this Court for decision in the light of judgment of the Constitution Bench. On July 14, 2006, the Division Benc .....

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not compensatory in character and amounted to restriction on free flow of trade and commerce and violated Articles 301 and 304 of the Constitution of India. On April 16, 2008, the State of Haryana repealed the 2000 Act and enacted the Haryana Tax on Entry of Goods into Local Areas Act, 2008, impugned in this Appeal. The High Court in Indian Oil Corporation v. State of Haryana(2009) 21 V.S.T 10 (P&H), declared that the provisions of the Haryana Tax on Entry of Goods into Local Areas Act, 2008 .....

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of Article 304 is conjunctive with or separate from Clause (b) of Article 304? 2.Whether imposition of Entry Tax levied in terms of Entry 52 List II of 7th Schedule is violative of Article 301 of the Constitution? If the answer is in the affirmative whether such levy can be protected if Entry Tax is compensatory in character and if the answer to the aforesaid question is in the affirmative what are the yardsticks to be applied to determine the compensatory character of the Entry Tax. 3.Whether .....

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explicit in Entry 52, List II, 7th Schedule which would compel the State to spend the tax collected within the local area in which it was collected? 4. Will the principles of quid pro quo relevant to a fee apply in the matter of taxes imposed under Part XIII?. 5. Whether the Entry Tax may be levied at all where the goods meant for being sold, used or consumed come to rest (standstill) after the movement of the goods ceases in the local area'? 6. Whether the Entry Tax can be termed a tax on t .....

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ssed on and has been passed on by traders to the consumers infringes Article 301 of the Constitution? 9. Whether a tax on goods within the State which directly impedes the trade and thus violates Article 301 of the Constitution can be saved by reference to Article 304 of the Constitution alone or can be saved by any other Article? 10. Whether a levy under Entry 52, List II, even if held to be in the nature of a compensatory levy, it must, on the principle of equivalence demonstrate that the valu .....

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cles 304 (a) and 304(b). When the matter was placed before the constitutional bench along with Jindal (3) 2010 (4) S.C.C 595, the constitutional bench was confronted with the arguments by the State that the tests propounded by the Atiabari and Automobile failed to strike a balance between freedom of trade and commerce under Article 301 and taxing power of the State under Article 246 r/w relevant legislative entries to the Constitution of India. The constitutional bench, found merit to refer to s .....

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dustry and for creation and maintenance of infrastructure facilities for free flow of trade and commerce in State . Section 25 of the Act provides that the proceeds of the levy shall be appropriated to a fund notified by the Government and shall be exclusively utilized for the development or facilitating the trade, commerce and industry in the State and also inter alia provides benefits towards which the proceeds may be applied. Most of the States in appeal have enacted similar provisions under .....

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e that a tax can be levied by State on goods manufactured/produced or imported in the State and thereby reasonable restrictions can be placed on the freedom of trade either with another State or between different areas of the same State. The vital federal safeguard provided in the proviso is pervious sanction of the President. Article 301 operates to restrict legislative power of State. Lastly, he argues that proviso of Article 304 can be read down in appropriate cases. In rejoinder he argues th .....

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141 of the Constitution. Regarding the construction of Article 304 of the Constitution he submits that it is inherent in the drafting of the clause (a) itself that both clauses (a) and (b) of article 304 are not mutually exclusive. It is submitted that clause (b) acts as a gateway to protect those laws which don't satisfy the dual conditions laid down in clause (a). Further he supported the concept of compensatory tax which has stood the test of time. 3.3 Mr. T.R. Andhyarujina, learned seni .....

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d for that particular purpose. A declaration to that effect would only mean a clever device to refute the abridgment of free trade. Hence, it is his submission that where a State claims to have imposed a compensatory tax, it should not be permitted to impose a tax without complying with the requirement of Article 304(b). Otherwise according to him all taxes would be outside the purview of the freedom of trade by mere assertion as is done by 22 States that the tax is compensatory. 3.4 Mr. Arvind .....

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e difference between enactment of AAETC before and after the impugned Law will provide the impact on Trade & commerce. The Burden of Proof will be on the petitioner to establish, prima facie, to prove actual or potential AAETC. 3.5 Mr. S.K. Bagaria, learned senior advocate, Mr. J. Dhankar, learned senior advocate, Mr. N. Venkatraman, learned senior advocate, Mr. R. Srivastava, learned senior advocates, Mr. Dhruv Aggrawal, learned senior advocate, Mr. Gopal Jain, learned senior advocate, Mr. .....

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ppressed even by the Parliament of India under our Constitution. Part XIII generally does not deal with Taxes except in so far as Article 304(a). Part XIII is only concerned with deliberate discrimination. If discrimination is done for alleviation of economic condition than such a measure would not be covered under the mischief of Article 304(a). Furthermore 304(a) and 304(b) are disjunctive in which only (a) applies to taxes and (b) applied to non-fiscal measures. It is always assumed taxes are .....

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Hon ble C.J Sinha s View in Atiabari has not required any reconsideration and the same should be followed even by this court. He submits that any test under article 301 will have to draw a line as to when taxes become Trade barriers. Such examination by Courts is not warranted. Part XIII has its origin in section 297 of Government of India Act 1935. It is to be noticed that earlier Article 301 was present as Article 16 under Part III of Constitution which was subsequently taken out. The source .....

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reduced. Discrimination only arises if goods are available. If no tax can be imposed on the ground that there is no production that consumer state loses their revenue and the same is detrimental to the existence of very State itself. Therefore, the interpretation that sub-serves the intent and autonomy of State should be adopted in a Federal Constitution. that 304 (a) is not a part of 301 and the only restriction on imposition of tax is article 304(a) of Constitution. He argues that inclusion of .....

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nt. If Article 19(1)(g) is explicitly given to citizens, Article 301 cannot be expanded to give same right to foreigners. Free in Art 301 does not mean free from Taxation. Subject to is the dominant expression in Art 301 and indicates subservience to at least Art 302, 303 and 304. Art 302-304 are mere restatement of powers under Art 246 r/w VII schedule with some limitations. Each restated power by itself overrides the freedom in Art 301. The equation between compensatory tax and fee is inconsis .....

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ax is obviously a restriction which would require this court to examine the height of the barrier on a case to case basis. 3.10Mr. Dinesh Dwivedi, learned senior counsel, Mr. S. V. Giri, learned senior counsel, Mr. A. K. Sinha, learned senior advocate, Mr. J. K. Gilda, learned Advocate General of State of Chhattisgarh, Mrs. Madhvi Divan, assisting the learned Attorney General of India, Mr. Devdutt Kamath, learned Additional Advocate General for the State of Karnataka, Mr. S. S. Shamshery, learne .....

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which furnish a workable test vis-a-vis validity of a tax law in the context of inter-State trade are sound. Therefore, there is no need to review the decisions in Atiabari and Automobile. They would urge that these two decisions have been followed by this Court in half a dozen judgments and by various High Courts, and therefore, the ratio therein acquired the status of stare decisis. According to them, in the absence of any compelling changes in the Constitution or the law, the reference may no .....

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kshminath, Precedent in India (3rd Ed.) p. 178 (2009), which is an impressive rate in itself, considering the fact that our nation is comparatively young and is developing jurisprudence in many aspects. Further it is interesting to note that there are only Seventeen Judgments of this Court with nine or higher bench strength. In re Sea Customs Act, A.I.R 1963 S.C 1760 (9 judge bench); State Trading Corp. of India Ltd. v. CTO, A.I.R 1963 S.C 1811 (9 judge bench); Golaknath v. State of Punjab, A.I. .....

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er Collage Society v. State of Gujarat, (1974) 1 S.C.C 717 (9 judge bench); Indira Sawhney v. UoI, 1992 Supp. (3) S.C.C 215 (9 judge bench); Supreme Court Advocates on Record Association v. UoI, (1993) 4 S.C.C 441 (9 judge bench); SR Bommai v. UoI, (1994) 3 S.C.C 1 (hereinafter S.R. Bomnai )(9 judge bench); Attorney General of India v. AmritlalPrajvandas (1994) 5 S.C.C 54 (9 judge bench); Mafatlal Industries v. UoI, 1997 (5) S.C.C 536 (9 judge bench); NMDC v. State of Punjab, (1997) 7 S.C.C 339 .....

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aused grave mischief to the general-public at large. These numbers speak of restraint in over-ruling its own decisions. When Atiabari was decided, States sovereign power to levy tax within its permissible Constitutional competence stood curtailed. Probably, for this reason, two years after the decision in Atiabari came the decision in Automobile on the premise that the ruling in Atiabari was insufficient. Indeed, Automobile added new dimension to the tax by introducing the doctrine of compensato .....

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llowed by the decisions in Bhagat Ram and Bihar Chamber of Commerce. From 1960 to 1996, there remained uncertainty with regard to the power of the State to levy tax as per entry 52 of the State List and principle of compensatory tax to immunize such entry tax from the perceived injunctive rigor of Articles 301 and 304(a). Thus, it would not be sound to argue that the principle laid down in Atiabarithat is direct and immediate effect and doctrine of compensatory tax evolved in Automobile attained .....

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en the language is capable of two different meanings it is not a bar to analyze the context RBI v. Pearless General Finance, A.I.R 1987 S.C 1023 . In interpreting the constitutional text the court may not feel shy of using all the tools and employing all the aids of construction. The Learned Chief Justice has elaborately analyzed various provisions in Part XIII and dealt with contextual aspects to see whether the contextual aspects match the textual. I am in respectful agreement with the nine po .....

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the construction of the Constitution must be most beneficial and widest possible amplitude. The court must gather from the spirit of the Constitution and the language must not be construed in a narrow and pedantic manner. In re CP and Berar Act, 19381939 F.C.R 18, Gwayer CJ., summed up this principle in the following manner - …the Court should seek to ascertain the meaning and intention of Parliament from the language of the statute itself; but with the motives of Parliament it has no co .....

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by implication. Unless there is express limitation on the power of the State to enact the State law, it is not the province of the court to curtail the power of the state by interpretative process. We have reached a stage that every law must be tested with reference to preamble and Directive Principles of State Policy. As held in Atam Prakash v. State of Haryana [herein after Atam Prakash ] (1986) 2 S.C.C 249, if preamble is the guiding light Directive Principles of State Policy is the book of .....

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when legislative enactments are interpreted may be misplaced. Originally the Preamble to the Constitution proclaimed the resolution of the people of India to constitute India into 'a Sovereign Democratic Republic' and set forth 'Justice, Liberty, Equality and Fraternity', the very rights mentioned in the French Declarations of the Rights of Man as our hopes and aspirations. That was in 1950 when we had just emerged from the colonial-feudal rule. Time passed. The people's hop .....

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e of a "Feudal exploited society". Whatever article of the Constitution it is that we seek to interpret, whatever statute it is whose constitutional validity is sought to be questioned, we must strive to give such an interpretation as will promote the march and progress towards a Socialistic Democratic State. Ibid. 5.4 Our constitutional history shows that we at one point had rigorously defended individualistic rights [for ex. Right to Property]. Slowly we have moved towards community .....

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passingly refer to certain factual scenarios which may be pertinent to the issues of economic unity, balanced growth and development of all regions of India. India that is Bharath is said to be a Country with economic unity. But such assertion cannot be sustained for the reason that 82.5˚ Meridian or Indian Standard Time line seems to starkly divide India broadly as affluent West and destitute East. Top 5 states share 44.87% of India's total economy. NITI A ayog (last visited on 15.10.2 .....

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rcent growth available at table (las t visited on 15.10.2016): http://niti.gov.in/content/gsdp-constant2004-05prices-percent-growth-2004- 05-2014-15 As per Tendulkar formulation Bihar has 54.4% population below poverty line while Jammu Kashmir has only 13.2%. Tendulkar committee report. The table is available at PRS website (last visited on 15.10.2016), http://www.prsindia.org/theprsblog/? tag=tendulkar-committee Population in Uttar Pradesh was pegged at 199,812,341 while Kerala is 33,406,061, a .....

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a is 879. Kerala State Profile, Census of India (last visited on 15.10.2016) http://censusindia.gov.in/2011census/censusinfodashboard/stock/profil es/en/IND032_Kerala.pdf Haryana state profile, Census of India http://censusindia.gov.in/2011census/censusinfodashboard/stock/profil es/en/IND006_Haryana.pdf In Andhra Pradesh 12.04% live in slums whereas in Assam only 0.63% live in slums. (Last visited on 15.10.2016) http://www.census2011.co.in/slums.php. The Utility of the Union to attain political .....

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eached distances in universe which were unfathomable five decades back. We have earned a respectable name in the international scenario. We have produced great artists, many leaders and great men. We were not scared so easily by any adverse situation. First step in solving any problem troubling the present is recognizing that there is one India but India as a union of States. States being independent entities under the Constitution require resource to perform their duties under the Constitution. .....

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de welfare measures. For this process it is the State Government which has been elected by the people to administer by taking into consideration priorities and peculiarities of that particular region. 5.7 This Constitutional principle should not be ignored while imposing restrictions on the State. While feeling happy that we are one nation, we must not ignore the State rights. The facts and realities cannot be forgotten in the first place. The Union does not exist in isolation rather it is a co- .....

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der-development because of various facts such as geographical positioning, colonial establishments and discriminatory policies that have resulted in concentration of wealth in only certain affluent areas. No State, in this grand Union, should be made to feel discriminated and embarrassed because of the mere fact that history has not been congenial to them and have remained under-developed. Any restriction imposed should not come in the way of natural development of a State on the ground that it .....

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envisaged by our framers will be more fully achieved by such construction. Such measure would not be justified in light of clear demarcation of functions bequeathed by our Constitution. 5.8 The Union and the States are co-equal in the Indian Federal structure. Our framers created a unique federal structure which cannot be abridged in a sentence or two. The nature of our federalism can only be studied having a thorough understanding of all the provisions of the Constitution. Confirmation that th .....

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ding of what exactly the Constitution contrives to do. As to the relation between the center and the States, it is necessary to bear in mind the fundamental principle on which it rests. The basic principle of Federalism is that the legislative and executive authority is partitioned between the center and the States not by any law to be made by the center but the Constitution itself.This is what the Constitution does. The States, under our Constitution, are in no way dependent upon the center for .....

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he chief mark of federalism, as I said lies in the partition of the legislative and executive authority between the centre and the Units by the Constitution. This is the principle embodied in our Constitution. (Emphasis Supplied) before the Constituent Assembly. Common philosophy which runs through our Constitution is that both Center and States have been vested with the substantial powers which are necessary to preserve our unique federation with clear demarcation of power. Calling India as qua .....

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pecial Reference No. 1 of 1964) AIR 1965 SC 745, ITC Ltd. v. Agricultural Produce Market Committee and Ors, (2002)1 S.C.R 441 [hereinafter ITC ]. Amphibious nature of our federalism has been even noted by the Sarkaria Commission Report on Center-State relationship. Co-operative federalism envisaged under our Constitution is a result of pick and choose policy which our framers abstracted from the wisdom of working experience of other Constitutions. Some Judgments which are illustrative of nature .....

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vereignty. The exercise of powers legislative and executive in the allotted fields is hedged in by numerous restrictions, so that the powers of the States are not coordinate with the Union and are not in many respects independent. Minority Judgment held that the Indian Constitution accepts the federal concept and distributes the sovereign powers between the co-ordinate constitutional entities, namely, the Union and the States. This concept implies that one cannot encroach upon the governmental f .....

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given by each of these Judges. They include supremacy of the Constitution, democratic, republican form of Government, secular character of the Constitution, separation of powers among the legislature, executive and judiciary, the federal character of the Constitution, Rule of Law, equality of status and of opportunity; justice, social, economic and political; unity and integrity of the nation and the dignity of the individual secured by the various provisions of the Constitution. In (iii) S.R. .....

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hers appear to have leaned in favour of a strong Centre while distributing the powers and functions between Centre and the States. But the essential characteristics can be understood by knowing the effects of such a system. As per Sawant and Kuldip Singh JJ: The features in the Constitution which provide the Centre with overriding powers over the states is only an exception and are not normal features of the Constitution. K. Ramaswamy J., observed that Indian Federalism places the nation as a wh .....

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ed by Justice Ruma Pal held that the Constitution of India deserves to be interpreted in a manner that it does not whittle down the powers of State Legislatures and preserves the federalism while also upholding the central supremacy as contemplated by some of the Articles. In (v) State of West Bengal v. Kesoram Industries Ltd. A.I.R 2005 S.C 1646, it was concerned with Entries 52, 54 and 97 in List I and Entries 23, 49, 50 and 66 in List II of the Seventh Schedule to the Constitution of India as .....

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l State. Thus constitutional courts have interpreted that India has a federal polity and that each State has independent constitutional existence assigned with important role of Constitutional governance. 5.9 In view of these aspects, we need to consider the controversies in these cases and interpret relevant provisions of the Constitution in light of following rules and principles, which are- 1. That Directive Principles of State Policy should be utilized for interpreting every part of the Cons .....

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nciples of State Policy and which sets normative and positive standards for the Government. When the State is burdened with such normative goals as its primary responsibility, such activities are inevitably dependent on availability of monitory resources. The definition of Sovereignty has acquired a new flavor in the recent past, Sovereignty is responsibility . In a democratic system the elected Governments are always responsible for its people. If there is any high taxation which is affecting t .....

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s not necessarily mean that they should tax at exorbitant rates. Tax is a way of apportioning the cost of government among those who in some measure are privileged to enjoy the benefits and must therefore bear its burdens. Fundamentally the exercise of sovereignty also includes lawful taxation as its incident. Assesses/dealer on the other hand stated that all powers exercised by the state such as police powers, power of eminent domain and power to tax are also incidents of sovereignty. Jaganathb .....

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level and to achieve the Constitutional goals set by our framers. 6.2 A tax is a burden or charge imposed by a competent legislature upon persons or property, to raise money for public purposes. Cooley on taxation-volume 1, 4th ed., Ch. 2. Important elements of a tax may be said to be first, that it is a compulsory exaction; secondly, it is payable to the State or to some public authority on its behalf; and thirdly, that it is an exaction for purposes of public interest. Our Constitution has de .....

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Legislature have power to make laws with respect to any matter enumerated in the Concurrent List (List III of schedule VII). As per Article 265, no taxes shall be levied or collected except by the authority of law. It is important to note that taxation entries are to be found only in lists I and II, indicating that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There are no Entries in the Concurrent List which gives power of taxation. This bei .....

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xtracting Part XIII verbatim. PART XIII TRADE, COMMERCE AND INTERCOURSE WITHIN THE TERRITORY OF INDIA 301.Freedom of trade, commerce and intercourse.- Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free. 302. Power of Parliament to impose restrictions on trade, commerce and intercourse.- Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one State and another or within a .....

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any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. (2) Nothing in clause (1) shall prevent Parliament from making any law giving, or authorizing the giving of, any preference or making, or authorizing the making of, any discrimination if it is declared by such law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India. 304. Restrictions on trade, commerce and intercourse amo .....

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in the public interest: Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President. 305. Saving of existing laws and laws providing for State monopolies.- Nothing in articles 301 and 303 shall affect the provisions of any existing law except in so far as the President may by order otherwise direct; and nothing in article 301 shall affect the operation of any law made before the commen .....

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n, any State specified in Part B of the First Schedule which before the commencement of this Constitution was levying any tax or duty on the import of goods into the State from other States or on the export of goods from the State to other States may, if an agreement in that behalf has been entered into between the Government of India and the Government of that State, continue to levy and collect such tax or duty subject to the terms of such agreement and for such period not exceeding ten years .....

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301 to 304.- Parliament may by law appoint such authority as it considers appropriate for carrying out the purposes of articles 301, 302, 303 and 304, and confer on the authority so appointed such powers and such duties as it thinks necessary. 7.2 Needless to mention that when the language of the provision is clear and unambiguous that, the intention of the law makers should be inferred from a plain reading of the provision itself. Ordinarily, we need not go beyond the clear language of the prov .....

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The dissection of Article 301 shows that it has three significant parts or phrases. These are, subject to other provisions of this part , and Trade, Commerce and Intercourse throughout territory of India , shall be free . Which everway one reads, the plain meaning of this is that trade, commerce and intercourse, shall be free, subject to Articles 302 to 307 of the Constitution. The two sets of the provisions which are mainly contemplated in the phrase subject to other provisions are Articles 30 .....

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. Further the opening words of Article 301, namely, subject to the provisions of this part require that all the Articles of the Part XIII have to be read together so as to understand the width and meaning of the Part XIII. Subject to is the dominant expression so far as Article 301 is concerned. It indicates subservience to at least Articles 302, 303 and 304. Articles 302 to 304 embody a restatement of powers under Article 246 r/w the State List under the VII Schedule. Each restated power by its .....

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le 302 does not have a non-obstante clause. As the freedom of trade in Article 301 is itself subject to 302 and 304, the intention of the framers, to my mind, appears to be clear. The Constitution guards and protects the State legislations under Article 304(a) and (b) from overemphasized effect on freedom of trade under Article 301. 7.7 It is a sound principle of jurisprudence that entire statute has to be construed as a whole and not in isolation. While doing so, no clause in any provision can .....

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le 302 is again subject to Article 303. 3. Articles 302 and 303 do not refer to laws under taxing entries. 4. Article 304 can be an exception to be generally construed as dealing with non-tax discriminatory tax and restrictions. 7.8 In addition to plain reading, an analysis of the relevant provisions and the legislative history of Article 301, is also relevant, in understanding the free trade clause in our Constitution. This can be considered also with reference to Constituent Assembly Debates a .....

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dly speaking, the trappings of a Sovereign State with power to impose taxes and to regulate inter-State trade. It is well known fact that many of them had erected trade barriers seriously impeding the free flow of trade, commerce and intercourse, thereby not only shutting out but also shutting in commodities meant for mass consumption. Between the years 1947 and 1950, almost all the Indian States entered into agreements with the Government of India and merged into India as one political unit, wi .....

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in the interest of national solidarity, economic and cultural unity as also of freedom of trade. 7.10 One of the early tasks to engage the attention of the Constituent Assembly in 1947 was freedom of trade and commerce within territories of the Union. It is important to note that in the Draft Constitution, the freedom of trade, commerce and intercourse which was a part of fundamental right, was dropped as such. Basic principles were formulated in the notes submitted to the sub-committee on Fund .....

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undamental Rights by Alladi Krishnaswami Iyer, dt. March 14, 1947- The Union powers being restricted in scope, care will have to be taken to bring in (a) the freedom of Inter-state and inter-provincial trade, (b.) inter-state and inter-provincial movement… . The Sub-Committee discussed Sir B.N. Rau s draft provision on the subject on March 29, 1947 and was adopted in the following form: Subject to regulation by the law of the Union, trade, commerce, and intercourse among the units, whethe .....

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jected to. These suggestions were accepted by the Sub-committee and incorporated in the report submitted to the Advisory Committee on April 16, 1947. On April 21, 1947 the clause came up for debate before the Advisory Committee. Shri C. Rajgopalchari expressed his view that the units must be allowed to raise some kind of custom duties for genuine revenue purposes, for which the reply of Shri K. M. Panikkar is relevant for our discussion: K. M. Panikkar: Rajaji (C. Rajgopalchari) has raised the q .....

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at, I am afraid, will be a negation of the clause. B. Shiva Rao, p. 253 7.12 In the interim report of the Advisory Committee dt.23.04.1947 placed by Shri Sardar Vallabhai Patel, the following recommendations were made : While agreeing in principle with this clause we recommend that instead of being included in Fundamental Rights, it should find a place in some other part of the Constitution. 7.13 Taking into consideration above deliberations and decisions of the Assembly, Sir B.N. Rau incorporat .....

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or revenue to one unit over another : Provided also that nothing in this section shall preclude the Federal Parliament from imposing by Act restrictions on the freedom of trade, commerce and intercourse among the units in the interests of public order, morality or health or in cases of emergency. Freedom of trade, commerce and intercourse among the units. [Cf. Common wealth of Australia Constitution Act. Ss. 92 and 99, Government of India Act, 1935, s. 297 7.14 With some modifications, this clau .....

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following manner:- Comments of AlladiKrishnaswamiAyyar: In this regard to interstate trade there are three main provisions in the Draft Constitution : I. The freedom of inter-state trade secured by Article 16; II. Subject to an interference by federal law : III. An interference by a provision or state law to the extent provided in item 33, Draft of Constitution, February 21, 1948-Seventh Schedule, List II- State List 33. Regulation of trade, commerce and intercourse with other states for the pu .....

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ft Constitution (i.e., Clause 16 and Articles 243 to 245) and the purpose was to string together all these scattered provisions under one head. Dr. Ambedkar stated before the Constituent Assembly that : Sir, all that I need do at this stage is to inform the House that originally the articles dealing with freedom of trade and commerce were scattered in different parts of the Draft Constitution. One article found its place in the list of Fundamental Rights, namely, article 16, which said that trad .....

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the provisions. relating to freedom of trade and commerce the Drafting Committee felt that it was much better to assemble all these different articles scattered in the different parts of the Draft Constitution into one single part and to set them out seriatim, so that at one glance it would be possible to know what are the provisions with regard to the freedom of trade and commerce throughout India. I should also like, to say that according to the provisions contained in this part it is not the .....

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with Articles in Part XA (now Part XIII) that they were not merely arranged in seriatim but were substantially altered. b. That freedom of trade, commerce and intercourse is not a fundamental right. c. That trade, commerce and intercourse in India is not absolutely free. d. That the discriminatory tax (like erstwhile custom duties imposed by certain independent states) is harmful for the federation. PLAINS OF GANGES CAN NEVER BE FERTILIZED BY WATER OF MURRAY OR POTMAC RIVERS 7.18 The precedents .....

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to glory. It is imperative to mention that during the drafting process of Article 301, foot note for the same had reference to Australian Constitution. It is no gainsaying that our framers were learned men who drew our Constitution having hindsight of the wisdom of these great federations. 7.19 The main inspiration for Part XIII has been American and Australian models. These models present before the Constituent Assembly were re-designed and expanded by the framers of the Constitution in India a .....

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tional structure is quite different from those provided under Australian and American Constitutions. 7.20 In Australia and the United States of America, giving textual meaning to the applicable Constitutional provisions, the Courts interpreted the commerce clause or free trade clause in such a manner that the (federal units) were completely barred to levy any taxes on inter-state trade and commerce, Fortunately off late, in these jurisdictions, the law has been diluted to enable the federal unit .....

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rein after Cole ] (1988) 165 C.L.R 360, and later in CastlemaineTooheys Ltd v South Australia (1990) 169 C.L.R 436 and, most recently, in Betfair Pty Ltd v Western Australia (2008) 234 C.L.R 418, the Court observed that Section 92 of the Australian Constitution only meant that Australia was free from those measures which were discriminatory and protectionist burdens. Cole insisted that Section 92 proscribes both direct and indirect protectionist discrimination: - The concept of discrimination in .....

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n a single trader who was burdened, could claim violation of Section 92 of the Australian Constitution. Common wealth v. Bank of new South Wales, (1949) 79 C.L.R 497. Such wide interpretation given in the earlier case laws led to development of narrower test by the High Court in Cole. Earlier Case laws were available and were cited in the Atiabari and Automobile also. It is interesting to note that our framers drawing experience of Bank Nationalization Case Ibid., were concerned about stifling t .....

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f this Article means that the Federal Legislature is empowered to regulate the inter-state trade. 7.24 In Brown v. Maryland 25 U.S. (12 Wheat.) 419 (1827), a case involving the constitutionality of a Maryland law requiring all importers and wholesalers of foreign articles to obtain a license, Chief Justice Marshall reasoned that the rationale of McCulloch 4 Wheat. 316 (1819) was "entirely applicable" to state taxation of private enterprises engaged in inter-state commerce. Thus, holdin .....

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reme . 7.25 The Supreme Court in Freeman v. Hewitt 329 U.S. 249 (1946), put a bar on the States to tax such activities which directly affected inter-state commerce as federal government was the sole authority to regulate these matters. Following extract may be relevant- The Commerce Clause was not. merely an authorization to Congress to enact laws for the protection and encouragement of commerce among the States, but by its own force created an area of trade free from interference by the States. .....

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judgment in Complete Auto Transit vs. Brady 430 U.S. 274 (1977), the Supreme Court went back on the above approach and adopted practical effects approach, according to which, a State law which is applied to an activity with a substantial nexus with the taxing state, fairly apportioned, non-discriminatory against inter-state commerce, and fairly related to the services provided by the State shall not be invalidated on the ground that States lack legislative competence. Subsequently the Supreme Co .....

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revenue tax does not discriminate against interstate commerce and is apportioned to activities occurring within the State, the State is free to pursue its own fiscal policies unembarrassed by the Constitution. It is obvious from the line of cases that America has been moving towards empowering States to develop their own fiscal policy under the Commerce Clause. Our Constitution, on the other hand, has achieved directly what the US Courts are trying to achieve by way of judicial interpretation. .....

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he province iii. The tax must be for provincial purposes . Constitutional Law of Canada, Peter W. Hogg, Vol.1, pg. 857. Federal and Provincial powers overlap in the field of direct taxation, which includes the two most lucrative taxes, namely, income tax and the sales tax. Section 121 has been interpreted by the Supreme Court in Gold Seal Case (1921) Gold Seal Ltd. V. Alberta AG, (1921) 62 S.C.R 424, In this Case the Supreme Court of Canada speaking through Duff J. observed that: The capacity of .....

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think that, like the enactment I have just quoted, the object of section 121 was not to decree that all articles of the growth, produce or manufacture of any of the provinces should be admitted into the others, but merely to secure that they should be admitted free, that is to say without any tax or duty imposed as a condition of their admission. The essential word here is free and what is prohibited is the levying of custom duties or other charges of a like nature in matters of interprovincial .....

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as not to deny such powers to States. INDIAN CASE LAW 7.29 Returning to the main controversy in the case, it may be noted that apart from the two leading judgments on the entry tax and compensatory tax in the context of transportation Cases, we have large number of cases decided by the various High courts and this Court. It is however not necessary to refer to all cases. It would be suffice to refer to a few. 7.30 In Atiabari, the validity of Assam Taxation (on Goods Carried by Roads and Inland .....

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y; and so the freedom guaranteed by Article 301 is made subject to the exceptions provided by the other Articles in Part XIII. The freedom guaranteed is limited in the manner specified by the said Articles but it is not limited by any other provisions of the Constitution outside Part XIII. That is why it seems to us that Article 301, read in its proper context and subject to the limitations prescribed by the other relevant Articles in Part XIII, must be regarded as imposing a constitutional limi .....

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icle 301 and ascertain the width and amplitude of its scope. On a careful examination of the relevant provisions of Part XIII as a whole as well as the principle of economic unity which it is intended to safeguard by making the said provisions, the conclusion appears to us to be inevitable that the content of freedom provided for by Article 301.... 51. certainly includes movement of free trade which is of the very essence of all trade and is its integral part. If the transport or the movement of .....

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territory of India, primarily it is the movement part of the trade that it has in mind and the movement or the transport part of trade must be free subject of course to the limitations and exceptions provided by the other Articles of Part XIII....Besides, it is not irrelevant to remember in this connection that the Article we are construing imposes a constitutional limitation on the power of the Parliament and State Legislatures to levy taxes, and generally, but for such limitation, the power of .....

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rticle 301. (Emphasis Supplied) 7.31 In Atiabari, Chief Justice B. P. Sinha wrote a dissenting opinion holding that any inference that the taxation simpliciter is within the terms of Article 301 cannot be justified under the Constitution. Indeed, it is observed that, it is only such taxes which directly and immediately affect trade would fall within the purview of Article 301, though both the Learned Judges used different languages, the purports appears to be same. It is only such laws which ope .....

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e to State, which is also guaranteed by Art.19(1)(d) of the Constitution. The three terms used in Art. 301 include not only free buying and selling, but also the freedom of bargain and contract and transmission of information relating to such bargains and contract as also transport of goods and commodities for the purposes of production, distribution and consumption in all their aspects, that is to say, transportation by land, air or water. They must also include commerce not only in goods and c .....

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sible to think that the makers of the Constitution intended to make trade, commerce and intercourse free from taxation in that comprehensive sense. If that were so, all laws of taxation relating to sale and purchase of goods on carriage of goods and commodities, men and animals, from one place to another, both inter-State and intra-State, would come within the purview of Art. 301 and the proviso to Art. 304(b) would make it necessary that all bills or Amendments or pre-existing laws shall have t .....

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t within the terms of Art. 301 of the Constitution is that the very connotation of taxation is the power of the State to raise money for public purposes by compelling the payment by persons, both natural and juristic, of monies earned or possessed by them, by virtue of the facilities and protection afforded by the State. Such burdens or imposts, either direct or indirect, are in the ultimate analysis meant as a contribution by the citizens or persons residing in the State or dealing with the cit .....

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ct, 1951. The Appellants were unsuccessful before the Rajasthan High Court, which upheld the said Act. By majority of 4:3 this Court affirmed the judgment of the High Court. Justice S.K.Das who wrote the lead judgment observed that Part XIII is intended to achieve the federal economic and fiscal integration and addresses the questions of economic unity. He held that, "regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview .....

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de, commerce and intercourse and compensatory taxes for the use of trading facilities are not hit by the freedom declared by Article 301. They are excluded from the purview of the provisions of Part XIII of the Constitution for the simple reason that they do not hamper trade, commerce and intercourse but rather facilitate them". 7.34 Justice K. Subba Rao (as his lordship then was) in a separate opinion concurred with the majority and summarized the following principles that are to be applie .....

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s, wharfs etc., with or without compensation. (3) Parliament, may by law, impose restrictions on such freedom in the public interest; and the said law can be made by virtue of any entry with respect whereof Parliament has power to make a law.(4) The State also, in exercise of its legislative power, may impose similar restrictions, subject to the two conditions laid down in Article 304(b) and subject to the proviso mentioned therein. (5) Neither Parliament nor the State Legislature can make a law .....

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from other States or the Union territory to which similar goods manufactured or produced in that State are subject. 7.35 As discussed above, a Constitution Bench of this Court in Atiabari had struck down the Assam Act levying the tax on goods carried by road or inland waterways. Making certain additional provisions, Assam Assembly enacted the Assam Act No. 10 of 1961, coming under Entry 56 of the State List, with the previous sanction of the President with the same nomenclature, which was impea .....

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hat the legislature understands and appreciates the needs of the people and the laws it enacts are directed to problems which are made manifest by experience and that the legislature enacts the laws which the people s representatives consider to be reasonable for the purpose for which they are enacted. The presumption is in favor of the constitutionality of enactment. However, when it is shown that an Act invades the freedom of trade, it is necessary to enquire whether the State has proved that .....

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ade by the State Legislature in compliance with the conditions imposed by Article 304 shall not be hit by Article 301. Article 301 thus provides for freedom of inter-State as well as intra-State trade and commerce subject to other provisions of Part XIII and correspondingly it imposes a general limitation on the legislative powers, which is relaxed under the following circumstances: (a) Limitation is relaxed in favour of Parliament under Article 302, in which case Parliament can impose restricti .....

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rliament, where discrimination or preference is admissible to Parliament in making of laws in case of scarcity. This is provided in Clause (2) of Article 303. (b) As regards the State Legislatures, apart from the limitation imposed by Article 301, Clause (1) of Article 303 imposes additional limitation, namely, that it must not give preference or make discrimination between one State or another in exercise of its powers relating to trade and commerce under Entry 26 of List II or List III. Howeve .....

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s), even though it interferes with the freedom of trade and commerce guaranteed by Article 301. Secondly, the ban under Article 303(1) shall stand lifted even if discriminatory restrictions are imposed by the State Legislature provided they fulfil the following three conditions, namely, that such restrictions shall be in public interest; they shall be reasonable; and lastly, they shall be subject to the procurement of prior sanction of the President before introduction of the Bill. 7.37 One need .....

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the nature of the tax contemplated there under. Entry 52 of the State list deals with taxes on the entry of the goods for consumption use or sale therein . A law made under this entry like various Acts which are impugned in these appeals levy tax on entry of goods from one State to other. The taxable event is the entry into local area in another State. As defined in Concise Oxford Dictionary the verb enter means to come or go into and entry as a noun is act of coming or going . Concise Oxford Di .....

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act that the goods are intended for sale is no significance to the taxable event in law on the entry of goods. 7.38 In Hansa Corp. 1980 (4) S.C.C 463, the Constitutional validity of Karnataka Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1979 was challenged before this Court. This Court upheld the validity of the Act and pointed out that the formulation in Atiabari and Automobile was even applicable for Entry Tax under Entry 52 of the State List. This Court sum .....

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understood was being levied by various municipalities and municipal corporations in Karnataka State. Since some time a feeling had grown that octroi was obnoxious in character and impeded the development of trade and commerce and there was a clamour for its abolition. Taking note of the resentment of the business community, Karnataka State abolished octroi with effect from April 1, 1979. However, no one was in doubt that octroi was a major source of revenue to municipalities and its abolition wo .....

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enerated by levy of tax under the impugned legislation. No doubt, the tax levied was one on entry of scheduled goods in local areas meaning thereby it had all the broad features of octroi, yet the manner of levy, the method of collection and the persons liable to pay the same were so devised by the impugned Act as to remove the obnoxious features of octroi. As the charging section shows, the tax was to be levied on entry of scheduled goods in a local area at a rate to be specified by the Governm .....

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n of sales tax on the scheduled goods and at the instance of the Union Government the State Governments agreed to forego their right to levy sales tax on the aforementioned scheduled goods on the condition that the Union Government would levy additional excise duty on them and distribute the net proceeds of such duty amongst the consenting States. Parliament accordingly has enacted the Additional Duties on Goods (Goods of Special Importance) Act, 1957. Therefore, while raising rates of sales tax .....

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ry for the party seeking to sustain the validity of the tax law to show that the requirements of Article 304 have been satisfied . 7.39 In Atiabari, majority held that the legislative competence of the legislature will have to be judged in the light of relevant Articles of Part XIII and that what entries will attract Article 301 will depend on the content of freedom guaranteed. In Jaiprakash, this Court ruled that concept of compensatory tax evolved in Automobile does not apply to general notion .....

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w which abridges fundamental rights is rendered void by reason of Article 13. A law by the Union or the States relating to a subject matter outside the powers assigned under Articles 245 read with Article 246 and relevant legislative entries in the Seventh Schedule would be ultra vires as legislatively incompetent. Apart from these limitations, the law of the Union or the States is also subject to other Constitutional limitations. The provisions of Part XIII, especially, Article 304(a) and (b) a .....

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01 and 304(a). Indeed various provisions of the Constitution dealing with fiscal measures in Part XII, for instance Articles 265, 269, 276 and 286, specifically deal with taxes, but in Part XIII, except Article 304(a), no other Article deals with taxes. Further Chapter I of Part XII of the Constitution specifically deals with provisions regarding Finance , whereas Part XIII deals with Trade, Commerce and Intercourse within the territory of India. Thus, these two Parts are kept distinctly separat .....

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Maharaj Umeg Singh v. State of Bombay, A.I.R 1955 S.C 540 Secondly, It is part of any sovereign government to ensure a welfare State. To achieve the same, tax is the only course available to the government to generate revenue for purposes of welfare activities. Courts, therefore, cannot abridge the taxing power of the sovereign State. Thirdly, the very conception of Part XIII was only to prevent discriminatory taxes under Article 304(a). Fourthly, argument of inconvenience cannot affect the int .....

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be derived from a general entry. M.P.V. Sundararamier & Co. vs. The State of Andhra Pradesh and Anr., AIR 1958 SC 468 In light of this principle the Constituent Assembly passed the Articles and Entries in the following time line: On 13 June, 1949 present Article 245 which was Article 217 (in the draft Constitution) was passed. On September 02, 1949 Entry 52 of State List (which was entry 61 in the draft Constitution) was passed. On September 08, 1949 PART XIII (which was PART XA in the draft .....

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bring all the provisions relating to free trade, commerce and intercourse at one place. What started as a fundamental right came to be enacted as a constitutional right? Thus, there is abundant guidance from the legislative history in regard to incorporation of Article 301 only as a constitutional right. Seventhly, That Article 306 cannot have an impact on the interpretation of Article 301, as it only saved certain discriminatory taxes. Since the framers wanted to preserve the imposition of such .....

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1 of the Indian Constitution uses the term free . The word free means which is not confined or restricted . Either the trade is free or not free . To state that trade, commerce and intercourse throughout the territory in India is free and then qualify this Article 301 with subsequent Articles under 302, 303 and 304 only portrays that Article 301 is merely clarificatory in nature. If trade was, indeed, free then majority of Articles in the Constitution would have been redundant. From the history, .....

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03 and 304. 7.41 In Atiabari and Automobile this Court relied on a non-obstante clause in Article 304 to hold that, by necessary implication, tax law come within the purview of Article 301. This view is not sound because one has to read the text and context while interpreting the constitutional provisions. In this regard, I respectfully agree with the reasoning and conclusions reached by Hon ble the Chief Justice that non-obstante clause in Article 304 (a) is not determinative in the interpretat .....

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of the States to legislate in relation to internal trade under Section 297 in the following terms:- 297. (1)No Provincial Legislature or Government shall. (a) by virtue of the entry in the Provincial Legislative List relation to trade and commerce within the Province, or the entry in that list relating to the production, supply, and distribution of commodities, have power to pass any law or take any executive action prohibiting or restricting the entry into or export from, the Province of goods .....

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of the contravention, be invalid. 8.2 It may be noticed that prohibition contained in the section quoted above applied only to Provincial Governments and Provincial legislatures with reference to entries in the legislative list relating to trade and commerce and to production, supply and distribution of commodities. This section dealt with prohibitions or restrictions in respect of import into or export from a Province, of goods generally. It also dealt with the power to impose taxes etc. and pr .....

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any unit may by law impose reasonable restrictions thereon in the interest of public order, morality or health. B. Shiva Rao, Framing of India s Constitution, A Study (2nd Ed.), p. 699 to 707 (Emphasis supplied) 8.4 The proviso herein above empowered the Unit to impose by law, reasonable restrictions in the interest of the public order, morality or health. Sir B. N. Rau in his comments to the aforesaid draft discussed by the Sub Committee stated that the first paragraph of Clause 13 is adopted .....

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ctions on the rights declared by the clause Ibid., p. 157-161 8.5 The suggestions of Sir. Alladi Krishnaswami Iyer were accepted and the Clause was accordingly modified and incorporated as Clause 14 as below : 14. (1) Subject to regulation by the law of the Union trade, commerce and intercourse among the units by and between the citizens shall be free: Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or in an emergency: Provided .....

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pre-cursor of Article 303. On 21.04.1947, the aforesaid Clause 14 came up for consideration of the Advisory Committee. Explaining the purpose of enabling a State to impose reasonable restriction in the interest of public order, morality, health or in emergency, Sir Alladi Krishnaswamy Iyer said: Suppose there is a general famine and people are starved that is what is meant here to be dealt with The advisory Committee accepted the recommendation of the Sub-Committee in relation to Clause 14 with .....

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or health or in any emergency: Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject: Provided further that no preference shall be given by any regulation of commerce or revenue by a unit to one unit over the another . Ibid., P. 297 8.8 On 01.05.1947 certain amendments were suggested which were adopted by the Constituent Assembly. Clause 10, as amended, reads as f .....

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no preference shall be given by any regulation of commerce or revenue by a unit to one unit over another. 8.9 In the first Draft Constitution of October, 1947, Clause 17 reads as follows: 17. Subject to the provisions of any Federal Law, trade, commerce and intercourse among the units shall, if between the citizens of the federation, be free: Provided that nothing in this section shall prevent ny unit from imposing goods imported from other unit from imposing goods imported from other units any .....

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s of public order, morality or health or in cases of emergency . B. Shiva Rao, Framing of India s Constitution, Vol. III, p. 9 (2nd Ed.) 8.10 On 01.11.1947, the Drafting Committee considered Clause 17 and was of the opinion that the first and second provisos to this clause should be transferred as independent clauses in the chapter dealing with relations between the different States and the third proviso was unnecessary. Ibid, p. 330 8.11 On 28.01.1948, the Drafting Committee decided to introduc .....

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ny state- To impose on goods imported from other State any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced: and To impose by law any restrictions on the freedom of trade, commerce or intercourse with that State in the interests of public order, morality and health or in cases of emergency. *The committee is of opinion that the provisions contained in Articles 192-E a .....

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resident may by Order determine. (3) The procedure of the commission shall be defined by the President by the Order and the Commission shall have such powers including the power of adjudication as the President may, from time to time, by Order, confer on it. (4) It shall be the duty of the Commission to decide any dispute relating to Trade or Commerce between the States referred to it by the President for adjudication and the decision of the Commission shall be final and shall not be questioned .....

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of this Constitution, it shall be lawful for any State- (a) to impose on goods imported from other State any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) To impose by law such reasonable restrictions on the freedom of trade, commerce or intercourse with that State as may be required in the public interests. *The committee is of opinion that the provisions .....

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apter which reads as under: 16. Subject to the provisions of Article 244 of this Constitution and of any law made by the Parliament, trade, commerce and intercourse throughout the territory of India shall be free. Inter-State trade and Commerce was dealt with in Article 243, Article 244 and Article 245 which reads as below: *243. No preference shall be given to one State over another nor shall any discrimination be made between one state and another by any law or regulation relating to trade or .....

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trade, commerce or intercourse with that State as may be required in public interests: Provided that during a period of five years from the commencement of this Constitution the provisions of Clause (b) of this Article shall not apply to trade or commerce in any of the Commodities mentioned in Clause (a) of Article 306 of this Constitution. 245. Parliament shall by law appoint such authority as it considers appropriate for the carrying out of the provisions of Articles 243 and 244 of this Consti .....

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foresee the circumstances in which the freedom of trade, commerce or intercourse with a State will need to be interfered with by the State in the Public interest, unless it be on the basis of discrimination between the residents of one State and another, and this would be wholly contrary to the spirit of the Constitution. B. Shiva Rao, The Framing of India s Constitution, Vol. IV, pg. 329 8.13 On 08.09.1949, Hon ble Dr. Ambedkar moved for the deletion of these Articles and the motion was adopte .....

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ittee and not even moved in the Constituent Assembly for adoption. Second, though the precursor clause to Article 304 underwent repeated changes before the Advisory Committee and the Drafting Committee, never it was suggested that freedom of trade was meant to be freedom from payment of taxes. Third, the power of federal unit to levy tax on the goods imported from other units was specifically adumbrated to dispel any doubt about taxing power of the State. The logical conclusion is that the power .....

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04 or only with reference to clause (a) of Article 304 of the Constitution? In other words is Clause (a) and (b) of Article 304 is conjunctive or disjunctive? The answer must be that the history, the context and the plain words indicate that Article 304 (a) and (b) are disjunctive in nature. A levy of tax need not be tested with reference to Article 304 (b) of the Constitution. Following are the reasons for reading Article 304 (a) and (b) of the Indian Constitution disjunctively. First, the legi .....

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actured or produced in the State. Thirdly, the two clauses of Article 304 are connected by the word and . Sub-clause (a) puts a restriction on the State to not impose a discriminatory tax, whereas sub-clause (b) deals with other restrictions relating to trade, commerce and intercourse. Fourthly, Article 304 (a) and (b), on a careful reading would show that Article 304 (a) and (b) are disjunctive. This is made clear by the proviso, which is to the effect that a Bill for the purpose of Article 304 .....

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explain the main operating part of the Article. It is never used or interpreted as expanding the operative part of the provision. Fifthly, if one reads Clauses (a) and (b) of Article 304 conjunctively, then it would not subserve the federal nature of the Constitution which is a basic structure. 8.15 I will now deal with the purport and scope of the word discrimination used in Article 304(a) by making some general observations. Article 304(a) should be interpreted keeping in mind the balanced dev .....

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nt. Therefore, Part XIII envisions a twofold object: (i) facilitation of a common market through ease of trade, commerce and intercourse by erasing barriers; and (ii) regulations (or restrictions) which may be necessary for development of backward regions or in public interest. A brief reference to the Constituent Assembly debates would amply demonstrate the same. Hon ble Member Shri P. S. Deshmukh said: How pompously did we decide that there shall be "free trade" everywhere! It is not .....

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and other things are concerned. I therefore do not think that is right to bar all discrimination, as it is called (in fact it is not),barring all possibility of help to those who are backward and who are unable to compete with the more advanced, and who therefore stand in need of assistance. From that point of view, my amendment seeks to give Parliament a blank cheque and leave to it entirely the determination of the policy with regard to trade and commerce not only of the whole Union or in reg .....

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s of Australia which depend for their well-being on agricultural conditions that their interests are being sacrificed to manufacturing regions, and there has been rivalry between manufacturing and agricultural interests. Therefore, in a federation what you have to do is, first, you will have to take into account the larger interests of India and permit freedom of trade and intercourse as far as possible. Secondly, you cannot ignore altogether regional interests. Thirdly, there must be the power .....

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. This Court even suggested that there could be differentiation among regions and among the goods exchanged between the regions without attracting the tag of discrimination. The following passage from Video Electronics is apposite: Economic unity is a desired goal, economic equilibrium and prosperity is also the goal. Development on parity is one of the commitments of the Constitution. Directive principles enshrined in Articles 38 and 39 must be harmonized with economic unity as well as economic .....

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ions used. The connotation of the expressions used takes its shape and color in evolving dynamic situations. A backward State or a disturbed State cannot with parity engage in competition with advanced or developed States. Even within a State, there are often backward areas which can be developed only if some special incentives are granted. If the incentives in the form of subsidies or grant are given to any part of units of a State so that it may come out of its limping or infancy to compete as .....

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vented through Part XIII. Again reference to certain observations of this Court in Video Electronics would be pertinent: … very differentiation is not discrimination. The word 'discrimination' is not used in art. 14 but is used in Articles 16, 303 & 304(a). When used in Article 304(a), it involves an element of intentional and purposeful differentiation thereby creating economic barrier and involves an element of an unfavorable bias. Discrimination implies an unfair classifica .....

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that the circumstances covering one set of provisions or objects may not necessarily be the same as these covering another set of provisions and objects so that the question of unequal treatment does not arise as between the provisions covered by different sets of circumstances . Ibid, p. 106-107. 8.18 In the above case exemption and incentive granted by one State to its inhabitants was challenged as being violative of Article of 304 (a). Recognizing the concept of economic equality, this Court .....

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such granting of exemption cannot be held to be contrary to the concept of economic unity. The contents of economic unity by the people of India would necessarily include the power to grant exemption or to reduce the rate of tax in special cases for achieving the industrial development or to provide tax incentives to attain economic equality in growth and development. When all the States have such provisions to exempt or reduce rates the question of economic war between the States inter se or e .....

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he matter has to be looked into to find out whether there is any discrimination in violation of the constitutional mandate . (emphasis supplied) 8.19 Thus stated, the principle laid down in Video Electronics is that, if a backward area in a State needs impetus for the development, and in such circumstances incentives are given for the industry to develop whether by way of subsidies or tax exemptions for a certain period of time as desired by the competent legislature, the same would be permissib .....

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ith Fundamental Rights making the right to free trade, commerce and intercourse as a Fundamental Right subject to reasonable restriction. Pandit Thakur Das Bhargava sought to move an amendment Constituent Assembly Debates, 1949, vol. IX, Page 1145. to substitute the words, public interest for interests of the general public he said : That is amendment No. 269 of List IV (Seventh Week), in clause (b) of the proposed new Article 274-D, for the words in the public interest , the words interests of .....

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terests of the general public" they would have reference to the interests, of the. general public of India as a whole. It may be that on many occasions a conflict may arise. between the public interest as understood in the amendment of Dr. Ambedkar and 'the interests of the general public' as used in article 13. When that conflict arises it would be encouraging provincialism and the interests of a few as against the general interest if we accept the words 'public interest' i .....

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three Judge bench of this Court in Video Electronics. Thus it can be said that the common thread in Part XIII is the achievement of economic unity and parity which does not altogether preclude differentiation for justifiable and rational reasons wherever necessary. The heart and soul of Part XIII is to dissolve hostile discrimination within the territory of India. 8.22 The second facet is that Article 304 (a) is a limitation to impose any tax on goods imported from other States. This power is s .....

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in Article 304 (a) and not in Article 245 r/w 246 is not correct. The words may by law appearing in Article 304 is not source of legislative power. It is an option given to the States in case it decides to levy any tax on the goods imported from other States. The source of legislative power resides in Article 245 r/w. Article 246 which is indisputable. This power is not subject to any implied limitation. The plain reading would show that in a given situation, the State may by choice decide not t .....

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, which prevents such levy of tax on goods as would result in discrimination between goods imported from other States and similar goods manufactured or produced within the State. The object is to prevent discrimination against imported goods by imposing tax on such goods at a rate higher than that borne by local goods since the difference between the two rates would constitute a tariff wall or fiscal barrier and thus impede the free flow of inter-State trade and commerce. It does not prohibit le .....

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ion/set off/credit with respect to Sales tax. 8.26 There was good amount of debate on the doctrine of compensatory tax evolved by this Court in Automobile. I am in respectful agreement with the consideration, reasoning and conclusion in the judgment of the learned Chief Justice, who held that concept of compensatory tax has neither any juristic basis nor a part of Indian Constitutional law. It is interesting and glaring to note that at the stage of drafting, at the stage of consideration by the .....

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Article 304(b) of the Constitution do not include tax. d. It is not correct to say that since goods being taxed are not produced in the State the power to levy a tax gets obliterated, that is to say, that Article 304 (a) does not bar levy of tax if the goods are not manufactured or produced within the State. e. Article 304(a) of the Constitution protects from discrimination (for protectionism) and not mere differentiation. 9.2 Before parting with this case, I would like to express my appreciati .....

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certain additions. On Question Nos. 2 and 3, while agreeing with the views of the Chief Justice over-ruling Jindal Stainless Ltd. (2), on the question of Compensatory tax , I have recorded my reasonings which in my view is necessary to be clarified. Since substantial questions of law arise for determination which is of considerable importance from the point of view of trade, commerce and intercourse and economic unity of the nation, I would like to give my own reasonings for my conclusions. 1(a .....

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ef Justice over-ruling Jindal Stainless Ltd. (2) & Anr. v. State of Haryana & Ors. (2006) 7 SCC 241. Insofar as the concept of compensatory taxes evolved in Automobile Transport. I am of the view, abandoning compensatory tax in the subsequent judicial pronouncement like the present one, might prejudice the interest of the concerned States. 1(b). Question No. 4:- I agree with the view taken by the Chief Justice on question No. 4 however, with the following additions:- (ii When the entry t .....

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gislative competence to levy entry tax on the goods imported from other countries when those goods imported from other countries enter a local area for use, consumption or sale therein. (iiii Tax concessions/benefits/subsidies granted by the State for locally manufactured goods need not necessarily be limited for a specific period of time. 1(c). Questions Nos. 2 and 3:- Insofar as compensatory taxes are concerned in the light of the conclusions on question No. 1, I hold that the nomenclature of .....

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ons in Automobile and the case subsequent to it. Subject to passing the muster of Art. 304(a), entry tax levied by the States under entry 52, List II even though termed as compensatory tax does not fall foul of Art. 301. In my view, Jindal Stainless Ltd. (2) & Anr. v. State of Haryana & Ors. (2006) 7 SCC 241 is not a correct view in adopting quantifiable data approach; for a tax, there is no requirement of proximate quid pro quo and Jindal Stainless Ltd. (2) is overruled. I agree with th .....

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lip;..[Para Nos. 15-27] Freedom under Article 301 is subject to Part XIII and other parts of the Constitution viz. Part III, IV, XII etc. …..[Para Nos. 28-35] Question No. 1 with incidental questions .….[Para Nos. 36-103] Question No.4 with incidental questions …..[Para Nos. 104-177] Question Nos. 2 and 3 .….[Para Nos. 178-191] Unjust Enrichment …..[Para Nos. 192-198 ] Conclusions …..[Para Nos. 199] BACKGROUND TO THE REFERENCE: 2. In Automobile the conce .....

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t the imposition of tax is must for the definite purpose of meeting the expenses on account of providing or adding to the trading facilities, either immediately or in future, provided the tax sought to be generated is based on a reasonable relation to the actual or the projected expenditure on the cost of the service or facility. But the decisions in Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. & Ors. 1995 Suppl. (1) SCC 673 and State of Bihar & Ors. v. Bihar Chamber of Comme .....

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to traders by reason of stepping up the developmental activities in various local areas of the State can be legitimately brought within the concept of compensatory tax and the nexus between the compensatory tax and the trading facility need not necessarily be either direct or specific. In Jindal Stripe Ltd. and Anr. v. State of Haryana and Ors. (2003) 8 SCC 60, this Court referred the matter to the Constitution Bench to authoritatively lay down the principles vis-à-vis compensatory tax. .....

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;it must broadly indicate proportionality to the quantifiable benefit. If the provisions are ambiguous or even if the Act does not indicate facially the quantifiable benefit, the burden will be on the State as a service/facility provider to show by placing the material before the Court, that the payment of compensatory tax is a reimbursement/recompense for the quantifiable/ measurable benefit provided or to be provided to its payer(s). As soon as it is shown that the Act invades freedom of trade .....

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rrect view and the judgments in Bhagatram and Bihar Chamber of Commerce were overruled. 5. After the judgment of Constitution Bench in Jindal Stainless (2) dated 13.04.2006, the matter went to a Division Bench which in turn by their order dated 14.07.2006, reported in Jindal Stainless Ltd. (3) and Anr. v. State of Haryana & Ors. (2006) 7 SCC 271, directed the High Courts to re-examine the challenge in the light of the principles laid down by the Constitution Bench. While doing so, this Court .....

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Area Development Act, 2000 was not compensatory. The State of Haryana challenged the aforesaid judgment dated 14.03.2007 in Civil Appeal No.4715 of 2008 and filed certain other appeals challenging orders in separate cases. 6. Considering the importance of the issues relating to Articles 301, 304 and other provisions of Part XIII of the Constitution, in Jaiprakash Associates Ltd. vs. State of Madhya Pradesh and Ors (2009) 7 SCC 339 [two Judges], the matter was referred to a larger Bench in terms .....

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sequently, in Jindal Stainless Ltd. & Anr. v. State of Haryana & Ors. (2010) 4 SCC 595, after referring to the reference made in Jaiprakash Associates, the matter was referred to a larger Bench. Accordingly, the matters are now before this larger Bench. 7. Even though ten questions were framed for reference, when the matters came up for consideration before this larger Bench, the issues for consideration were abridged to four questions as under:- (1) Can the levy of a non-discriminatory .....

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ing to entry tax to be tested with reference to both Articles 304(a) and 304(b) of the Constitution for determining their validity? SCHEME OF THE CONSTITUTION/DISTRIBUTION OF LEGISLATIVE POWERS: 8. Art. 1 of the Constitution describes India as a Union of States, thereby implying the indestructible nature of its unity. The country is divided into several units, known as States or Union Territories and the Constitution lays down not only structure of the Union Government but also the structure of .....

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hedule to the Constitution. The three Lists are exhaustive, yet as a matter of principle and also to meet unforeseen circumstances, Art. 248 and entry 97, List I stipulate that the residuary power vests in the Union i.e., Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent or State List. 10. Art. 246 stipulates that with respect to the matters enumerated in List I, Parliament has the exclusive jurisdiction; with respect to those in List II, .....

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as AIR 1950 SC 27] 11. As the opening words of Art. 245(1) state, the legislative powers of both Union and State Legislatures are subject to other provisions of the Constitution even though their powers are plenary within the spheres assigned to them respectively by the Constitution. Legislative competence of State Legislature can only be circumscribed by express prohibition contained in the Constitution itself. Unless and until there is any provision in the Constitution expressly prohibiting le .....

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the words subject to the provisions of the Constitution apply equally to Art. 246. 12. The power of the Parliament and State Legislature to enact laws flows from Articles 245 and 246. Considering the source of legislative powers of the Union and the State in Maharaj Umeg Singh and Others v . The State of Bombay and Others, 1955 (2) SCR 164, it was held as under:- Under Article 246 the State Legislature was invested with the power to legislate on the topics enumerated in Lists II & III of the .....

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Court in State of W.B. v. Kesoram Industries Ltd. (2004) 1 SCC 10 held that Article 245 of the Constitution is the fountain source of legislative power. It provides that subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State. 14. While interpreting Articles 245 and 246, in State of Kerala and Ors. v. Mar Appraem Kuri Company Limited and Anr. .....

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ive fields of the respective legislatures and do not confer legislative power as such. While Parliament has power to make laws for the whole or any part of the territory of India, the legislature of a State can make laws only for the State or part thereof. Thus, Article 245 inter alia indicates the extent of laws made by Parliament and by the State Legislatures. ….. 37. Article 246, thus, provides for distribution, as between Union and the States, of the legislative powers which are confe .....

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gislative powers. In these articles, the Constitution Framers have used the word make and not commencement which has a specific legal connotation. [See Section 3(13) of the General Clauses Act, 1897.] [Emphasis Supplied] FREEDOM OF TRADE, COMMERCE AND INTERCOURSE: 15. Art. 301 of the Constitution provides for freedom of trade, commerce and intercourse throughout the territory of India, subject to the other provisions of Part XIII, Articles 302-305 which permit the imposition of reasonable restri .....

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ress of the political and economic unity of the nation, and that the country should function as one single economic unity without barriers on internal trade. In order to ensure that the State Legislatures subjected to local and regional pulls did not create trade barriers in future, Art. 301 was incorporated in the Constitution. Art. 301 in general enacts that subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free . After hav .....

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itself overrides the freedom in Art. 301. 17. Art.302 empowers the Parliament to impose restrictions on the freedom of trade, commerce and intercourse provided they are required in public interest. The purpose of this provision is to allow the Government of India to restrict the movement of goods so as to safeguard a well-balanced economy and for proper organization or supply of goods and services. Famine may be raging in one part of the country while there is plenty in another part, as has been .....

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trade and commerce, normally the laws passed by Parliament in this context ought to be non-discriminatory in character. Art. 303(1) of the Constitution prohibits Parliament and the State Legislature from making any law giving or authorizing the giving of, any preference to one State over another, or making or authorizing the making or, any discrimination between State and another, by virtue of any entry relating to trade and commerce in any of the Lists in Seventh Schedule . Preference or discri .....

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city of goods, Parliament may, to meet such a situation; pass even a discriminatory law [Art. 303(2)]. Art. 303(2) is an exception to Art. 303(1) inasmuch that the limitations of Art. 303(1) lose operation when aforesaid preference and discrimination is made for the purpose of dealing with situation arising from scarcity of goods, and the Parliament may in these situations enact a law that gives or authorises giving preference or makes or authorises making of any discrimination. 19. As per Art. .....

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dment shall be moved in the Legislature of a State without previous sanction of the President [Art. 304(b)]. Art. 304 begins with non-obstante clause and is intended to override both Art. 301 and Art. 303. Art. 304(a) does not prevent taxation of goods; it only prohibits taxes that discriminate between the goods imported from other States and similar goods that are manufactured or produced within the taxing State. 20. Under Art. 305, tax laws existing at the time of the commencement of the Const .....

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is empowered to appoint such authority as it considers appropriate for carrying out the purposes of Articles 301 to 304 and to confer on that authority such powers and duties as it thinks necessary. 21. Part XII and Part XIII of the Constitution lay down the parameters within which State Governments can exercise their right to enact laws/impose tax, restricting the freedom of trade, commerce and intercourse. Purpose of including Part XIII (as it stands today) in the Constitution as emerges from .....

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uent Assembly Debates 30.07.1949 to 18.09.1949 shows that Dr. B.R. Ambedkar while introducing Part XA: Trade, Commerce and Intercourse within the territory of India Articles 274A to 274D (which corresponds to Articles 301 to 304 and 307) before the Constituent Assembly specifically noted that it is not the intention to make trade, commerce and intercourse absolutely free in India. Relevant extracts from the debate are as under:- ….I should also like, to say that according to the provision .....

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power of Parliament to invade the freedom of trade and commerce is confined to cases arising from scarcity of goods in any part of the territory of India and in the case of, the States it must be justified on the ground of public interest. The action of the States in invading the freedom of trade and commerce in the public interest is also made subject to a condition that any Bill affecting the freedom of trade and commerce shall have the previous sanction of the President; otherwise, the State .....

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me tell the House that so far as I am concerned I think this is about the maximum amount of liberty that we can give for trade and commerce, the maximum amount of concession that we can give to trade and commerce consistent with the future economic improvement of this country. Even as it was originally suggested, that we should make it a matter of fundamental right, and even without the restriction that have been put in article 16, I am afraid the economic progress of the country will become wel .....

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are mistaken. [CAD Page No.1140 dated 08.09.1949] 23. Reiterating the views of Shri T.T. Krishnamachari, Shri Alladi Krishnaswami Ayyar pointed out that the Scheme as evolved has taken into account larger interest of India along with the interests of particular State, wide geography of the country where the interest of one region differs from the interest of another region, and future prosperity of our country. Relevant extract is as under:- Shri Alladi Krishnaswami Ayyar:…. It may be th .....

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the highest Court. There has been a feeling in those parts of Australia which depend for their well-being on agricultural conditions that their interests are being sacrificed to manufacturing regions, and there has been rivalry between manufacturing and agricultural interests. Therefore, in a federation what you have to do is first, you will have to take into account the larger interests of India and permit freedom of trade and intercourse as far as possible. Secondly, you cannot ignore altoget .....

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i Alladi Krishnaswami Ayyar:…. Therefore, if on account of parochial patriotism or separatism, without consulting the larger interests of India as a whole if any Bill or amendment is introduced, it will be open to the President, namely, the Cabinet of India to withhold sanction. This is therefore a very restricted power that is conferred on the legislature of a State. After all what is the nature of the power given? The power is confined to imposing such reasonable, restrictions on the fr .....

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Constituent Assembly Debates was to ensure the interest of the larger economy of the nation and to prevent unreasonable trade barriers in the free flow of trade, commerce and intercourse, impeding economic growth. Framers of the Constitution considered flow of trade, commerce and intercourse throughout the territory of India as important for economic unity, but they did not deify trade, commerce and intercourse nor they entertained any fetish for it. In fact, freedom of trade, commerce and inter .....

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d be deleted as this clause negatives articles 16 and 243 by its vague generality. Note: Clause (b) of article 244 is based on the recommendation of the Advisory Committee as adopted by the Constituent Assembly. The Drafting Committee has considered it necessary to substitute for the words in the interest of public order, morality or health which occur in the said recommendation, the words in the public interests . [The Framing of India s Constitution (Vol. 4) (Page 328)] Shri C. Subramanian (Ma .....

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purposes of the provisions of article 244 of this Constitution. Therefore, you will find inter-state trade and commerce, subject to article 244, is a Union subject. Parliament can deal with it. Trade and commerce within the state and inter-state commerce as provided in article 244 are given to the State Legislatures. You will find, Sir, that in article 244, even though it might be inter-state trade and commerce, the State Legislature is given certain powers to impose certain taxes and impose cer .....

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l to understand how this can be a fundamental right and whether there is any right at all reserved. The very conception of a fundamental right is that there is a certain right taken out of the province of the legislature either of the Union or of the State. To put it in other words, the sovereignty vests in the public, but that sovereignty is delegated to the legislatures or the sovereignty is expressed through the legislatures in respect of certain subjects. [CAD Page No. 798, 30.07.1949-18.09. .....

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n only on three subjects- foreign affairs, defence and communications. On no other matter they would agree to permit the Union Parliament to extend its legislative and executive jurisdiction..… Or to put it briefly and in a different language, they were not prepared to allow trade and commerce to be included as an entry in List No.I. If it was possible for us to include trade and commerce in List I, which means that Parliament will have the executive authority to make laws with regard to .....

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the desire of a large majority of our people that trade and commerce should be free throughout India, was to bring it under fundamental rights. That is the reason why, awkward as it may seem, we thought that there was no other way left to us, except to bring trade and commerce under fundamental rights. I think that will satisfy my friend Mr. Subramaniam why we gave this place to trade and commerce in the list of fundamental rights, although theoretically, I agree that the subject is not germane .....

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ons on the entry of goods manufactured or transported from another State, provided the legislation is such that it does not impose any disparity, discrimination between the goods manufactured within the State and the goods imported from outside the State. Now, I am sure he will agree that that is a very limited law. It certainly does not take away the right of trade and commerce and intercourse throughout India which is required to be free. [CAD Page No. 1125, 30.07.1949 to 18.09.1949] 27. After .....

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THER PARTS OF THE CONSTITUTION PARTS III, IV AND XII ETC.: 28. An argument was advanced that Art. 301 is subject only to Part XIII and the same cannot be restricted by general and special powers of the Constitution. In this regard, reliance was placed upon Constituent Assembly Debates where an amendment to Art. 274A was moved by Pandit Thakur Das Bhargav: I want the word Part to be substituted by the word Constitution , which was not approved. Freedom under Art. 301 in the constitutional context .....

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itution. What it means is that such plenary power of taxation shall not be used to create trade barriers or to discriminate between goods manufactured within the State and goods imported . The expression in Art. 301 subject to is a dominant expression. It indicates subservience of the freedom to Articles 302, 303 and 304. 30. Considering the scope of the expression subject to this Court in K.T. Plantation (P) Ltd v. State of Karnataka (2011) 9 SCC 1, observed: Section 110 of the Land Reforms Act .....

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ned or effected by; provided that; provided; answerable for. 66. Since Section 107 is made subject to Section 110, the former section conveys the idea of yielding to the provision to which it is made subject that is Section 110 which is the will of the legislature…. 31. Interpretation of the Constitution should emerge from a reading of the whole of the Constitution to ensure that the overall objectives are achieved. Part XIII as a whole is based on a balanced scheme and it should be inter .....

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vacuum and then insert the meaning into an article. Lord Green observed in Bidie v. General Accident, Fire and Life Assurance Corporation (1948) [All E.R. 995, 998] …… 61. I may also refer to the observation of Gwyer, C.J., and Lord Wright: A grant of the power in general terms, standing by itself, would no doubt be construed in the wider sense; but it may be qualified by other express provisions in the same enactment, by the implications of the context, and even by considerations .....

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(Per Lord Wright - James v. Commonwealth of Australia, 1936 AC 578 at 613.) See also Kihoto Hollohan v. Zachillhu and Ors. (1992) Supp 2 SCC 651 [Paras 26 and 27]. 32. In T.M.A. Pai Foundation v. State of Karnataka, (2002) 8 SCC 481, the Supreme Court stated:- 148. ….When constitutional provisions are interpreted, it has to be borne in mind that the interpretation should be such as to further the object of their incorporation. They cannot be read in isolation and have to be read harmoniou .....

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bject of Part XIII is not to make inter-State trade, commerce and intercourse absolutely free. Part XIII will have to be read along with other Parts of the Constitution namely, Parts III, IV and XII along with the basic features of sovereignty and federalism. Free trade, commerce and intercourse is subject to the other provisions of Part XIII as well as other constitutional provisions. Art. 301 does not use the word subject only to Part XIII. The word free in Art. 301 is to be read not in isolat .....

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t both Atiabari and Automobile proceeded on the footing that Art. 302 is in the nature of exception to Art. 301. Gajendragdkar J. in Atiabari held: Thus, the effect of Art. 302 is to provide for an exception to the general rule prescribed by Article 301…. [Pages 853-854] Similarly, Das J. in Automobile held: ….The fact of the matter is that there is such a mix up of exception upon exception in the series of articles in Part XIII that a purely textual interpretation may not disclose .....

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m it by implication what clearly falls within its express term…. [Page 528] The above view in Atiabari and Automobile is not correct. Articles 302 to 304 embody re-statement of powers under Art. 246 and the Seventh Schedule. Each re-stated power by itself overrides the freedom in Art. 301. 35. Further the majority in Atiabari held that: …The doctrine of freedom of trade, commerce and intercourse enunciated in Art. 301 is not subject to the other provisions of the Constitution, but .....

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rvai s book on Constitutional Law of India, 4th Edition, Volume 3: …..The reasons are - (1) It read into Art. 301 after the words subject the word only which is not there and this is contrary to well-settled principles of interpretation. Further, the power to make rules, referred to in Arts. 302 to 305 is governed by Articles 245 and 246, and, therefore, subject to the provisions of our Constitution. (2) The proviso to Art. 304(b) which requires the previous consent of the President to a .....

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) and the relation of that Article is necessary for a proper interpretation of Part XIII. Article 19(1)(g) guarantees to every citizen the right to carry on any trade or business. But trade cannot be carried on without goods or property and the right to acquire, hold and dispose of property which is guaranteed under Art; 19(1) (f). Again, it is not only Art.303 which speaks of discrimination Arts. 14 and 15 do likewise and the relation of this Article to 303 must be considered. [Page 2591] The S .....

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ating to taxation and levy of duty under the State List, Seventh Schedule are Entries 46-62 and under the Concurrent List, Seventh Schedule are Entries 35, 43 and 44. The power to tax is a sovereign right of the State and is essential to the very existence of a Government. Any fetters on the power of the State to generate revenue through taxes have a direct impact on the autonomy and governance of the State. 37. The term tax is ordinarily used to express the exercise of the sovereign power to ra .....

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ortionment from the property or occupations within its jurisdiction for the purpose of defraying the public expenses: - … It is obvious that it is an incident of sovereignty, and is co-extensive with that to which it is an incident. All subjects over which the sovereign power of a State extends are objects of taxation, but those over which it does not extend are, upon the soundest principles, exempt from taxation. This proposition may almost be pronounced self-evident. The power of taxati .....

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or apportionment, from the property or occupation within its jurisdiction for the purpose of defraying the public expenses . (Cooley, Taxation (4th Edition) Pages. 72, 149, 150; Referred to in the Article Power to Tax by Herman M. Knoeller reported in Market Law Review Volume 22 Issue 3 April, 1938. ) 38. This Hon ble Court has held in a catena of cases that power to levy tax is a sovereign power of the State starting from Raja Jagannath Baksh Singh v. The State of U.P. and Anr., (1963) 1 SCR 22 .....

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nction of the Court to enquire whether the power of taxation has been reasonably exercised either in respect of the amount taxed or in respect of the property which is made the object of the tax. Article 265 of the Constitution provides that no tax shall be levied or collected, except by authority of law; and so, for deciding whether a tax has been validly levied or not, it would be necessary first to enquire whether the legislature which passes the Act was competent to pass it or not. [Emphasis .....

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e of sovereign power for the purpose of effectuating regulation though incidentally the levy may contribute to the revenue…. Power of taxation has been regarded as an inherent attribute of sovereignty emanating from necessity. Same view was reiterated in Yadlapati Venkateswarlu v. State of A.P . (1992) Suppl. (1) SCC 74 [Para 9], State of U.P. & Anr . v . Synthetics and Chemicals Ltd. & Anr . (1991) 4 SCC 139 [Para 44], Amrit Banaspati Co. Ltd. and Anr . v. State of Punjab and Anr .....

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m which source is a matter of fiscal policy and wholly depends on the needs of a State. In order to support the existence of the State and its welfare activities, as mandated by the Directive Principles of the State Policy, the State is empowered to raise revenue through, (i) taxes and duties; (ii) loans raised by the issue of treasury bills, loans or ways and means of advances; (iii) fees for licenses; (iv) fees for services rendered; and (v) fines or other pecuniary penalties (Articles 199, 20 .....

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objectives… 42. Parts XI and XII of the Constitution deal with Relations between the Union and the States and Finance, Property, Contracts and Suits respectively. Part XII dealing with finance etc. has been treated as Part dealing with the sovereign power of the States to impose taxes, which must always mean imposing burden on citizens and others in public interest. The power of taxation is vested in a sovereign State to carry on with the affairs of the Government. Our Constitution had la .....

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ions other than those imposed by the Constitution itself. 43. In Mahara j Umeg Singh and Ors. v. The State of Bombay and Ors. AIR 1955 SC 540, this Court held that since the power of the State to legislate within its legislative competence is plenary and the same cannot be curtailed in the absence of an express limitation placed on such power in the Constitution itself, there is no express prohibition on the legislative powers of the State to levy taxes on the goods entering into a local area fo .....

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s plenary power ought not to be whittled down by interpretation. In the present reference, we are concerned with entry 52, List II Taxes on the entry of goods into a local area for consumption, use or sale therein . Entry tax is a tax levied on Entry of goods into a local area for the purpose of consumption, use or sale therein. States within their spheres are autonomous entities and have the competence to enact legislation in the fields enumerated in List II of Seventh Schedule. 45. In the Stat .....

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ower of taxation expressly granted under the Constitution cannot be allowed to be whittled down and made subservient to trade, commerce and intercourse. 46. Tax has always been treated as a distinct entity and is kept on a pedestal separate from all the other legislative fields of the Seventh Schedule. It is worth repeating that the power of taxation is an inherent attribute of sovereignty emanating from necessity. As noted earlier, the exaction is not merely fundamental for existence of the Sta .....

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erefore, have a different laying procedure. They can originate only in the lower houses of the Parliament and the State Legislature as per Articles 109 and 198. Being a Money Bill, all the revenue is sent to the Consolidated Fund and can only be taken out through Appropriation Bills (Articles 114 and 204). Freedom in Art. 301 does not mean freedom from taxation:- 47. Historically, Art. 301 was meant to do away with barriers between Native States and the rest of India. Thus, Art. 301 should be in .....

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is held to be subject to the limitation under Art. 301, the legislative power of the State to levy taxes under various entries in List II would be rendered ineffective. 48. In various provisions in Part XII of the Constitution certain restrictions have specifically been incorporated on State s power to levy tax. Restrictions as to imposition of tax on the sale or purchase of goods [Art. 286]; Taxes on professions, trades, callings and employments, in terms of which power of the State Legislatur .....

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ticles 288, 288 (1) and (2)]; Identically, there are at least five entries in List II [entries 50, 51, 54, 55 and 57] which specifically provide that they are subject to the limitations/principles prescribed by Parliament by law made under List I and List III. 49. In the Constitution, wherever exemption from taxes were contemplated, they were expressly provided for-Exemption of property of the Union from State taxation [Art. 285]; Exemption from taxes on electricity [Art. 287]; Exemption from ta .....

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or business carried on by or on behalf of the Government of the State can also be subjected to tax, it would be erroneous to hold trade, commerce and intercourse carried on by private individuals and companies in the country free from tax; and that too, by implication. 50. It is well-settled that even Fundamental Rights in Part III of the Constitution are not immune from taxation and taxation has been held to be not a restriction . In Indian Express Newspapers (Bombay) Pvt. Ltd. and Ors. etc. v. .....

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vereignty or one of its governmental agents to exact or impose a charge upon persons or their property for the support of the government and for the payment for any other public purposes which it may constitutionally carry out. … 65. Newspaper industry enjoys two of the fundamental rights, namely the freedom of speech and expression guaranteed under Article 19(1) (a) and the freedom to engage in any profession, occupation, trade, industry or business guaranteed under Art. 19(1) (g) of the .....

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n such tax transgresses into the field of freedom of expression and stifles that freedom, it becomes unconstitutional. As long as it is within reasonable limits and does not impede freedom of expression it will not be contravening the limitation of Art.19(2). The delicate task of determining when it crosses from the area of profession, occupation, trade, business or industry into the area of freedom of expression and interferes with that freedom is entrusted to the courts. …. 69. In the c .....

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ws including tax measures and social welfare legislations. Similarly, in Printers (Mysore) Ltd. and Anr. v. Asstt. Commercial Tax Officer and Ors. (1994) 2 SCC 434, after referring to Express Newspapers case, it was held that press is not immune from taxation or general law. Thus when even Fundamental Rights are not free from taxation, trade, commerce and intercourse cannot claim immunity from taxation. 52. Art. 304(a) allows levy of tax on goods imported from other States, any tax, to which sim .....

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tax is also imposed on similar goods manufactured or produced in that State; and (d) there is no discrimination between goods imported and goods manufactured or produced in that State. When these four conditions are fulfilled, Art. 304(a) provides a constitutional route to levy non-discriminatory tax. Under Art. 304(b), the ban under Art.301 stands lifted even if discriminatory restrictions are imposed by the State Legislatures, provided they fulfill the following conditions-(a) such restriction .....

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ante clause in Art. 304 with respect to Art. 301, actually indicates that since tax does not fall within the purview of Art. 301, therefore, Art. 304(a) was brought in to provide against discrimination based on source or destination of goods. Art. 304(a) is thus a restriction on the tax powers of the States, not to discriminate between the goods imported into the State with similar goods manufactured or produced within the taxing State. 54. Constituent Assembly Debates indicate that the framers .....

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tes to impose taxes, subject of course, the levy is not discriminatory. Hence, Art. 301 ought not to be read as freedom from tax laws. 55. In this regard, we may usefully refer to Constituent Assembly Debates/Framing of India s Constitution: Shri Alladi Krishnaswami Ayyar And then, Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which goods produced in the unit are subject . That is to say we ought not to .....

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deral Constitution. If the units are to be discriminated against we will come to blows more often than otherwise. Therefore this should be avoided. (The framing of India s Constitution, Select Documents by Universal Law, Law Publishing Pvt. Co. Pvt. Ltd. Vol.2 Page.254) Shri Krishnaswami Ayyar So far as article 16 is concerned, the substance of the freedom of trade guarantee is preserved. We have prohibited the States and the Centre from passing discriminatory laws [Constituent Assembly Debates .....

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at taxing statutes are not beyond the pale of the constitutional limitations prescribed by Articles 19 and 14, and he also concedes that the test of reasonableness prescribed by Art. 304(b) is justiciable. It is, of course, true that the power of taxing the people and their property is an essential attribute of the Government and Government may legitimately exercise the said power by reference to the objects to which it is applicable to the utmost extent to which Government thinks it expedient t .....

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he contention raised by a citizen that the taxing statute contravenes Art. 19, courts would naturally be circumspect and cautious. Where for instance, it appears that the taxing statute is plainly discriminatory, or provides no procedural machinery for assessment and levy of the tax, or that it is confiscatory, Courts would be justified in striking down the impugned statute as unconstitutional. In such cases, the character of the material provisions of the impugned statute is such that the Court .....

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(SC) , where a challenge to the taxing statute on the ground that its provisions were unreasonable was rejected and it was observed that unless the infirmities in the impugned statute were of such a serious nature as to justify its description as a colourable exercise of legislative power; the Court would uphold a taxing statute. [Emphasis supplied] 57. In Hari Krishna Bhargav v. Union of India and Anr. AIR 1966 SC 619, the Bench noting the effect the series of decisions has had on Ramjilal, co .....

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oms guaranteed by Ch. III of the Constitution. It is not a power which transcends the fundamental rights, as was assumed in certain earlier decisions : Ramjilal v. Income-tax Officer (1951) 19 ITR 174 (SC) ; Laxmanappa Hanumantappa v. Union of India (UOI) (1954) 26 ITR 754 (SC) ; and the view expressed by Venkatarama Ayyar J., in S. Anantha Krishnan v. State of Madras I.L.R. [1952] Mad. 933. But it is now settled by decisions of this Court (e.g.) Kunnathat Thathunni Moopil Nair v. The State of K .....

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tax legislations can be challenged on the ground that they infringe the Fundamental Rights under Part III but that does not however mean that there is freedom from taxation or that tax is per se a restriction on Fundamental Rights or freedom of trade, commerce and intercourse. Tax is not a restriction per se: 58. The above Constituent Assembly Debates and the history of Art. 301 show that freedom envisaged in Art. 301 is not freedom from taxation but only freedom from trade barriers. So long as .....

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Executive. Taxation includes the imposition of any tax as defined under Art. 366(28): taxation includes the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly. It is a sovereign power of compulsory exaction as a part of any burden by public authority for public purposes enforceable by law. Imposing a tax is a compulsory exaction made for a public purpose without reference to any special benefit to the taxpayers. 59. The taxing power of th .....

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njoyment of any freedom contemplated by the Constitution. It would be highly unjustified to view a taxing Statute as a restriction on individual freedoms. 60. The essential characteristics of a tax are that: (i) it is imposed under a statutory power without the taxpayer s consent and the payment is enforced by law; (ii) it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax; and (iii) it is part of the common burden. In Commis .....

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other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer s consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general re .....

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651 and also in State of Gujarat and Ors. v. Akhil Gujarat Pravasi V.S. Mahamandal and Ors. (2004) 5 SCC 155. 61. A five Judges Bench of this Court in Federation of Hotel and Restaurant Association of India, Etc. v. Union of India and Ors. (1989) 3 SCC 634 has held that mere excessiveness of a tax or even the circumstance that its imposition might tend towards diminution of the earnings or profits of the persons of incidence does not per se and without more, constitute violation of Art. 19(1)(g .....

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umstance that its imposition might tend towards the diminution of the earnings or profits of the persons of incidence does not, per se, and without more, constitute violation of the rights under Article 19(1)(g). 62. Similar view was expressed in Express Hotels Private Limited v. State of Gujarat and Anr. (1989) 3 SCC 677. A taxing Statute is not per se restriction of the freedom under Art. 19(1)(g): 28. So far as the argument that Fundamental Rights under Article 19(1)(g) are violated by a levy .....

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from other States and similar goods manufactured or produced within the State. The object is to prevent imported goods from being discriminated by imposition of a higher tax thereon than the local goods. Under Art. 304(b), States can impose reasonable restrictions on the freedom of trade, commerce and intercourse with or within that State as may be required in public interest; provided they obtain prior sanction of the President before introduction of the Bill. As taxes are levied for the purpos .....

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mposed tax at a rate of one anna per pound of tea in chest box, carried through the State of Assam by any means other than the railways and the air. The appellant who carried their tea to Calcutta in the State of West Bengal through the State of Assam assailed the validity of the Act inter alia on the ground that it violated Art. 301 of the Constitution. Contention of the appellant was that words of Art. 301 are very wide and unambiguous and that it would be unreasonable to exclude from its ambi .....

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onsidered we think it would be reasonable and proper to hold that restrictions freedom from which is guaranteed by Art. 301 would be such restrictions as directly and immediately restrict or impede the free flow or movement of trade. Taxes may and do amount to restrictions; but it is only such taxes as directly and immediately restrict trade that would fall within the purview of Art.301. The argument that all taxes should be governed by Article 301 whether or not their impact on trade is immedia .....

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ional and workable test to apply would be: Does the impugned restriction operate directly or immediately on trade or its movement? [Page 860] [Emphasis Supplied] The majority based its opinion on the reasoning that any legislation whether taxing or otherwise which imposed any restrictions that had the effect of directly offending the movement or transport of goods would attract the provisions of Art. 301 and its validity could be sustained only if it satisfied Art. 302 or Art. 304(b) of the Cons .....

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and duties meant not only for raising revenue but also as trade barriers and tariff walls. In the background of those circumstances, it was necessary to abolish all those trade barriers and custom posts as also in the interest of national solidarity, economic and cultural unity and freedom of trade and commerce guaranteed in the Constitution by Art. 301. Observing that the power to tax is inherent in sovereignty, public purpose is inherent in every taxation and tax simpliciter is not an impedim .....

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ll be putting too great an impediment to the power of taxation vested in the States and reduce the States limited sovereignty under the Constitution to a mere fiction. That extreme position has, therefore, to be rejected as unsound. [Page 827] …… In my opinion, another very cogent reason for holding that taxation simpliciter is not within the terms of Art. 301 of the constitution is that the very connotation of taxation is the power of the State to raise money for public purposes b .....

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pose is implicit in every taxation, as such. Therefore, when Part XIII of the Constitution speaks of imposition of reasonable restrictions in public interest, it could not have intended to include taxation within the generic term reasonable restrictions ………[Page 828] …… ….The objections against the contention that taxation was included within the prohibition contained in Part XIII may thus be summarized: (1) Taxation, as such, always implies that it is i .....

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es in the three lists referred to above empowering the Union Government and the State Governments to impose certain taxations with reference to movements of goods and passengers would be rendered ineffective, if not otiose, if it were held that taxation simpliciter is within the terms of Art. 301. (3) If the argument on behalf of the appellants were accepted, many taxes, for example, sales tax by the Union and by the States, would have to go through the gamut prescribed in Articles 303 and 304, .....

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necessarily an impediment. [Page 829] …… Article 301, with which Part XIII commences, contains the crucial words shall be free and provides the key to the solution of the problems posed by the whole Part. The freedom declared by this Article is not an absolute freedom from all legislation. As already indicated, the several entries in the three Lists would suggest that both Parliament and State Legislatures have been given the power to legislate in respect of trade, commerce and int .....

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fferent aspects of trade, commerce and intercourse. The Union and State Legislature, therefore, have the power to legislate by way of taxation in respect of trade, commerce and intercourse, so as not to erect trade barriers, tariff walls or imposts, which have a deleterious effect on the free flow of trade, commerce and intercourse. That freedom has further been circumscribed by the power vested in Parliament or in the Legislature of a State to impose restrictions in the public interest. Parliam .....

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01 does not mean freedom from taxation simpliciter, but does mean freedom from taxation which has the effect of directly impeding the free flow of trade, commerce and intercourse; ( 3 ) the freedom envisaged in Art. 301 is subject to non-discriminatory restrictions imposed by Parliament in public interest (Art.302); (4) even discriminatory or preferential legislation may be made by Parliament for the purpose of dealing with an emergency like a scarcity of goods in any part of India [Art. 303(2)] .....

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hasis added] 67. A larger Bench of seven Judges was constituted in Automobile Transport (Rajasthan) Ltd. v. The State of Rajasthan and Ors. (1963) 1 SCR 491, in which the validity of Rajasthan Motor Vehicles Taxation Act, 1951 and the Rules made thereunder was under challenge. Section 4 of the Rajasthan Act required every owner of motor vehicle used in any public place or kept for use in Rajasthan to pay tax at the appropriate rate specified in the Schedule to the Act. The appellants therein who .....

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301. But the majority in Automobile added a clarification that a regulatory measure or measures imposing compensatory taxes for the use of trading facilities would not come within the purview of restrictions contemplated by Art. 301 and such measures need not comply with the requirements of Art. 304(b). 68. While concurring with the majority view that the provisions of the Rajasthan Motor Vehicles Taxation Act 1951, are regulatory in character, delivering a separate judgment. Justice Subba Rao w .....

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nd Automobile held that State tax legislation must conform to Art. 304(b) in addition to Art. 304(a). The thrust of the submissions made is that entry tax falls within the expression restriction under Art. 304(b). They submit that the State legislation levying tax on the goods imported into the State may have to be justified under Art. 304(b), if they are challenged as excessive in amount, to such an extent that they operate as a restriction on the movement of goods or persons and impose a burde .....

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of the Government of India Act, 1935 and referred to the economic unity of the nation, no detailed discussion was done on the history of Part XIII and Constituent Assembly Debates which threw considerable light on Part XIII and consequently erred in holding that Art. 301 read in its proper context imposes constitutional limitations on the legislative powers of the Parliament and the State. [Page 848] Majority in Atiabari held that :- ….the freedom of the movement of trade cannot be subje .....

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igations as a Welfare State. Such plenary powers of the State legislature to impose taxes cannot be whittled down or made subservient to Art. 301. (ii) The majority read Art. 301 as subject only to the provisions of Part XIII. [Page 848] (iii) Majority drew support from the Constitutions of Australia and USA however one does not find any provision comparable to Part XIII in Australian and American Constitution. Even Australia and USA now reject the direct and immediate test and have adopted disc .....

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ity of the country. 72. Art. 301 guarantees freedom of trade and commerce from restrictions and not freedom from all laws . With due respect, in Atiabari, by application of direct and immediate test , rather than examining the powers of the State Legislature to enact legislation with reference to the entries in List II, the majority has gone into the effects of the legislation. As per majority view of Atiabari, Art. 301 is a limitation upon the exercise of legislative powers of the State, which, .....

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ed by Part XII of the Constitution and can be challenged only on the ground of reasonableness. Through a series of judicial pronouncements, it is accepted that even a challenge to the taxing Statute under Articles 19(1)(g), 14 and under Part III of the Constitution has to be dealt with caution and only after great circumspection should the Statute be struck down. Freedom in Art. 301 is not freedom from taxation-non-discriminatory taxes are outside the purview of Art. 301: 74. In Atiabari, Sinha, .....

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e very connotation of taxation is the power of the State to raise money for public purposes by compelling the payment by persons, both natural and juristic, of monies earned or possessed by them, by virtue of the facilities and protection afforded by the State. Such burdens or imposts, either direct or indirect, are in the ultimate analysis meant as a contribution by the citizens or persons residing in the State or dealing with the citizens of the State, for the support of the Government, with p .....

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in the matter of trade, commerce and intercourse. As per Sinha C.J., taxation by its very nature could not be included within the term reasonable restriction used in Part XIII. The view of Sinha C.J. is a correct view and is in consonance with the consistent view taken by this Court that taxing statutes are not per se a restriction . Atiabari and Automobile: Reference to Australian and American cases: 75. The Commonwealth of Australia Constitution Act came into being in 1900. Chapter I, Part V l .....

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bject only to imposition of custom duties. Further, Section 99 mandates that the Commonwealth shall not give preference to one State or any part thereof over another State or any part thereof while making any law or regulation with respect to trade, commerce or revenue. Under Section 102, the Parliament is authorised to make a law forbidding the States from making any preference or discrimination insofar as Railways are concerned, but with due regard to financial responsibilities incurred by Sta .....

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d commerce in India on par with Section 92 of the Australian Constitution. 77. The following observations of Shri T.T. Krishnamachari are relevant to be noted: ….I do not know if he realises that an ombnibus right such as the one that we recognise should not be given so far as freedom of trade and commerce is concerned, which perhaps has an echo in article 92 of the Australian Constitution, which has made the economic position of Australia a very difficult one today. They in Australia fin .....

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is no point in shutting the hands of the future Government in operating this Constitution. [Constitutional Assembly Debates, Volume IX, Page.1142, dated 30.07.1949-18.09.1949] 78. Shri T.T. Krishnamachari highlighted how Section 92 stood in between the nationalisation of private banks in Australia. This observation was probably made taking note of the view taken by Australian High Court, which was later affirmed by Privy Council in Commonwealth of Australia v. Bank of New South Wales (1949) 79 .....

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em down. The Commonwealth Government appealed against the decision in the Privy Council, however, the Privy Council affirmed the decision of the Australian High Court. 79. Our Constitution framers noticed the problems which had emerged in relation to the trade and commerce provisions of the Australian Constitution. After deliberations, the phrase absolutely free occurring in Section 92 of the Australian Constitution was not borrowed and incorporated in the Indian Constitution. While the framers .....

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6) A.C. 578] and was dominantly relied upon in the Bank Nationalisation Case. In the Bank Nationalisation Case, it was held that Section 92 would be breached only where the law under challenge restricted trade and commerce directly and immediately. The Court observed that where the restriction is indirect or remote, the freedom provided by Section 92 would not be impaired. The test on which every impugned legislation ought to be examined was formulated in the following terms: Does the law under .....

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itself, the distribution of powers and the general scheme of the Constitution are different, and so it would to be safe to seek for guidance or assistance from the Australian decisions when we are called upon to construe the provisions of our Constitution. . Gajendragadkar, J. further relied on the Bank Nationalisation Case to borrow the concept of direct and immediate impediment on the freedom of trade and commerce from the Australian system. Relevant extract from Gajendragadkar J. s judgment .....

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s to which they will say something later) but directly restrict the inter-State business of Banking", and he concluded that "two general propositions may be accepted, (1) that regulation of trade, commerce and intercourse among the States is compatible with its absolute freedom, and (2) that s. 92 is violated only when a legislative or executive act operates to restrict such trade, commerce and intercourse directly and immediately as distinct from creating some indirect or consequentia .....

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referring to the differences in the language of both the provisions and evolution of federation in both the countries, Subba Rao J. chose to concur with doctrine of direct and immediate effect . Following observations of Subba Rao J. clearly show that heavy reliance was placed by him on American and Australian decisions:- In this context, the principles evolved by American and Australian decision in their attempt to reconcile the commerce power and the State police power or the freedom of comme .....

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t a law which may have only indirect and remote repercussion on the said freedom cannot be considered to be a restriction on it. 82. The above views taken in Atiabari and Automobile in the light of the Australian cases represent a mechanical implantation of a foreign concept into the Indian legal system, not keeping in view the distinct features of Indian Polity and the Constituent Assembly Debates. Majority view in Atiabari and Automobile do not appear to have taken note of the historical backg .....

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er of the State, they borrowed the concepts of direct and immediate test and compensatory tax from the Australian and American Cases. 83. In this regard, learned author H.M. Seervai in Constitutional Law of India, 4th Edition, Volume 3 has observed as under: It is submitted that the principles of interpretation adopted by the majority judgment in the Atiabari case and by all the judgments in the Automobile case depart widely from well settled principles of construction. They first try to ascerta .....

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ario is akin to the Indian scenario was flawed. It is obscure how the comparative study of the Australian and Indian Constitutions undertaken by this Court in Atiabari and Automobile lead to a conclusion that interpretation of Section 92 as done in Bank Nationalisation Case can be suitably adopted in Indian set-up. Mr. Seervai at Page 2599 observed as under:- …provisions of part XIII of our Constitution are radically different. The judges who cite the Australian decisions repeat the warni .....

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the Australian cases relied upon in Atiabari and Automobile failed to withstand the test of time. As of today, by virtue of a seven Judges Bench, judgment of the High Court of Australia, the decisions in James v. Common Wealth and Bank Nationalisation Case stand overruled. In Cole v. Whitfield (1988) 78 ALR 42, the High Court of Australia considered Section 92 and other ancillary provisions relating to freedom of trade and commerce and found the test of direct and immediate effect to be insignif .....

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same kind…. 85. In Cole v. Whitfield, the High Court while disapproving of the "individual rights" approach authoritatively adopted in Bank Nationalisation Case held that Section 92 guarantees freedom of inter-State trade and commerce only against the discriminatory protectionist burdens. This decision brought to an end the "quite unacceptable state of affairs" then attending Section 92 of the Constitution, as the preceding eighty years of judicial development concern .....

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onism and will not be prohibited by s 92. But if a law, which may be otherwise justified by reference to an object which is not protectionist, discriminates against interstate trade or commerce in pursuit of that object in a way or to an extent which warrants characterization of the law as protectionist, a court will be justified in concluding that it nonetheless offends s 92. [Page 66] 86. This requirement was based on an appraisal of the history of Section 92, which showed that its purpose was .....

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explained and developed in subsequent cases, fundamentally the judgment has withstood the test of time. 87. From the above it clearly emerges that the ramshackle cottage on which the decision in Atiabari and Automobile was based has itself fallen down. Even the idea of freedom in respect of trade and commerce in Australia has considerably changed to suit the dynamics of the present day trade and commerce. 88. Similarly, Article I, Section 8, Clause 3 of the US Constitution empowers the Congress .....

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r things in inter-State commerce, and activities that substantially affect inter-State commerce; whereas in the Indian Constitution, States have plenary power to legislate on the subjects enumerated in List II subject to the Constitutional limitations. Atiabari and Automobile erred in relying on Freeman v. Hewit 329 U.S. 249 (1946), which has been discarded by the US Supreme Court itself in Complete Auto Transit, Inc. v. Charles R. Brady [1977] USSC 54: (1977) 430 US 274. In Complete Auto Transi .....

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than in-State taxpayers; and (iv) Related to services: the tax must be fairly related to services provided to the taxpayer by the State. 89. In view of the above, the position which stands good today is that the judgments of US Supreme Court, Privy Council and Australian High Court relied upon in Atiabari and Automobile have been overruled in Complete Auto Transit in USA and Cole v. Whitfield in Australia. The principle of direct and immediate effect on the trade and commerce has been rejected a .....

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t Clauses (a) and (b) of Art. 304 confer distinct powers. Art. 304(a) deals with tax; Art. 304(b) deals with restrictions that are reasonable and in public interest. Constitution framers could not have intended to include tax in Art. 304(b); since the elements of reasonableness and public interest are inherent in a tax. The use of the word and does not assist the interpretation that the provisions are conjunctive. It only means that:- (i) the State can impose taxes on goods coming from outside s .....

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ods imported from other States contemplated under Art. 304(a). This is because, Art. 304(a) has an inbuilt safeguard, inasmuch the taxes imposed on the goods coming from another State cannot be discriminatory and, therefore, no presidential sanction is required. 91. It is relevant to note that the word and is used after semi colon in Art. 304(a). While it is correct to say that the word and normally is conjunctive, it is also often construed as disjunctive on the basis of the legislative intent .....

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Ishwar Singh Bindra v.State of U.P., AIR 1968 SC 1450, wherein in para 11 it has been held as under: (AIR p. 1454) 11. … It would be much more appropriate in the context to read it disconjunctively. In Stroud s Judicial Dictionary , 3rd Edn., it is stated at p. 135 that and has generally a cumulative sense, requiring the fulfilment of all the conditions that it joins together, and herein it is the antithesis of or. Sometimes, however, even in such a connection, it is, by force of a conte .....

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clause in sub-section (1) of Section 3 of the Act read with the two provisos beneath clauses (a) and (b), the word and at the end of para (b) of sub-clause (ii) of the proviso to clause (a) of Section 3(1) must in the context in which it appears, be construed as or ; and if so construed, the existence of any one of the three conditions stipulated in paras (a), (b) and (c) would at once attract the proviso to clauses (a) and (b) of sub-section (1) of Section 3 and thereby make the mine subject to .....

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Preamble, as well as in Section 4 should be read conjunctively as contended by the learned counsel for the State. On the other hand, in the context in which the said expression is used, it will have to be read as or creating a disjunctive reading of the provision. 92. In A.K. Gopalan v. State of Madras AIR 1950 SC 27, in the context of Art. 22(7)(a) of the Constitution of India, Constitution Bench observed that since it is an enabling provision the word and should be read disjunctively and held .....

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make a law it must prescribe both the circumstances under which, and the class or classes of cases in which, a person may be detained for a period longer than three months. I am unable to construe clause (7) (a) in the way suggested by learned counsel for the petitioner. It is an enabling provision empowering Parliament to prescribe two things. Parliament may prescribe either or both. If a father tells his delicate child that he may play table tennis and badminton but not the strenuous game of f .....

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have to be read as or creating a disjunctive reading of Art. 304(a) and Art. 304(b) indicating that the State Legislature can exercise its power either under Art.304 (a) or Art. 304 (b) or both. Whether Art. 304(b) coupled with the proviso is applicable to tax laws-Judicial Approach: 93. In Atiabari, majority held that tax laws fall within the comprehension of Art. 301 and, therefore, any legislation whether taxing or otherwise which imposes any direct restriction on the movement or transport o .....

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entry 56, List II). If the legislations under the above entries are challenged on the ground that they operate as a direct restriction on the freedom of trade, commerce and intercourse, as per the view in Atiabari, these legislations may have to be justified under Art. 304(b). Atiabari approach would totally take away the sovereign powers of the State Legislature to enact laws in exercise of its powers under various taxing entries of List II, which could not have been the intention of the framer .....

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f the Advisory Committee on the Subject of Fundamental Rights dated 23.04.1947, as published in The Framing of India s Constitution Select Documents-The Project Committee by Universal Law Publishing Co. Pvt. Ltd. Learned Senior Counsel Mr. Rakesh Dwivedi has taken us through the chain of events leading to Art. 304(b) and the proviso s present form in Art. 304(b). Draft Article 10 of the Justiciable Fundamental Rights (page No.297 of the said book) presently Part XIII as originally proposed read .....

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t no preference shall be given by any regulation of commerce or revenue by a unit to one unit over another. [Emphasis added] 95. The first proviso to Draft Art. 10 corresponds to Art. 304(b) and second proviso relates to Art. 304(a). That first proviso to Draft Art.10 [Art. 304(b)] relates only to public order, morality or health or in an emergency is also made clear from the Constituent Assembly Debates/Advisory Committee Proceedings. In this regard, we may refer to the speech of Shri Alladi Kr .....

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what is meant here to be dealt with. And then Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject. That is to say, we ought not to differentiate; but at the same time, goods coming in should not go scot-free; they should be subject to the same duty as goods produced in the area. [Emphasis Added] (Page. 253 of the said book of Select Documents-Project Committee) .....

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anufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) to impose by law such reasonable restrictions on the freedom of trade, commerce or intercourse with that State as may be required in the public interest. 97. In this regard Note to Art. 244 (b) as referred to in Page 328 of the said book Framing of India s Constitution Select Documents-Project Committee reads as under:- Note: Clause (b) o .....

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ituted with the word public interest . This clearly shows that the framers of the Constitution never intended to bring tax laws within the fold of Art. 304(b). 98. After Debate, first proviso to Draft Art. 10 was adopted as Art. 274(D)(b) [present Art. 304(b)]. As seen from page 330 of the first Draft Constitution, the Committee was of the opinion that the first and second proviso should be transferred as independent clauses in the Chapter dealing with relation between the different States and t .....

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slature of a State nor shall any Ordinance be promulgated for the purpose by the Governor or Ruler of the State without the previous sanction of the President. 99. If Art. 304(b) is also held to cover tax laws, it would amount to empowering the States to make laws imposing tax even on the freedom of trade, commerce and intercourse. As such there is no such entry in List II of Seventh Schedule of the Constitution so empowering the States. Commenting on this, learned author H.M. Seervai in his Con .....

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idden by Art. 303 (1). We have seen that Art. 303(1) cannot possibly refer to taxes. Thirdly, the whole scheme of taxation in our Constitution would be completely dislocated if Art.304 (b) included a tax. The taxing powers of the Union and the States have been made mutually exclusive so that Parliament cannot deprive the States of their taxing powers as has happened in countries where the powers of taxation are concurrent. It would be surprising if the Union legislature, i.e. Parliament could no .....

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entry relating to a tax on the freedom of trade unless the residuary entry is resorted to, Art. 304 (b) would raise the same question, and there would be no residuary entry to resort to, and it would raise the further question whether the reasonableness of taxes is made justiciable under our Constitution. [Page 2607] Levy of taxes is the economic lifeline of the State. Framers of the Constitution never intended to include tax within the fold of Art. 304(b). To give the Centre a veto over the pl .....

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). Further, trade and commerce in production, supply and distribution of industry controlled by the Union, food stuffs, including edible oils, seeds and oils; cattle fodder; raw cotton, cotton seed; and raw jute are subject matters in entry 33, List III. Entry 34, List III deals with price control. Only intra-State trade and commerce is in List II (entry 26, List II) subject to entry 33, List III, as stated therein. Parliament has thus occupied an overwhelming space with respect to trade and com .....

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ccupied field of the Parliament in List III. It follows that Art. 304(b) relates to non-fiscal laws of the States. In the above context, the assent of the President envisaged in proviso to Art.304(b) would be somewhat akin to the assent contemplated in Art. 254. Such assents are not judicially reviewable. [vide Kaiser-i-Hind (P) Ltd. and Anr. v. National Textile Corpn. (Maharashtra North) Ltd. and Others (2002) 8 SCC 182, (Paras 23 to 27)] 101. If the framers of the Constitution intended that St .....

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iament except on the recommendation of the President . This indicates the significance of revenue for States and also the limits on Union. If framers intended to have an identical framework in Art. 304 for State Tax Laws they would have expressly said so. Art. 288 also provides for the role of President in the context of imposition of tax by States in respect of water and electricity. Under Art. 288(1), the tax imposed by existing State laws would continue only subject to order passed by the Pre .....

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or. 102. In the light of the above discussion, the majority view in Atiabari, at Page 861 that the freedom of movement of trade cannot be subject to any restriction in the form of taxes and that such a legislation can be passed only after specifying the requirements of Art. 304(b), is not a correct view. I find merit in the submission made by Mr. Rakesh Dwivedi, Senior Advocate, that the Parliament has occupied an overwhelming space with respect to trade and commerce both within and outside the .....

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he absence of an express provision in the Constitution, such presidential sanction for taxing laws cannot be read into the provision. Conclusion on Question No.1: 103. Non-discriminatory taxes do not constitute infraction of Art. 301 of the Constitution. With due respect, the view taken in Atiabari and approved in Automobile Transport declaring that taxes do amount to restriction and that freedom of trade, commerce and intercourse cannot be subject to restriction in the form of taxes is not a co .....

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ALIDITY? 104. The core question which needs to be addressed is whether the tax levied under entry 52, List II would impinge upon Article 301. Entry 52, List II reads as: Tax on the entry of goods into a local area or consumption or sale therein . A bare reading of the entry would show that entry tax can be levied only on the satisfaction of the conditions in entry 52 of List II namely: (i) the tax to be levied on the entry of goods into local area; (ii) entry of goods into the local area is for .....

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sea or air, taxes on railway fares and freights . While there are variations in the operational form of taxes under entry 52, essentially these constitute a levy on entry of goods into a local area for sale, consumption or use therein. Under an entry tax regime, a company, trading firm or an individual would be liable to pay entry tax on goods brought into a local area for consumption, use or sale therein. The core question which needs to be addressed in respect of entry 52, List II of Seventh .....

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came to be known as town duties . The term octroi appeared in the Scheduled Tax Rules framed under the Government of India Act, 1919. The expression signified a tax levied on entry into an area of a unit of local administration. The entry was re-fashioned and enacted as item 49 of the Provincial Legislative List under the Government of India Act, 1935. Item 49 reads as Cesses on the entry of goods into a local area for consumption, use or sale therein . In Burmah Shell Oil Storage and Disturbin .....

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minal taxes are also octroi in a sense. This scheme has been adopted in the Constitution with the difference that in the entry relating to octroi the word tax replaces the word cess . Levy of octroi was also criticized for being an obsolete method of the collection, involving stoppage of vehicles at the check posts outside the city limits, thereby obstructing flow of vehicular traffic, and causing wastage of business hours, loss of fuel etc. 108. Entry tax like octroi is a tax on entry of goods .....

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as against octroi, which is generally a combination of specific and ad valorem levies. Thirdly, entry tax is a State-level levy while octroi is a local levy; entry tax revenue is treated as State revenue and is spent on local bodies for their development and the State in general. 109. On behalf of the assessees, it was contended that proper meaning attached to the words local area in Entry 52 is an area administered by a local body like a municipality, a district Board, a local Board, a Union Bo .....

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rea is a part of the State imposing the law) is an area administered by a local body like a municipality, a district board, a local board, a union board, a Panchayat or the like. The premises of a factory is therefore not a local area . This Court in M.O. Shamsudhin v. State of Kerala (1995) 3 SCC 351 has also held that: the expression local area has been used in various Articles of the Constitution namely 3(b) 12, 245(1), 246, 277, 321, 323-A and 371-D. They indicate that the constitutional int .....

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he assesses by filing their returns. Entry tax is a State level levy, levied by State Legislature upon entry of goods into a local area for consumption, use or sale therein. The local authorities themselves cannot levy the tax. The power is that of State Legislature and of no one. In Bihar Chamber of Commerce, this Court was faced with the task of interpreting the term local area in the context of entry 52, List II. The Court observed that where State Legislature has levied a tax covering the en .....

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the levy is upon the entry of goods into those local areas alone. This is an important distinction which should be kept in mind while appreciating the aspect and also while examining the decisions of this Court rendered in fifties and sixties). The facilities provided in the State are the facilities provided in the local areas as well. Interests of the State and the interests of the local authorities are, in essence, no different…. 36. …Entry 52 empowers the State Legislature to l .....

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Spending for the purposes of the State is thus spending for the purposes of local areas. Situation may perhaps be different where the local areas are confined to a few cities or towns in the State. But where the local areas span the entire State, it cannot be argued that money spent for welfare schemes for improvement of roads, rivers and other means of transport and communication is not spent on or for the purposes of local areas. The purposes and needs of local areas are no different from the .....

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tax is levied by the Entry Tax Act enacted by the State Legislature, the term a local area contemplated by Entry 52 may cover the whole State or a local area as notified in the legislation. I agree with the views taken in Bihar Chamber of Commerce that from the view of Entry Tax, the State is a compendium of local areas and where the local areas cover the entire State, the difference between the State and a local area practically disappears. 111. Counsel appearing for the States contend that the .....

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ature to levy tax cannot be decimated by every inconvenience that may be caused to a trader. If the tax is of such a character, that the burden, if any, borne by the dealer, can be absorbed by him as a part of his trade and business, then the trader will have to bear the same. It does not then make the tax discriminatory or create a restriction on the flow of goods from one State to another. 112. Imposition of entry tax is not merely on movement or transport of goods ; consideration of entry 52, .....

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goods are supposed to be used, consumed or sold in that local area. Since the taxable event under entry 52 is not the mere entry of the goods into the local area, but the fact that the goods are also to be used, consumed or sold, the necessary sequiter is that the movement of goods is terminated in that local area. Power to levy entry tax lies within the competence of a State Legislature. Since entry tax is leviable at the termination of the movement of trade and the goods have entered the local .....

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mination Tamil Nadu/Andhra Pradesh/ Kerala/Jharkhand Entry tax levied only on goods imported from other States; no levy of entry tax on the goods manufactured inside the State which is discriminatory. Assam/Bihar/Haryana/Kerala(Post) Jharkhand/West Bengal/Tamil Nadu/Mizoram/Arunachal Pradesh/ Andhra Pradesh Facially, the legislations state that all goods are taxed; but grant exemption to the locally produced goods Orissa/Madhya Pradesh Local manufacturers are given the setoff of entry tax paid o .....

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s entering the local area from other States and there is no levy of entry tax on the locally produced goods when they move from one local area to another; as goods imported from other States are being discriminated against, such levy is not saved under Art. 304(a). It is their contention that entry tax only on goods coming from outside the State and not intra-State entry of goods from one local area to another local area or on movement of goods is a clear case of discrimination, offending Art. 3 .....

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s any exaction by any impost or levy. The effect of all the taxes levied on the goods imported from other States and the ones manufactured within the State must be such that no discrimination is caused either to the imported goods or locally manufactured goods. Unlike Section 92 of the Australian Constitution, Art. 304(a) does not talk of uniformity. Section 92 of the Australian Constitution reads as follows:- On the imposition of uniform duties of customs, trade, commerce, and intercourse among .....

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ia, the State Legislature is nowhere obligated by the Constitution to ensure that the law imposing tax deals with one subject of taxation only. 117. The chargeable event in the case of entry tax is entry of goods into a local area. By its very nature, entry tax does not contemplate impost on indigenous goods. Goods imported into a local area from another State are subjected to entry tax but goods entering into a local area from another local area of the same State do not attract entry tax. In th .....

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ax used in Art. 304(a) is generic in nature and covers all taxes on goods which a State is competent to impose by virtue of Articles 245 and 246 read with List II of Seventh Schedule. A Scheme adopted by a State Legislature whereby several taxes are levied on the goods (either locally produced or imported from other States) under different heads, cannot be faulted with if it conforms to the principle of equivalence and non-discrimination. For e.g., both sales tax levied under entry 54, List II a .....

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hat the term any tax used in Art. 304(a) refers to every tax distinctly, thereby prohibiting imposition of entry tax on imported goods unless, entry tax is imposed on locally manufactured/produced goods, does not lead to just and reasonable interpretation of Art. 304(a). The wholesome effect of the taxes levied under distinct heads needs to be taken into account. The tax burden borne by the goods form a part of the price of the goods and if both, locally manufactured/produced goods and imported .....

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e of motor vehicles. System of sales tax on motor vehicles varies from one State to another. Rates of tax also vary according to the category of the vehicles viz., car, jeep, scooter, motorcycle, truck, tractor etc. Inter-State sales tax differential is large enough to induce trade diversions from high-rate tax States to low-rate tax States. These trade diversions have their impact on the collection of sales tax and results in loss of tax revenue to the State and the local area where the vehicle .....

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oducts to consumers all over the country. Where the tax rates differ widely in adjoining States/Union Territories, dealers located in low-rate tax territories act as agents for purchasers from the State with high-rate tax areas/territories. The vehicles do not move physically but the sales are shown to have taken place outside the high-rate tax State. The State where sale is said to have taken place stands to gain but the State where the vehicle is used loses the revenue of its sales tax. The ex .....

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purchased the goods from the manufacturer or by an individual. A dealer who effects entry of goods into a local area from another local area in the same State would be taxed in the form of sales tax/VAT; so also the individual would have already paid the sales tax in another local area, where he bought the goods. In case of entry tax levied on goods imported from other State, set-off like in the cases of State enactments of Tamil Nadu and Andhra Pradesh is given to the extent of the sales tax/VA .....

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oreover, if a State enactment provides for set-off and statutory exemptions to goods paying local sales tax, thereby equalising the net tax burden on the imported goods and local goods, it does not fall foul under Art. 304(a), so long as it is balancing sales tax against the entry tax. 122. The question as to whether entry tax in a particular case constitutes an impediment will always have to be decided with reference to the comparison of burdens that are cast on persons who bring the goods into .....

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her tax thereon than on local goods. If the tax burden on both the categories are almost the same, then the entry tax obviously cannot constitute an impediment to the very flow of trade and commerce across the borders of the State. There is no merit in the contention of the assessees that the levy of entry tax only on goods imported from other States and not on indigenous goods is discriminatory and violative of Art. 304(a). 123. In a catena of decisions, this Court has struck down the levy of e .....

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Levy of sales tax imposed on sale of cement imported from other States was challenged as impeding free flow of trade and commerce. The Supreme Court held the Notification invalid as it was hit by Art. 304(a) affecting inter-State trade and commerce. 124. In Western Electronic and Anr. vs. State of Gujarat and Ors. (1988) 2 SCC 568, State of Gujarat imposed sales tax at 15% on all electronic goods whether locally manufactured or imported from outside. After sometime, the State reduced the tax to .....

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e exercise-books made from paper purchases within Uttar Pradesh from the levy of sales tax. Whereas, exercise-books produced outside the State of Uttar Pradesh were subjected to sales tax at the rate of 5%. The said exemption granted to indigenously manufactured exercise-books was challenged. The challenge was upheld by this Court and the exemption granted to locally manufactured exercise-books was held to be discriminatory within the meaning of Art. 304(a) of the Constitution of India. Preferen .....

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tes economic and regional imbalances in India and is an area of concern. 127. Contention of States is that apart from legislative power to levy taxes, States also have the power to grant exemptions, tax concessions or incentives to the goods manufactured within the State so as to encourage the manufacturing units and traders within the State, and also to attain economic growth and development. Reiterating the same, the learned Attorney General has submitted that such fiscal measures are necessar .....

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.304(a). The States submit that every differentiation is not discrimination, and only those restrictions which impede the flow of trade, commerce and intercourse would fall foul under Art.304 (a). The above contention of the States has been favourably considered by the Supreme Court over the years. The Supreme Court has taken note of the differentiation on consideration of natural or economic factors prevailing in different regions which need to be encouraged by providing tax incentives to attai .....

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mic integration of the country and parity. Balanced development of the country is an equally vital facet of economic integration. The freedom referred to in Art. 301 must take flavour from the expression throughout the territory of India ; the Union was envisaged not only as a political union but also an economic union. The grand vision was to unify the country, not only politically but also by creation of an economic union of hitherto disparate Provinces and Princely States. Freedom of movement .....

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er: The great problem of any federal structure is to prevent the growth of sectional and local interests which are inimical to the interests of the nation as a whole. The strength of the Union may be achieved only by minimizing inter-State barriers as much as possible, so that the people may feel that they are the members of one nation, though they may, for the time being, be residents of particular geographical divisions of the country. One of the means to achieve this object is to guarantee to .....

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rently local disturbances have a wide repercussion. It is this last mentioned economic strength of the federation which is intended to be ensured by the safeguard for maintaining freedom of trade, commerce and intercourse throughout the federal territory, which safeguard the Union and the States are both enjoined not to violate. [Page 613] Part XIII and the provisions therein are to be interpreted in a manner that encourages a backward region or creates a level playing field for those parts of t .....

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and general economy of the country were taken note of by the framers of the Constitution. The Constituent Assembly was conscious of the uneven development in different parts of the country and the need to create a level playing field by removal of trade barriers as well as by affording avenues for economic opportunity and economic equality for less developed parts of the country. Significant observations have been made in Constituent Assembly Debates justifying certain amount of flexibility to t .....

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a particular State is concerned or in respect of more than one State. How pompously did we decide that there shall be free trade everywhere. It is not such an easy thing as that and I hope that this is now broadly realized. For instance, we know that the stage, of advancement and progress of the various units of the Union varies considerably. Some of them are backward like Assam or Orissa where there are, very few industries and very little trade is in the hands, at least of the indigenous popu .....

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in need of assistance. From that point of view, my amendment seeks to give Parliament a blank cheque and leave to it entirely the determination of the policy. With regard to the trade and commerce not only of the whole Union or in regard to any particular State or States, but so far as all States and their trade and commerce inter se is concerned. Therefore, I have proposed a very simple provision as has been embodied in my amendment No. 340. [Page No. 1133] While the proposed amendments were n .....

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graphy of this country in which the interests of one region differ from the interests of another region….. My Friend Mr. Krishnamachari has pointed out that this freedom clause in the Australian Constitution has given rise to considerable trouble and to conflicting decisions of the highest Court. There has been a feeling in those parts of Australia which depend for their well-being on agricultural conditions that their interests are being sacrificed to manufacturing regions, and there has .....

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account in the scheme that has been placed before you. [Emphasis added] [Page No. 1143] 131. Similar was the concern expressed by Shri C. Rajagopalachari in his observations on the proposed draft Article 10: C. Rajagopalachari: I would request members who have given thought to this subject to please inform me how the units will raise their revenue. As it is, the Union does not contemplate the distribution of subsidies to the provinces. The provinces or groups differ among themselves, some are r .....

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32. There are considerable regional disparities in India attributable to a variety of reasons. Economically speaking, of these reasons, the ones that are most apparent are geography and consequent economic inadequacy. States with access to seacoasts and natural resources including mineral wealth, water resources have a definite edge over the other States. Whereas States that have terrains that make access to a region difficult, including hills, rivers and dense forests, show lesser signs of econ .....

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n these forward States; and the backward regions, unable to attract significant investment have not seen much growth. To counter-balance this tendency, various incentive and disincentive schemes have been introduced to direct investments to backward regions. However, the success of these policies has been limited because often the States with these backward regions are unable to meet their expenses and provide economic overheads, such as transport, communication, power, banking & insurance e .....

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ed in The Hindu , titled The gap between rich and poor States , delineates this economic disparity between the States. The authors propose that since contrary to global experiences, India continues to show trends of divergence among its large States, it is time to accept the country s economic diversity. Amid such economic disparity among States with varying future needs and priorities, the way forward is greater devolution of fiscal and legislative powers on the States to create a level playing .....

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n two and three times. Our convergence analysis shows that this economic disparity among States is only widening and not narrowing. India is the only large country in the world today that is experiencing an economic divergence among its States and not convergence, as economic theory would posit. …..Pre-1990 and post-1990 look like almost two different eras in India s history of economic diversity among States. Economic theory would suggest that the poorer regions grow faster to catch up w .....

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y is a well-entrenched fact. It is time to accept its economic diversity too. Amid such economic disparity among States with varying future needs and priorities, a Delhi-based one-size-fits-all policy regime for all of India is entirely anachronistics.….. the struggles of the European Union in balancing common market policies for economically diverse nations should serve as a gentle reminder for an even more diverse India. [emphasis added] [By Praveen Chakravarty and Vivek Dehejia [New De .....

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condly, the object of freedom of trade, commerce and intercourse is to foster economic unity by contribution to the development of all the States. Thirdly, as per the Directive Principles of State Policy, the States are to sub-serve common good; secure and protect a social order which stands for the welfare of the people; endeavour to provide an adequate means of livelihood; and also secure, within the limits of its economic capacity the right to work, education and public assistance. 135. Re-or .....

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h Courts in due course. They have to develop their own industrial bases for manufacture and production and for creating job opportunities. To attract capital investment, they have to provide infrastructure like transport, communication, power and technology. Re-organisation of States apart, as a Welfare State, a State is under an obligation to create job opportunities and promote welfare of the people by securing standard of living and economic justice. Having regard to the multifarious activiti .....

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ds. Manufacturing activities convert the State from a mere trade hub to a manufacturing hub, creating employment opportunities for the locals, thereby giving impetus to the growth of the State. Manufacturing is a giant step for boosting the economy of the State; it brings in opportunities and socio-economic benefits to the residents of the respective States. Per contra, goods coming in from outside the State only tap the market potential of the State without creating any employment opportunities .....

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ent of locally produced goods and goods imported from other States. The distinction between differentiation and discrimination has been culled out in Kathi Raning Rawat v. The State of Saurashtra (1952) SCR 435, wherein the Constitution Bench held as under:- Patanjali Shastri J:…. All legislative differentiation is not necessarily discriminatory. In fact, the word discrimination does not occur in Article 14. The expression discriminate against is used in Article 15(1) and Article 16(2), a .....

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ss it is saved by one or other of the provisos to those articles. But the position under Article 14 is different. Equal protection claims under that Article are examined with the presumption that the State action is reasonable and justified. This presumption of constitutionality stems from the wide power of classification which the legislature must, of necessity, possess in making laws operating differently as regards different groups of persons in order to give effect to its policies. The power .....

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is distinction and on the well-known fact that the circumstances which govern one set of persons or objects may not necessarily be the same as those governing another set of persons or objects, so that the question of unequal treatment does not really arise as between persons governed by different conditions and different sets of circumstances…. [Emphasis added] 138. The desired objective of economic integration through checks and balances to encourage less developed parts of the country, .....

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further to be borne in mind that Article 301 enjoins that trade, commerce and intercourse throughout the territory of India shall be free. The first question, therefore, which one has to examine in this case is, whether the sales tax provisions (exemption etc.) in these cases directly and immediately restrict the free flow of trade and commerce within the meaning of Article 301 of the Constitution, We have examined the scheme of Article 301 of the Constitution read with Article 304 and the obser .....

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nfers plenary powers on States to raise revenue for its purposes and does not require that every legislation of the State must obtain assent of the President. Constitution of India is an organic document. It must be so construed that it lives and adapts itself to the exigencies of the situation, in a growing and evolving society, economically, politically and socially. The meaning of the expressions used there must, therefore, be so interpreted that it attempts to solve the present problem of di .....

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op the economic unity of India is one of the major commitments or goals of the constitutional aspirations of this land. For working of an orderly society economic equality of all the States is as much vital as economic unity. ... 22. It has to be examined whether difference in rates per se discriminates so as to come within Articles 301 and 304(a) of the Constitution. It is manifest that free flow of trade between two States does not necessarily or generally depend upon the rate of tax alone. Ma .....

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is hit by Articles 301 and 303 of the Constitution. If it is not then Article 304 of the Constitution will not come into picture at all. See the observations in Nataraja Mudaliar's case [1968] 3 SCR 829 of the report. It has to be borne in mind that there may be differentiations based on consideration of natural or business factors which are more or less in force in different localities. A State might be allowed to impose a higher rate of tax on a commodity either when it is not consumed at .....

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ales tax was reserved for the States. … 24. The object is to prevent discrimination against the imported goods by imposing tax on such goods at a rate higher than that borne by local goods. The question as to when the levy of tax would constitute discrimination would depend upon a variety of factors including the rate of tax and the item of goods in respect of the sale on which it is levied. Every differentiation is not discrimination. The word 'discrimination' is not used in Arti .....

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not necessarily discriminatory. At p. 448 of AIR) of the report, Justice Fazal Ali noticed the, distinction between 'discrimination without reason' and 'discrimination with reason'. The whole doctrine of classification is based on this and on the well-known fact that the circumstances covering one set of provisions or objects may not necessarily be the same as these covering another set of provisions and objects so that the question of unequal treatment does not arise as between .....

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powers to grant exemption to specified class for limited period, such granting of exemption cannot be held to be contrary to the concept of economic unity. The contents of economic unity by the people of India would necessarily include the power to grant exemption or to reduce the rate of tax in special cases for achieving the industrial development or to provide tax incentives to attain economic equality in growth and development. When all the States have such provisions to exempt or reduce rat .....

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s case and as in all constitutional adjudications the substance of the matter has to be looked into to find out whether there is any discrimination in violation of the constitutional mandate. [Emphasis added] Thus while considering the scope of discrimination under Art. 304(a) in Video Electronics, this Court has carved out an exception that States have powers to grant exemption to specific class for limited period and that such grant of exemption cannot be held to be discriminatory. To reduce t .....

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ible oil produced in other States to sales tax at 8 per cent. A subsequent Notification was issued on 20.12.1993 as a result of which the general rate of sales tax payable on edible oil became 8%. The manufacturers of edible oil from the adjoining States claimed that the exemption granted from payment of tax to the local industries was discriminatory. The exemption given by the Government of Jammu and Kashmir to the manufacturers of the edible oil was absolute and the period of exemption was fiv .....

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he State of Jammu and Kashmir for a period of ten years and at the same time subjecting edible oil imported from other States to sales tax at 8% was discriminatory and violative of Art. 304(a) of the Constitution. 140. The decision in Video Electronics was, however, approvingly referred to by the Constitution Bench in Sri Digvijay Cement Company Limited and Ors. v. State of Rajasthan and Others (2000) 1 SCC 688. In Digvijay, Section 8 of the Central Sales Tax Act came up for consideration. Secti .....

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State of Madras & Anr. AIR 1963 SC 928 and State of Madras v. N.K. Nataraja Mudaliar (1968) 3 SCR 829, this Court held as under:- 24. We are unable to agree with the contention of the learned counsel for the petitioners that the impugned notification had the effect of preventing or hindering the free movement of goods from one State to another. As far as the State of Rajasthan is concerned, it had the opposite effect. Merely because local rate of tax in the State of Gujarat on the sale of ce .....

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, the sales tax barrier was lowered resulting in increased volume of inter-state trade. 141. It follows from the Constituent Assembly Debates and the decisions in Video Electronics and Digvijay that historical, cultural, geographical and other factors have an impact on trade and commerce. While insisting on economic integration of the nation, Courts are to keep in view the regional requirements so as to cater to the need of economic development of the nation as a whole. Government incentives to .....

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e concept of discrimination towards true and a stronger union which is the underlining objective of the Constitution. Although balanced growth and economic integration of the nation as a whole has been accepted as one of the major objectives of economic planning, it is to make a headway in achieving the object. The growing regional disparities have become a reality and hence may pose a barrier to India s future economic growth. 143. India is a union of States with federalism as a basic feature o .....

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cation (entry 25, List III); providing employment opportunities; roads, bridges etc. and other infrastructure (entry 30, List II) inter alia are subject matters for the State; and States have limited resources to provide for education, healthcare, civic amenities, infrastructure, communications, village industries, rural employment and technology and to ensure dignified human living of the people of the State, without access to an adequate source of revenue. 144. As discussed earlier, developmen .....

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imbalances are to be removed. While trade, commerce and intercourse is important for the economic unity of the nation, the Courts cannot be oblivious of the responsibilities of a Welfare State in raising its resources by levy of taxes to meet the challenges. Incentives to invest in backward areas, subsidies and tax concessions are some of the measures used by the State to guide the location of the industries in backward areas and to generate employment opportunities for the people of the State. .....

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titution Bench in Digvijay and Video Electronics, I do not endorse the views of Mahavir Oil Mills. Accordingly, the law laid down in Laxmi Paper Mart which relies upon Mahavir Oils is also held bad in law. Moreover, Indian Cement needs no consideration as it has been specifically overruled in Digvijay. The conclusions in this regard could be summarized as under:- · Any difference in the rate of tax on goods locally manufactured and those imported, such difference not being discriminatory .....

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oduce or manufacture goods within its territory then it cannot resort to the power conferred on it by Art.304(a) to impose a tax on similar imported goods. In support of their contentions, the assessees placed reliance upon Kalyani Stores v. State of Orissa (1966) 1 SCR 865, where no foreign liquor was produced or manufactured in the State of Orissa but tax was levied on foreign liquor imported into the State of Orissa. When the levy was challenged as violative of Art.301, it was held that:- 7. .....

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that is, as may be required in the public interest . Without entering upon an exhaustive categorization of what may be deemed required in the public interest , it may be said that restrictions which may validly be imposed under Article 304(b) are those which seek to protect public health, safety, morals and property within the territory. Exercise of the power under Article 304( a ) can only be effective if the tax or duty imposed on goods imported from other States and the tax or duty imposed on .....

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4(a) is the only avenue for the State to impose entry tax and the same can be availed of only when there are similar goods being manufactured within the State so as to prevent discrimination. However, the law laid down in Kalyani Stores cannot be applied in the case of entry tax levied under entry 52, List II. The dictum of Kalyani Stores has a limited application to counterveiling duties imposed on sale of liquor levied under entry 51, List II and that too to the limited extent it is actually i .....

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obstante clause in Art. 304 Notwithstanding anything in Article 301 or Article 303…. . The non obstante clause should be understood in a manner appropriate to the substance of Articles 302 to 304. The true source of power of the State Legislature remains in Part XI, in Article 245 read with Article 246 and entries of List II. Art.304 is not a source of power; it embodies a re-statement of powers conferred under Articles 245 and 246 read with the entries of List II of Seventh Schedule with .....

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der Art.301. The Court stated that levy of tax on tobacco did not impede the free flow of trade and commerce. 149. The first part of Art. 304(a) re-states the power of the State to impose a tax on goods imported from the other States. Second part of Art. 304(a) places a limitation on the power of the State Legislature. It provides that a State may only tax imported goods so as not to discriminate them with the locally produced or manufactured similar goods i.e. the limitation of non-discriminati .....

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nc is an important mineral resource used in galvanization of iron and steel. It is also used in automotive, electrical and machinery industries. Haryana does not have zinc ore, however, it does have the industries mentioned above. If zinc is imported from Odisha or Rajasthan, then State of Haryana can impose a tax on it, even though there is no local production of zinc. This does not mean that there is a discrimination against the imported zinc. Discrimination involves an element of intentional .....

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into the taxing State from other States but that does not mean that there should be a blanket protection of such goods from tax. Power of the State to tax the goods imported cannot be whittled down on the ground that there are no similar goods manufactured or produced within the taxing State. Exorbitant taxation of such goods will remain open to challenge under Part III in Art. 19(1)(g) read with Art. 19(6) and Art. 14. With these observations, I hold that the power to impose a tax on imported g .....

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cal area for consumption, use or sale therein. 153. Contention of the assessees is that import and export across the customs frontiers are covered by entry 41, List I; duties of customs including export duties are covered by entry 83, List I of the Seventh Schedule and thus transactions relating to import/export across customs frontiers including duties of customs including export duties fall within the exclusive domain of the Parliament. It is further contended that the mandate of Clause 1(d) o .....

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the Parliament under entry 41 and entry 83 of List I. 154. Per contra, the States contend that once the imported goods are cleared on payment of customs duty, the goods are mixed with the mass of goods in India and when such imported goods enter into the local area, the States are well within their legislative competence to levy entry tax in exercise of their legislative power under entry 52, List II. Counsel for the States have submitted before us that the taxable event under entry 83, List I .....

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g with entry 83, List I. Meaning of the word Import : 155. Import means bringing or taking by sea or air across any customs frontier. Import is defined in Section 2(23) and imported goods in Section 2(25) of the Customs Act as under:- (23) "import", with its grammatical variations and cognate expressions, means bringing into India from a place outside India; …. (25) "imported goods" means any goods brought into India from a place outside India but does not include good .....

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erm export . Goods brought into the country from abroad. The importation of certain goods, as authorized reprints of copyright books, false coin and indecent or obscene prints, is expressly forbidden and with regard to certain other goods, such as wine, spirits and tobacco, restrictions are imposed as to the place and manner of their importation. Goods or services brought into a country for sale, from abroad, or to bring in such goods or services. (Trade Finance & Banking) [Page 3207] 157. S .....

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Trade and commerce with foreign countries; import and export across customs frontiers; definition of customs frontiers. 83. Duties of customs including export duties. 159. As per Section 2(28) of the Customs Act, 1962 read with Section 5(1) of the Territorial Waters Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, Indian Customs Waters mean water extending in sea upto the limit of contiguous zone, i.e., a line, every point of which is at a distance of 24 Nautical Mi .....

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ed goods have to be followed by the importers. In respect of goods which are off-loaded, importers have the option to clear them for home consumption after payment of the duties leviable or to clear them for warehousing without immediate discharge of the duties leviable in terms of the warehousing provisions as provided in the Customs Act. Sections 45 to 48 deal with clearance of imported goods for home consumption. In terms of Section 46, every importer is required to file Bill of Entry for cle .....

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it of imported goods and their clearance. Section 68 provides for clearance of warehoused goods for home consumption by the importer. Under Section 68, the warehoused goods can be cleared for home consumption by presenting Bill of Entry, paying import duty etc. and obtaining an order for clearance. 161. The moment imported goods are cleared for home consumption either under Section 47 of the Act or under Section 68 of the Customs Act, the imported goods mix up with the mass of goods in the count .....

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ere is no overlap. 162. Under the Indian Constitution, the distribution of power with regard to tax has been done in a mutually exclusive manner and in great detail with reference to different aspects of property or goods. Considering an issue with regard to excise duty and sales tax payable by a manufacturer upon manufacture and sale in Province of Madras v. M/s Boddu Paidanna and Sons AIR 1942 FC 33 = 1942 FCR 90, the Federal Court has held that:- If the taxpayer who pays a sales tax is also a .....

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hellip; It is the fact of manufacture which attracts the duty, even though it may be collected later… In the case of a sales tax, the liability to tax arises on the occasion of a sale, and a sale has no necessary connection with manufacture or production. ….there are two complementary powers, each expressed in precise and definite terms then there is no reason for extending the meaning of the expression duties of excise at the expense of the provincial power to levy taxes on sale o .....

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e is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the exciseable article leaves the factory or workshop for the first time upon the occasion of its sale. But that method of collecting the tax is an accident of administration, it is not of the essence of the duty of excise which is attracted by the manufacturer itself. 164. In Ram .....

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try of goods within a certain area. It was observed that it is wrong to think that two independent impost arising from two different sets of circumstances were not permitted in law . 165. In Gujarat Ambuja Cement Ltd. v. Union of India (2005) 4 SCC 214, the levy of service tax on carriage of goods by transport operators was challenged as being legislatively beyond the competence of Parliament. This Court held that there is a distinction between the object of tax, the incidence of tax as well as .....

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ral Constitutions as rightly observed in Hoechst Pharmaceuticals v. State of Bihar (1983) 4 SCC 45 and State of West Bengal v. Kesoram Industries (2004) 10 SCC 201. 167. The other contention of the appellants is that the doctrine of Unbroken Package should be applied in the context of entry 83, List I as was initially applied by US courts. Doctrine of Unbroken Package postulates that import of goods continues even after crossing customs barrier until the package imported is broken up at the impo .....

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American context, reference can be made to Prof. Tribe on American Constitutional Law States, in which the learned Professor has criticized the doctrine of Unbroken Package in the following words: in the dormant commerce clause context, the court long ago disparaged the unbroken-package doctrine as applied to interstate commerce……..as more artificial than sound and the court has concluded that taxes imposed on goods while in transit through the taxing state are in effect potential .....

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ounded in Brown v. State of Maryland by Chief Justice Marshall has been expressly disapproved by Indian courts as well. In this regard, reliance has been placed upon Province of Madras v. Boddu Paidanna & Sons AIR 1942 FC 33 = 1942 FCR 90; State of Bombay v. F.N. Balsara (CB) AIR 1951 SC 318; State of Travancore-Cochin v. Shanmugha Vilas Cashew Nut Factory (1954) SCR 53. 170. In Gramophone Company of India Ltd. v. Birendra Bahadur Pandey (1984) 2 SCC 534, this Court while interpreting the wo .....

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Court upon the decision of this Court in the Central India Spinning and Weaving and Manufacturing Co. Ltd. The Empress Mills, Nagpur v. Municipal Committee, Wardha [1958]1SCR1102 . That was a case which arose under the C.P. and Berar Municipalities Act and the question was whether the power to impose 'a terminal tax on goods or animals imported into or exported from the limits of a municipality' included the right to levy tax on goods which 'were neither loaded or unloaded at Wardha .....

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ive at the conclusion that they did, was that the very levy was a 'terminal tax' and, therefore the words 'import and export', in the given context, had something to do with the idea of a terminus and not an intermediate stage of a journey. We are afraid the case is really not of any guidance to us since in the context of a 'terminal tax' the words 'imported and exported' could be construed in no other manner than was done by the Court. We must however say that th .....

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. So we derive no help from this case. As we said, we prefer to interpret the word 'import' as it is found in the Copyright Act rather than search for its meaning by referring to other statutes where it has been used. 171. Chapter VIII of Customs Act deals with goods in Transit. Section 54 deals with trans-shipment of goods without payment of duty upon presentation of bill of trans-shipment. The inland container depot and land custom station are creatures of Statute. They are not determi .....

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t under a bond which may even permit sale or manufacture. It was even contended that the warehouse itself may be in the same local area, illustratively in Delhi/Mumbai. 173. Sections 2(43), 2(44) and 2(45) deal with warehouse, warehoused goods and warehousing station. Section 9 requires the Board to issue a Notification in the Official Gazette declaring places to be warehousing stations at which alone public warehouses may be appointed and private warehouses may be licensed. The public warehouse .....

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evidence nor is there any pleading that the Bill of Entry is filed in the factory units or in a land custom station which is located in the same local area as the assessees unit. Hence, it is submitted that the warehouse and warehouse bond based contentions have been advanced without any basis in pleadings and facts. 175. A comparison of Sections 58 and 57 shows that a licensed private warehouse is different from a public warehouse. Section 58 deploys the expression dutiable goods imported by or .....

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of the duty assessed. When the requirements in Section 59 are complied with then permission to deposit the goods in warehouse is granted. This indicates that both in public warehouses and private warehouses the deposits are permitted only for goods which are already imported. Stringent provision is made in Section 59(2) to pay all duties or interest on or before the date of demand. Under Section 62, the proper custom officer exercises control over all the warehoused goods and he may cause any wa .....

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are distinct; any movement of the imported goods to the warehouse in the factory unit would not prevent the State from levying and collecting entry tax when such goods enter a local area of the State for consumption, use or sale therein. 177. Summarily, the conclusion on question No.4 is as under:- · Entry tax with reference to entry 52, List II of Seventh Schedule is not violative of Art. 301 subject to the levy being non-discriminatory i.e. passing the muster of Art. 304(a). A levy sust .....

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by the Act cover the entire State, the difference between the State and a local area practically disappears. · Articles 304(a) and 304(b) are to be read disjunctively; both apply to different subject matters; while Art. 304(a) deals with tax, Art. 304(b) deals only with non-fiscal matters. Conclusions on the incidental questions arising under Question No.4:- · Where there is equivalence in terms of tax treatment between the locally produced goods and the ones imported from other S .....

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urers/production in the State cannot be said to be discriminatory. Digvijay and Video Electronics have laid down the correct law. Mahavir Oil Mills is not a correct view. · Levy of entry tax on the goods imported from the other States is not discriminatory merely on the ground that there are no similar goods manufactured or produced within the taxing State. The law laid down in Kalyani Stores is not a good law. · Levy of entry tax on the goods imported from outside India which ente .....

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to restrictions and hence tax legislation is subject to scrutiny under Art. 301. In Atiabari, the test of direct and immediate effect on trade, commerce and intercourse was evolved. The majority in Atiabari had thus completely read down State s taxing power under entry 52, List II thereby holding that State s legislative power is subject to the freedom clause in Art. 301. This had an adverse effect on the legislative power of the State to levy tax and its financial autonomy. 179. In Automobile, .....

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itated the same. Further, the Court laid down a working test to ascertain whether a tax is compensatory or not in the following terms:- 27…. It seems to us that a working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having the use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities. It would be impossible to judge the compensatory nature of .....

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Court held as under:- 28. Nor do we think that it will make any difference that the money collected from the tax is not put into a separate fund so long as facilities for the trades people who pay the tax are provided and the expenses incurred in providing them are borne by the State out of whatever source it may be… Having observed so, in Automobile itself, this Court had ruled out the element of quid pro quo from the ambit of compensatory tax. While stressing on the need for ensuring th .....

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While upholding the enhancement of the motor vehicles tax, in G.K. Krishnan v. State of Tamil Nadu (1975) 1 SCC 375, this Court held that a compensatory tax is not a restriction upon the movement part of trade and commerce. Neither should the tax go beyond a proper recompense to the State for the actual use made of the physical facilities provided in the shape of a road nor it is necessary that there should be a separate fund or express allocation of money for the maintenance of roads to prove t .....

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e transporters would use national highway, pass through Haryana, without picking up or setting down passengers in the State. Since, the responsibility to construct and maintain the highways is with the National Highways Authority of India, it was contended by the transporters that the tax could hardly be regarded as compensatory. But the Court rejected this contention and held that if the taxes were to be proportionate to the expenditure on regulation and service, it would not be a tax but a fee .....

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ment and levy the fee according to the benefits received and the expenditure incurred, in the case of a regulatory and compensatory tax it would ordinarily be wellnigh impossible to identify and measure, with any exactitude, the benefits received and the expenditure incurred and levy the tax according to the benefits received and the expenditure incurred. What is necessary to uphold a regulatory and compensatory tax is the existence of a specific, identifiable object behind the levy and a nexus .....

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n to more or less expenditure being incurred on the object behind the compensatory and regulatory levy than the realisation from the levy. [Emphasis added] 183. In M/s. Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. and Ors. 1995 Supp (1) SCC 673, it was held that even if there is some link or some connection between the tax and the facilities extended to the trade directly or indirectly the levy cannot be challenged as invalid. 184. The same dictum was followed in State of Bihar and O .....

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73, a three-judge Bench of this Court has rejected the argument that to be compensatory, the tax must facilitate the trade. The reason is obvious: if a measure facilitates the trade, it would not be a restriction on trade but an encouragement to it. It was observed: [SCC Page 678, Para 8] …The submission of Shri Ashok Sen, learned Senior Counsel that compensation is that which facilitates the trade only does not appear to be sound. The concept of compensatory nature of tax has been widene .....

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se of which the impost has to be regarded as compensatory in nature, in view of what has been stated in the aforesaid decisions, more particularly in Hansa Corpn. Case (1980) 4 SCC 697 .[Emphasis supplied] 185. The Constitution Bench in Jindal Stainless Ltd. (2) after placing reliance on Automobile concluded that there is difference between a taxing Statute whose purpose is collection of revenue, and a taxing Statute whose purpose is regulation. The Court formulated a working test to determine w .....

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pugned law seeks to control the conditions under which an activity like trade is to take place then such law is regulatory. Payment for regulation is different from payment for revenue. If the impugned taxing or non-taxing law chooses an activity, say, movement of trade and commerce as the criterion of its operation and if the effect of the operation of such a law is to impede the activity, then the law is a restriction under Article 301. However, if the law enacted is to enforce discipline or c .....

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f "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 reco .....

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is impugned as violative of Article 301 of the Constitution, the Court has to see whether the impugned enactment facially or patently indicates quantifiable data on the basis of which the compensatory tax is sought to be levied. The Act must facially indicate the benefit which is quantifiable or measurable. It must broadly indicate proportionality to the quantifiable benefit. If the provisions are ambiguous or even if the Act does not indicate facially the quantifiable benefit, the burden will b .....

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ara 35 (of AIR) of the decision in Khyerbari Tea Co. Ltd. and Anr. v. State of Assam]. For compensatory tax, Jindal Stainless Ltd. (2) thus ingrained the tests of (i) facial declaration; and (ii) proportionality to the quantifiable benefits provided to its payers, as an essential element. It was held that compensatory taxes like fees always have to be proportionate to the benefits and the decisions rendered in Bhagatram and Bihar Chamber of Commerce were declared bad in law. 186. Until Jindal St .....

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y some governmental agency. The distinction between tax and fee has been elucidated in Gujarat Ambuja Exports Limited and Another v. State of Uttarakhand and Others (2016) 3 SCC 601 as under: ….it is necessary to consider the difference between the concept of tax and that of a fee. The neat and terse definition of tax which has been given by Latham, C.J., in Matthews v. Chicory Marketing Board (1938) 60 C.L.R. 263 is often cited as a classic on this subject. A tax , said Latham, C.J., is .....

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rendered in return, a fee is levied essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it….In regard to fees there is, and must always be, co-relation between the fee collected and the service intended to be rendered….The distinction between a tax and a fee is, however, important, and it is recognized by the Constitution. Several Etnries in the Three Lists empower the appropri .....

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aon (1990) 3 SCC 645. 187. It must be reiterated that all the taxes are intended for public purpose and are levied in public interest. Levy of tax is not to fill the State coffers but to perform various functions including public welfare for which said funds are required. Taxation is not a profit-making exercise for the States; as stated earlier, the States perform several functions for which they require funds and have the power to levy tax to raise revenues and thus virtually all taxes are mon .....

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of passing an Appropriation Act. Further, Art. 266(3) by stating that no money out of any Consolidated Fund shall be appropriated except in accordance with law - for the purposes and in the manner provided in the Constitution provides another safeguard in lieu of ensuring legitimate use of public money. The manner of appropriation of money collected in the Consolidated Fund of the State falls under Part VI, Chapter III, ranging from Articles 202 to 206 of the Constitution. There are sufficient .....

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mposed. 188. I hold that the entry tax levied by various States, falling within the domain of entry 52, List II, is a tax simpliciter, even though by nomenclature it is termed as a compensatory tax . Subject to passing the muster of Art. 304(a), entry tax levied by the States under entry 52, List II even though termed as compensatory tax does not fall foul of Art. 301. The ratio laid down in Jindal Stainless Ltd. (2) equating compensatory taxes to fee had wide ramifications. Some High Courts viz .....

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s to fee and mandating the States to prove proximate quid pro quo by quantifiable data approach . Since now we have held that taxes are outside the purview of Art. 301, taxes in the name of compensatory taxes are also outside the purview of Art. 301. To uphold a regulatory or compensatory tax, comprehensive parameters cannot be laid down as they may vary depending upon the nature of the levy. Automobile case itself has laid down parameters of compensatory taxes (Das J. at Pages 536-537). It is n .....

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ridges, and for other amenities which facilitate trade, there will always be a link between the liability of the tax borne by the traders and benefits enjoyed by them either directly or indirectly. 191. To summarise the conclusions on question Nos. 2 and 3:- · In so far as compensatory taxes are concerned in the light of the conclusion on question No.1, I hold that the nomenclature of compensatory ascribed to the taxes levied by the State Government under Entry 52, List II pursuant to Aut .....

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entry tax levied by the States under entry 52, List II even though termed as compensatory tax does not fall foul of Art. 301. It is not necessary that the money realized by the levy should be put into a separate Fund or that the levy should be proportionate to the expenditure. There is no bar to subsumption of the revenue realized from regulatory/compensatory taxes into the Consolidated Fund of the State as they are no different from other taxes of a general nature. Moreover, the quantum of expe .....

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own in Automobile. REFUND AND UNJUST ENRICHMENT:- 192. Lastly, it is necessary to consider an important issue raised by the assessees on the payment of tax/refund of tax in case the validity of the legislations is upheld or otherwise as the case may be. It has come on record that many Entry Tax legislations of the State are enacted pursuant to Bhagatram and Bihar Chamber of Commerce. But Jindal Stainless Ltd. (2) which we have now over-ruled, has led to a scenario of discordant judicial pronounc .....

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not pleaded and produced evidence to establish that they have not passed on the tax burdens to the consumers. In absence of such a submission, the normal presumption is that they have passed on the tax burden. Had they contended otherwise, burden would have been on them to allege and establish the same. In the absence of any such allegation and proof, the claim of refund is not called for. 193. Learned Senior Counsel Mr. Giri has argued that the payment effected under the Entry Tax Act can be le .....

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the States have acted on the basis of earlier Supreme Court judgments or where the laws have been operating for a very long time and the rights and liabilities of the people have crystallised on the basis of such laws, and where the laws are subsequently declared ultra vires and previous judgments are over-ruled. It is further submitted that in such cases, particularly in tax matters, law is declared prospectively and the reason behind such prospective application is to save the taxes which has .....

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ich inequitably at the expense of another. A right of recovery/payment under the doctrine of unjust enrichment arises where retention of a benefit is considered contrary to justice or against equity. The concept of unjust enrichment is applicable for the purpose of grant of refund. The concept provides that if a person pays tax/duty to the Government in terms of the prevailing tax Statutes and passes it on to the consumers and, subsequently, the tax/duty is found not payable, refund cannot be cl .....

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red that no refund shall be made except in accordance therewith. The Court further held that even in regard to exercise of jurisdiction under Articles 32 and 226, Court would certainly take note of the legislative intent manifested in the provision in the Act. The Court further dealt extensively with the scope of refund in a case where the burden of tax has been passed on to the consumers. An excerpt from the majority view reads as under: 108. A claim for refund, whether made under the provision .....

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n is treated as a constitutional imperative or as a statutory requirement, it is neither an absolute right nor an unconditional obligation but is subject to the above requirement, as explained in the body of t he judgment. Where the burden of the duty has been passed on, the claimant cannot say that he has suffered any real loss or prejudice. The real loss or prejudice is suffered in such a case by the person who has ultimately borne the burden and it is only that person who can legitimately cla .....

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y from the purchaser at one end and also collect the same duty from the State on the ground that it has been collected from him contrary to law. The power of the court is not meant to be exercised for unjustly enriching a person. The doctrine of unjust enrichment is, however, inapplicable to the State. State represents the people of the country. No one can speak of the people being unjustly enriched. 197. In Godfrey Philips India Ltd. v. State of U.P. (2005) 2 SCC 515, the constitutional validit .....

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ourt held as under: 94. It was stated on behalf of the State Governments that after obtaining interim orders from this Court against recovery of luxury tax, the appellants continued to charge such tax from consumers/customers. It is alleged that they did not pay such tax to respective State Governments. It was, therefore, submitted that if the appellants are allowed to retain the amounts collected by them towards luxury tax from consumers, it would amount to "unjust enrichment" by them .....

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turer notwithstanding its illegality. 198. It is well-settled that a claim of refund can be allowed only when the claimant establishes that he has not passed on the tax burden to the consumers. No refund can be granted so as to cause windfall gain to any person when he has not suffered the burden of tax. The possibility of the tax burden having been passed on to the consumers by the assessees cannot be ruled out in the present case. Applying the law laid down above to the present case, it emerge .....

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n Atiabari and approved in Automobile Transport that taxes do amount to restriction and that freedom of trade, commerce and intercourse cannot be subject to restriction in the form of taxes is not a correct view and are to be over ruled. However, I am agreeing with the theory of compensatory tax evolved in the Automobile case for the reasons indicated hereunder while answering Question Nos. 2 and 3. Q uestion No.4:- · Entry tax with reference to entry 52, List II of Seventh Schedule is no .....

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from the point of view of entry tax that the State is a compendium of local areas and where the local areas contemplated by the Act cover the entire State, the difference between the State and a local area practically disappears. · Articles 304(a) and 304(b) are to be read disjunctively; both apply to different subject matters; while Art. 304(a) deals with tax, Art. 304(b) deals only with non-fiscal matters. · Where there is equivalence in terms of tax treatment between the locally .....

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producers in order to encourage the local manufacturers/production in the State cannot be said to be discriminatory. Digvijay and Video Electronics have laid down the correct law. Mahavir Oil Mills is not a correct view. · Levy of entry tax on the goods imported from the other States is not discriminatory merely on the ground that there are no similar goods manufactured or produced within the taxing State. The law laid down in Kalyani Stores is not a good law. · Levy of entry tax o .....

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s back through judicial pronouncements. It has withstood the test of time and thus, any subsequent judicial pronouncement like the present one should not prejudice the interest of the parties involved. The States should not suffer any loss of revenue solely because of judicial interpretations and innovations in Automobile and the decisions subsequent to it. · Subject to passing the muster of Art. 304(a), entry tax levied by the States under entry 52, List II even though termed as compensa .....

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d into. · Jindal Stainless Ltd. (2) & Anr. v. State of Haryana & Ors. (2006) 7 SCC 241 is not a correct view in adopting quantifiable data approach; for a tax, there is no requirement of proximate quid pro quo and Jindal Stainless Ltd. (2) is overruled. The view taken in Bhagatram and Bihar Chamber of Commerce is correct as the same is in harmony with the original design of compensatory tax laid down in Automobile. Unjust Enrichment: The concept of unjust enrichment is applicable .....

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xation D.2 Automobile Transport E Compensatory taxes; E.1 Original understanding E.2 Khyerbari E.3 Subsequent applications E.4 The breaking point E.5 Doctrinal concerns and inconsistencies F The content of freedom : goods, services, persons and capital; G Taxation and Federalism; H Taxing powers; H.1 Article 245 and constitutional limitations H.2 Sovereignty and constitutional limitations H.3 Part XIII and taxation H.3.1 All taxes are not impediments H.3.2 Articles 302, 303 and 304 H.3.3 Constru .....

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asonable classification J.3.1 Formal and substantive equality J.4 Production and manufacture within the home state K Entry tax; K.1 Octrois and terminal taxes K.2 Entry taxes and Article 304(a) K.3 Meaning of Local area K.4 Severability K.5 Equalising tax burdens K.6 Entry tax and imported goods M Direct and inevitable effect test; N Conclusion. A Introduction References to Benches of nine Judges, or at any rate decisions by nine, are a comparative rarity. Despite a prolific tradition of precede .....

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ndustries Ltd v. Union of India (1997) 5 SCC 536; Special Reference No. 1 of 1998 (1998) 7 SCC 739; I. R. Coelho versus State of Tamil Nadu (2007) 2 SCC 1.. The present reference traverses an area of constitutional law which is fraught with unresolved complexity. The draft-persons of the Constitution perceived the freedom of trade, commerce and intercourse to lie at the heart of the economic unity of the nation. They were keenly aware that parochial pressures emanating from within the states cou .....

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XIII was formulated in this background. It represents the balancing vision of the framers and seeks to create an equilibrium between free trade and regulation, state and federal control and between provincial autonomy and national interests in an area closely related to economic growth and development. 2 Yet, the semantics of the provisions adopted in framing all of six constitutional articles which comprised Part XIII- Articles 301 to 306 - attracted criticism within the Constituent Assembly. .....

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of exception upon exception in the series of articles in Part XIII that a purely textual interpretation may not disclose the true intendment of the articles Justice S K Das : (1963) 1 SCR 491, Para 10, pg. 520 ". Those remarks continue to be relevant even now. The law in the area of free trade and commerce has remained in a state of flux despite successive decisions by Constitution benches of this court. A similar judicial cri de coeur has found expression in Australia Cri De Coeur : (i) Ac .....

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nt providing for a Goods and Services Tax. When the hearings began, many of the counsel had reservations on the continued relevance of the reference. With the passage of the one hundred and first constitutional amendment, the distribution of the legislative power to tax goods and services has undergone a significant change. The taxing entry for the levy of Entry tax (Entry 52 of List II of the Seventh Schedule), which lies at the core of the dispute in the present reference, stands deleted as pa .....

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have a vital bearing on the intersection of the Constitution with free trade one hand and growth and development on the other. 4 This judgment will explore the socio-economic and political compulsions which led the founding fathers of the Constitution to adopt the guarantee under Article 301. The political backdrop of partition with its attendant social suffering provided a powerful rationale for a constitutional structure which would knit the nation together as a cohesive unit. The instrumenta .....

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hich formed part of British India. Part XIII reflected an attempt by the framers to draw a balance between freedom on one hand and the need to regulate to protect diverse aspects of public interest both of a national and regional character, on the other. The regulatory power under Article 302 would enable the national legislative body to perceive and regulate aspects of public interest of a national character. Within the area of regulation a distribution was envisaged between the Centre and the .....

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the perspective of trade and commerce itself, but from a wider national perspective that incorporates both the needs of the nation as reflected in regulatory powers of the centre and the concerns of the federating states to preserve their interests and obligations as well as their commitments to their people. 6 The debates of the Constituent Assembly provide a valuable insight, grounded in history, which helps us in illuminating the meaning and content of the text of Part XIII. History constitut .....

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s important to realise that the Constitution as an organic document has to evolve with societal change. The challenges to governance which India has faced over the last seven decades cannot be ignored in giving present meaning to the constitutional text. The words of the Constitution cannot be frozen in their content with reference to the intent of its framers. To succeeding generations lies the task of imparting a meaning that would, while ensuring a sense of continuity, infuse the constitution .....

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sons. B Part XIII of the Constitution : Text and Context 8 Part XIII of the Constitution has more than an abundant share of constitutional intricacies. Despite a judicial discourse of more than five decades, the debate on the true meaning of its provisions continues to bedevil academics, lawyers and judges who have had occasion to visit its provisions. 9 The ambit of Part XIII is trade, commerce and intercourse within the territory of India. Article 301 Article 301: Freedom of trade, commerce an .....

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fications upon the power to restrict are defined in Part XIII. 10 In framing Article 301, the framers of the Constitution made a deliberate departure 88 Article 301: Freedom of trade, commerce and intercourse : Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free. from the text of the Australian and US Constitutions. Article 1 Section 8 of the US Constitution confers upon Congress the power to regulate commerce with foreign .....

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ely free . 11 Dr B R Ambedkar while moving the introduction of draft Part XA of the Constitution (corresponding to Part XIII) emphasised the impact of the deletion of the qualification absolutely in defining the extent of the freedom. Dr Ambedkar observed that : I should also like to say that according to the provisions contained in this part, it is not the intention to make trade and commerce absolutely free, that is to say, deprive both Parliament as well as the States of any power to depart f .....

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he observations of Dr Ambedkar indicate that while trade, commerce and intercourse are to be free, that freedom is not unqualified but that it is subject to the provisions of Part XIII. While conferring the freedom, the Constitution recognises expressly that the freedom which it confers would be subject to the provisions of Part XIII. 12 The second aspect of Article 301 in which a conscious departure was made from the US and Australian Constitutions is that the freedom of trade, commerce and int .....

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a-State trade, commerce and intercourse. Throughout the territory of India , means in every part of India. In other words, the freedom that is conferred by Article 301 extends over but is not confined to inter-State movement across State boundaries. 13 The Constitution, while recognising the freedom of trade, commerce and intercourse throughout the territory of India makes that freedom subject to the provisions of Part XIII. Article 302 Article 302 : Power of Parliament to impose restrictions on .....

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Second, they must be such as may be required in the public interest. However, the empowerment of Parliament under Article 302 to impose restrictions on the freedom guaranteed by Article 301 is subject to constitutional limitations prescribed in clause 1 of Article 303. Under clause 1 of Article 30390, there is an absolute prohibition upon Parliament making any law giving or authorising the giving of preferences to one state over another or making a discrimination between one state and another, b .....

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interest. Since Article 302 applies only to Parliament and not to the state legislatures, the non-obstante provision contained in Article 303 is to that extent inartistic. Be that it is may, clause 1 of Article 303 imposes a constitutional limitation upon the law making power of Parliament and the state legislatures while enacting a law by virtue of any entry relating to trade and commerce in the lists of the Seventh Schedule. The constitutional limitation prevents the grant of preferences or th .....

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estrictions under Article 302. The power to impose restrictions is subject to the limitations in clause 1 of Article 303. However, those limitations can be relaxed in the situation contemplated by clause 2 of Article 303. The prohibition on the enactment of law which has the effect of granting preferences or making discrimination between states is, in relation to Parliament, lifted by clause 2 when it is necessary to deal with a situation of the scarcity of goods in any part of India. 14 Article .....

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de, commerce or intercourse with or within that State as may be required in the public interest: provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature or a State without the previous sanction of the President. commences with a non-obstante provision, notwithstanding anything in Article 301 or Article 303 . Under clause (a), a state legislature may by law impose on goods imported from other states, a tax to which similar goods manufactur .....

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ty of treatment is with reference to the tax imposed on goods manufactured or produced in the state. The nonobstante provision which refers to Article 301 carries the clear intendment that a tax of the nature within the contemplation of clause (a) of Article 304 would, but for that provision have fallen within the ambit of Article 301. The effect of the non-obstante provision is that notwithstanding Article 301 (which would otherwise bring within its purview a tax of this nature), clause (a) of .....

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eals with a non-discriminatory tax imposed on goods imported into a state when a similar tax is imposed on goods produced or manufactured in the state. Article 302 refers to restrictions in general without any qualification as regards the fiscal or non-fiscal nature of the restrictions. The constitutional limitation imposed by Article 303 on the power to impose a restriction under Article 302 is also not defined with reference to a fiscal or non-fiscal provision. Article 304(a) is a species of r .....

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he state to do so is, however, conditioned by three limitations : the first is that the restriction must be reasonable; the second is that the restriction should be required in the public interest; and the third which is spelt out in the proviso, is that the Bill or an amendment for the purpose of clause (b) shall not be introduced or moved in the legislature of a state without the previous sanction of the President. 16 A plain construction of the provisions of clause (a) and clause (b) of Artic .....

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tate may impose any tax to which similar goods manufactured or produced in that state are subject. Clause (a), in other words deals only with the taxation of goods which are imported from other states or union territories. 17 Clause (b) of Article 304 refers to reasonable restrictions on the freedom of trade, commerce or intercourse with or within the state. An intra-State restriction is within the purview of clause (b) but not within clause (a). Clauses (a) and (b) are separated by the conjunct .....

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I of the Constitution contain an elaboration of the freedom of trade, commerce and intercourse and the restrictions which the Constitution contemplates as being within the legislative powers of Parliament and the state legislatures. The legislative power conferred upon Parliament can restrict the ambit of the freedom to the extent that is specified in Articles 302 and 303. Similarly, the state legislatures are subject to the limitations contained in Article 303 (1) and Article 304. Parliament as .....

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. C Constitutional history as a guide 20 The Constitution was enacted in a historical and comparative framework. Historically, there was the presence in India prior to independence of the British Indian territories on the one hand and the princely states on the other. The founding fathers intended while enacting Part XIII to wield India into an economically integrated entity. In adopting Part XIII, the founding fathers did not intend to elaborate as much on the notion of lassiez-faire as on the .....

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on of the Constituent Assembly being engaged towards the freedom of trade and commerce within the territories of the Union : Under the British Rule, freedom of trade was the established practice in British India, with no inter-provincial duties or other trade barriers. With the advent of provincial autonomy in April, 1937, it was considered necessary to place this mater on a statutory basis. Accordingly, section 297 of the Government of India Act, 1935, prohibited Provincial Governments from imp .....

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hts discussed and adopted the draft provisions submitted by B N Rau on the freedom of trade and commerce, which read thus : Subject to regulation by the law of the Union, trade, commerce and intercourse among the units, whether by means of internal carriage or by ocean navigation, shall be free: Provided that any unit may by law impose reasonable restrictions thereon in the interest of public order, morality or health. (Id. at p.699) 23 While discussing the report of the Sub-committee Alladi Kri .....

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dvisory Committee took up the issue for discussion. Commenting on these developments, B Shiva Rao (supra) specifically adverts to the view of C Rajagopalachari which was that the units of the Union must have the power to impose customs duties and other taxes for raising revenue. A contrary view was, however, expressed inter-alia by Alladi Krishnaswami Ayyar. Shiva Rao s statement of what transpired is extracted below : During the discussions, Rajagopalachari expressed the view that units should .....

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evented. The committee accepted the provisions as recommended by the sub-committee with one change; the sub-clause providing for central regulation of trade by or with non-citizens was dropped as being vague and unnecessary. (Id. at p.700) 24 The clause was debated in the Constituent Assembly. B N Rau incorporated the following clauses in the draft constitution of October 1947 : Subject to the provisions of any Federal law, trade, commerce and intercourse among the units shall, if between the ci .....

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al Parliament from imposing by Act restrictions on the freedom of trade, commerce and intercourse among the units in the interests of public order, morality or health or in cases of emergency. (Id. at p.701) 25 The Drafting Committee thereafter redrafted the above provisos which came to be included as independent articles under the heading of Inter-State Trade and Commerce in Part IX of the draft constitution. Article 16 (which formed a part of the Chapter on Fundamental Rights) provided that su .....

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n of reasonable restrictions on inter-State trade, on the ground that this would practically nullify the freedom of trade secured under draft Article 16, the expression in the public interest being vague. When draft Article 16 was taken up in the Constituent Assembly, objections were raised to it being adopted as an Article under the Fundamental Rights. Subjecting the freedom of trade under Article 16 to a law made by Parliament and to the power of the state to impose PART C taxes and restrictio .....

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de and commerce by its inclusion in the Union List of the Seventh Schedule. Shiva Rao (supra at page 703) states that on the other hand it was believed that the formation of an All-India Union would be without meaning if trade and commerce throughout the Union was not free. After the speech by Dr Ambedkar, draft Article 16 was adopted to be added to the Constitution. 28 Subsequently, the Constituent Assembly accepted the view of Dr Ambedkar that a separate part, Part XA, exclusively devoted to t .....

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of trade, commerce and intercourse. Shiva Rao adverts to the observations of Alladi Krishnaswami Ayyar, which are significant : Alladi Krishnaswami Ayyar replied that the transfer of a provision in regard to freedom of inter-State trade from one part of the Constitution to another did not alter or affect the nature of the right embodied in it; the mere placing of a provision in the chapter on fundamental rights did not carry with it any particular sanctity, nor did its justiciability depend on s .....

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founding fathers had a constitutional vision for preserving the political unity of free and democratic India. The economic history of both the British and Indian states was marred by famines and scarcity. Present to the minds of the founding fathers were the inequalities of resources and disparities in development between various provinces, including those that constituted British India on one hand and Indian states on the other. The framers of the Constitution contemplated that the provisions .....

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e was not an attractive political doctrine. In fact, responding to an amendment that was proposed by Pandit Thakur Das Bhargava that the freedom of trade should be absolute, T T Krishnamachari, responded by stating that the extent of freedom which was allowed is about the maximum amount of liberty that we can give for trade and commerce, the maximum amount of concession that we can give to trade and commerce consistent with the future economic improvement of this country . He observed : Even as .....

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f direction by the Government. If my honourable friends think that we are in the days of the nineteenth century when the laissez faire enthusiast had practically the ordering of everything in the world, I am afraid they are mistaken. In his address to the Constituent Assembly, T T Krishnamachari emphasised the need to restrain the exercise of state powers which, it was apprehended, may be deployed to pursue narrow provincial interests : A certain amount of freedom of trade and commerce has to be .....

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required attention as well: My friend, Dr Ambedkar in the scheme has evolved and has taken into account the larger interests of India as well as the interest of particular states and the wide geography of this country in which the interests of one region differ from the interests of another region. There is no need to mention that famine may be raging in one part of the country while there is plenty in another part. It may be that manure and other things are required in one part of the country .....

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the larger interests of India and permit freedom of trade and intercourse as far as possible. Secondly, you cannot ignore altogether regional interests. Thirdly, there must be the power of intervention of the Centre in any case of crisis to deal with peculiar problems that might arise in any part of India. All these three factors are taken into account in the scheme that has been placed before you. 32 The introduction of the proviso to draft Article 274 (D) [corresponding to the proviso to the p .....

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t. Therefore, it was envisaged that the President who had to grant sanction will have the opportunity to see that the legislation is in the public interest and that the restriction imposed is reasonable. Moreover, he observed it is not possible to devise a watertight formula for defining these restrictions. 33 The deliberations in the Constituent Assembly surrounding the introduction of Part XIII leave little ambiguity about the constitutional philosophy underlying the introduction of the guaran .....

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and intercourse, the founding fathers had evident concerns about what they described as parochial interests or narrow provincial policies posing a danger to the economic development of the nation. Hence, the Union Government was conferred with a power of intervention which was qualitatively different from the regulatory power conferred upon the states. To the Union Government was assigned the role of ensuring that the goal of PART C pursuing economic development of the nation as one economic ent .....

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ake. The nature of the Indian economy on the eve of the adoption of the Indian Constitution was radically different from the economy which has emerged in the era of trade liberalism and beyond. I shall deal with the impact of those changes in a subsequent part of this judgment. At this stage, it would suffice to note that the guarantee of freedom for trade, commerce and intercourse which the Constitution adopted in Part XIII was an instrument of fostering economic progress as an important facet .....

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491. 36 In Atiabari, the Assam Taxation (on goods carried by roads and inland waters ways) Act, 1954 was enacted by the state legislature under entry 56 of the State List to the Seventh Schedule. The law provided for the levy of a tax on manufactured tea in chests carried by motor vehicles (except by railways and airways) at a specified rate per pound. 37 A Special Bench of the High Court dismissed the petitions challenging the validity of the Act. By a judgment of the Supreme Court rendered by .....

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tional. Justice Shah held that Part XIII imposes restrictions on the legislative powers of Parliament and state legislatures under Articles 245, 246 and 248 read with the lists of the Seventh Schedule. According to this view, restrictions on freedom of trade and commerce include burdens in the nature of taxation. The Act was held as having infringed Article 301 and failing compliance with the proviso to Article 304 (b), it was found to be unconstitutional. Chief Justice B P Sinha differed with t .....

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its Full Bench negatived a challenge to the provisions of the Act. The decision of the Rajasthan High Court had been rendered before the judgment in Atiabari was pronounced. When a Bench of seven Judges considered the matter in this Court, Justice S K Das, delivered the leading majority judgment on behalf of himself and Justices Kapoor and Sarkar. 40 The view of the three judges was that the Act did not violate the provisions of Article 301 because the taxes imposed were compensatory in nature w .....

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stice S K Das, in a concurring judgment. 41 Justice M Hidayatullah delivered a dissenting judgment for and on behalf of himself and Justices Rajagopala Ayyangar and Mudholkar. In the view of the PART D minority a tax which is made a condition precedent to the right to enter upon and carry on business is a restriction on the right to carry on trade and commerce. The tax, it was held, was not a fee for administrative purposes, its object being to raise revenue. The judgment of the minority held th .....

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include freedom from all impediments, restraints and barriers, including freedom from all taxes : 13. Learned counsel for the appellants vehemently argued that the freedom contemplated by Article 301 must be construed in its most comprehensive sense of freedom from all kinds of impediments, restraints and trade barriers, including freedom from all taxation. In my opinion, there is no warrant for such an extreme position. (Id. at p.826) Defining the expressions trade, commerce and intercourse, C .....

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ortation of men and animals by all means of transportation. Commerce would thus include dealings over the telegraph, telephone or wireless and every kind of contract relating to sale, purchase, exchange etc. of goods and commodities. (Id. at p. 826-827) 44 In the view of Chief Justice Sinha, in this comprehensive sense, taxation of trade, commerce and intercourse would cover almost the entire field of public taxation both in the Union and in the State lists. Hence, it is almost impossible to thi .....

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the purpose of government is elucidated in Part XII of the Constitution. Article 265 imposes a prohibition on the levy or collection of a tax except by authority of law. Part XII of the Constitution which deals with finances and Part XIII are self-contained provisions, one not being subject to the other : Hence, both Parts XII and XIII are meant to be self-contained in their respective fields. It cannot, therefore, be said that the one is subject to the other. (Id. at p. 824) The third reason ad .....

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s on carriage of goods and commodities, men and animals, from one place to another, both inter-State and intra-State, would come within the purview of Article 301 and the proviso to Article 304(b) would make it necessary that all Bills or Amendments of pre-existing laws shall have to go through the gamut prescribed by that proviso. That will be putting too great an impediment to the power of taxation vested in the States and reduce the States' limited sovereignty under the Constitution to a .....

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, commerce and intercourse : 12…..But a close examination of the provisions of Article 304 would show that it is divided into two parts viz. (1) dealing with imposition of discriminatory taxes by a State Legislature; and (2) relating to imposition of reasonable restrictions, thus showing that imposition of taxes, discriminatory or otherwise, is a class apart from imposition of reasonable restrictions on freedom of trade, commerce and intercourse. (Id. at p. 824) Fifthly, Chief Justice Sin .....

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arcane from sugarcane fields to sugar mills may be wholly lacking or insufficient. In order to make new roads as also to improve old ones, cess on the grower of cane or others interested in the transport of this commodity has to be imposed, and has been known in some parts of India to have been imposed at a certain rate per maund or ton of sugarcane transported to sugar factories. Such an imposition is a tax on transport of sugarcane from one place to another, either intra-State or inter-State. .....

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lable at all. Hence, in my opinion, it is not correct to characterise a tax on movement of goods or passengers as necessarily connoting an impediment, or a restraint, in the matter of trade and commerce. That is another good reason in support of the conclusion that taxation is not ordinarily included within the terms of Article 301 of the Constitution. (Id. at p. 827-828) Sixthly, in the view of the Chief Justice Sinha taxation simpliciter is not within the terms of Article 301 since the very pu .....

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ed the extreme proposition that taxation would be wholly outside the purview of Article 301. That position was rejected on the ground that firstly, Article 304 contains a specific reference to taxation and secondly, Article 305 prior to its repeal made a specific reference to taxation for certain purposes. Chief Justice Sinha made a distinction in the following observations : 17…..The Article thus brings out the clear distinction between taxation as such for the purpose of revenue and tax .....

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ediment to the free flow of trade, commerce and intercourse such as by a high tariff wall is not a measure of taxation but assumes a character of a trade barrier : 16…..If a law is passed by the Legislature imposing a tax which in its true nature and effect is meant to impose an impediment to the free flow of trade, commerce and intercourse, for example, by imposing a high tariff wall, or by preventing imports into or exports out of a State, such a law is outside the significance of taxat .....

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ictions, which may be characterised by the courts as reasonable and in public interest. (2) The power is vested in a sovereign State to carry on Government. Our Constitution has laid the foundations of a welfare State, which means very much expanding the scope of the activities of Government and administration, thus making it necessary for the State to impose taxes on a much larger scale and in much wider fields. The legislative entries in the three Lists referred to above empowering the Union G .....

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f the States, as envisaged by the Constitution. (4) Laws relating to taxation, which is essentially a legislative function of the State, will become justiciable and every time a taxation law is challenged as unconstitutional, the State will have to satisfy the courts - a course which will seriously affect the division of powers on which modern constitutions, including ours, are based. (5) Taxation on movement of goods and passengers is not necessarily an PART D impediment. (Id. at p. 829-830) Th .....

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it falls within the ambit of Article 301. The test is of the true nature and effect of the tax. Does it impose an impediment to the free flow of trade, commerce & intercourse? An illustration of such an impediment is a high tariff wall which then assumes the character of a trade barrier. A high tariff wall is an example of an impediment under taxing laws to the freedom of trade, not an exhaustive elaboration. Those taxes which impede the free flow of trade and commerce are within Article 301 .....

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he very existence of the government, its exercise must inevitably be controlled by the constitutional provisions made in that behalf. It cannot be said that the power of taxation per se is outside the purview of any constitutional limitations. (Id. at p. 846) 50 Justice Gajendragadkar noted first, that the power under Article 265 of the Constitution to levy a tax under the authority of law is referable to Article 245 read with the corresponding legislative entries in the Seventh Schedule. Since .....

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tes to make laws including laws imposing taxes is subject to the provisions of this Constitution and that must bring in the application of the provisions of Part XIII. (Id. at p. 847-848) Second, in this view, the freedom of trade, commerce and intercourse under Article 301 is subject only to the provisions of Part XIII which means that the amplitude of the freedom cannot be controlled outside Part XIII. Thirdly, in the view of Justice Gajendragadkar, the freedom guaranteed by Article 301 is a f .....

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n the context. At this stage, we would content ourselves with the statement that the freedom of trade guaranteed by Article 301 is freedom from all restrictions except those which are provided by the other Articles in Part XIII. (Id. at p. 853) Fourthly, Justice Gajendragadkar adverts to the effect of the non-obstante clause in Article 304 which enables the imposition of a tax notwithstanding the provisions of Article 301 : 46…..How a tax can be levied on internal goods is, however, provi .....

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ation is included in Article 301 is an inference from the use of the non-obstante clause in Article 304. Finally, Justice Gajendragadkar held that movement of trade is the essence of the freedom guaranteed by Article 301. If transport or movement of goods is taxed solely on the basis that goods are carried PART D or transported, that would affect directly the freedom of trade under Article 301 : 49…..it certainly includes movement of trade which is of the very essence of all trade and its .....

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01 provides that trade shall be free throughout the territory of India, primarily it is the movement part of the trade that it has in mind and the movement or the transport part of trade must be free subject of course to the limitations and exceptions provided by the other Articles of Part XIII. (Id. at p. 859) 51 Justice Gajendragadkar did notice the need to draw a balance for preserving the powers of the states in a federal constitution. The test which he formulated is that the restrictions wh .....

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d fall within the purview of Article 301. The argument that all taxes should be governed by Article 301 whether or not their impact on trade is immediate or mediate, direct or remote, adopts, in our opinion, an extreme approach which cannot be upheld. (Id. at p. 860) 52 Justice Gajendragadkar, in the ultimate analysis also shuns an interpretation under which all taxes would be brought within the ambit of Article 301. The principle which the learned judge adopts is that taxing laws are not exclud .....

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mise that all laws of taxation fall within the purview of Article 301. In his view, trade and commerce comprehends traffic in goods and much more. In this view, while movement of goods may be an important ingredient of effective commerce, movement itself is not an essential ingredient of commerce. In his view : 66…..What is guaranteed is freedom in its widest amplitude - freedom from prohibition, control, burden or impediment in commercial intercourse. Not merely discriminative tariffs re .....

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875) The freedom under Article 301, in the judgment of Justice Shah, connotes freedom from tax burdens as well as other impediments but is subject to Part XIII of the Constitution. 54 The distinction between the judgment of the majority and the view of Justice Shah is precisely in the extent to which tax laws are held to fall within the ambit of Article 301. For the majority, movement constitutes the soul of trade whereas for Justice Shah, it is not an essential ingredient in all situations. For .....

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ion of commercial intercourse, even when it is a measure for the collection of revenue is hit by Article 301. 55 Having said this, it is necessary also to note that there was at the same time an agreement on principle on certain crucial aspects of Part XIII between the views expressed in the judgment of the majority and the views of Justice Shah. Firstly, the PART D majority (as noted earlier) spoke of constitutional restrictions and limitations on the legislative powers of Parliament and the st .....

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mental freedoms contained in Part III, e.g., Articles 14,15(1),19(1)(g) and 31(1) and is further restricted by Part XIII. Article 245, clause (1), of the Constitution expressly provides that the legislative powers of the Parliament and the State Legislatures to make laws are subject to the provisions of the Constitution; and Article 301 is undoubtedly one of the provisions to which the legislative powers are subject. (Id. at p. 873) Secondly, Justice Shah like the majority emphasized the non-obs .....

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f the Constitution do not impose additional or independent powers of taxation; the powers of taxation are to be found conferred by Articles 245, 246 and 248 read with the Lists in the Seventh Schedule, and the provisions of Part XIII are limitative of the exercise of legislative power. The circumstance that the Constitution has chosen to deal with a specific field of taxation as an exception to Articles 301 and 303 (which should really be Article 303(1)) strongly supports the inference that taxa .....

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ls with a specific burden of taxation in a limited field. (Id. at p. 881) 56 The basic difference between the judgment of the majority and the decision of Justice Shah lies in the extent to which the taxing power is regarded as being within or outside the purview of Article 301. For the majority every taxing legislation is not within the ambit of Article 301. The guarantee under Article 301 is against such restrictions as directly and immediately restrict or impede the free flow or movement of t .....

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art XII and that Part XII and Part XIII are self-contained and independent provisions. Moreover, Chief Justice Sinha held that taxation being an essential attribute of sovereignty, it would not be appropriate in a federal structure to make the state power of taxation subservient by the application of Article 304 (b) to all taxing legislation. However, Chief Justice Sinha ultimately accepts the position that not all but some tax legislation is subject to the mandate of Article 301. In his view, s .....

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es as directly and immediately restrict trade find a broad co-relation to the test adopted by Chief Justice Sinha. The difference in the view of the majority from that of the learned Chief Justice on this aspect was essentially a difference of degree. Chief Justice Sinha noted that he differed with the majority on the ground that the Constitution does not justify the inference that taxation simpliciter is within the terms of Article 301. In his view, the Assam legislation in that case was a taxi .....

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Justice Sinha would regard only a discriminatory tax as a restriction on trade. D.2 Automobile Transport 58 The seven Judge bench in Automobile Transport dealt, in the three judgments which were delivered, with: (i) the nature and extent of the freedom guaranteed by Article 301; (ii) the power to impose taxes; (iii) constitutional limitations or restrictions on the power to tax; (iv) the necessity of interpreting the provisions of Part XIII so as not to eviscerate the sovereignty of the states; .....

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rily to add certain qualifications subject to which alone that freedom may be exercised. (Id. at p. 521) 60 Justice Subba Rao in a concurring judgment held that the freedom conferred by Article 301 is a freedom of trade across borders. The freedom is to trade unrestricted by barriers : 35….. the said composite expression means trade across the borders: what is free is that trade. It is implicit in the concept of freedom that there will be obstructions to it. Such obstructions or barriers .....

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ontinuous impediment till the boundary is crossed. It may take different forms. The restrictions may be before or after movement. It may be a prior restraint or a subsequent burden. But the essential idea is that a barrier is an obstacle put across trade in motion at a particular point or different points. The expression shall be free declares in a mandatory form a freedom of such transport or movement from such barriers. (Id. at p. 547-548) 61 Freedom under Article 301, being throughout the ter .....

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m under Article 301 is not impaired by facilitative regulations. Such regulations are facilitative because they promote trade and are not restrictive of it. The concept of facilitative regulations is PART D in tandem with the view that the right under Article 301 is capable of regulation so as to preserve an orderly society. Regulations such as those defining limits of speed for transport vehicles, permissible loads or requiring the registration of vehicles do not impede trade. Adverting to thes .....

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ve in a manner dangerous to the public. If the word free in Article 301 means freedom to do whatever one wants to do , then chaos may be the result. (Id. at p. 522) Justice Subba Rao adopted the same position. Facilitative regulations, in his view, do not restrict trade : 37…Before a particular law can be said to infringe the said freedom, it must be ascertained whether the impugned provision operates as a restriction impeding the free movement of trade or only as a regulation facilitatin .....

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but regulatory provisions; for without it, the necessary lines of communication, such as roads, water-ways and air-ways, 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 PART D be described as restrictions impeding the freedom. (Id. at p. 549) Significantly, these observations of Justice Subba Rao indicate that fee .....

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xhaust the limitations on the power to tax: 13…. though the power of levying tax is essential for the very existence of government, its exercise may be controlled by constitutional provisions made in that behalf. It cannot be laid down as a general proposition that the power to tax is outside the purview of any constitutional limitations. We have carefully examined the provisions in Part XII of the Constitution and are unable to agree that those provisions exhaust all the limitations on t .....

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he case may be, in exercise of the power conferred under the Constitution by virtue of the entries found therein. It is a law just like any other law made under the Constitution. This Court, in K. Thathunni Moopil Nair v. State of Kerala [ AIR (1962) SC 552] and in Balaji v. I.T. Officer [ AIR (1962) SC 123] , held that a law of taxation would be void if it infringed the fundamental right guaranteed under Article 19 of the Constitution. Therefore, the law of taxation also should satisfy the two .....

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may cause irremediable harm to the public rather than promote public good, that the court may have to hold that it is not in public interest. Nor can I agree with the contention that it is impossible for a court to hold in any case that a rate of taxation is reasonable or not . (Id. at p. 553) In this view, no restriction, if it is unreasonable, can be more deleterious to freedom than the imposition of a fiscal burden on it, which may in certain circumstances destroy the very freedom. Consequent .....

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or restrictions. Under Article 265, a tax can be levied only with the authority of law. Article 245 which empowers Parliament to enact legislation for the territory of India and the state legislatures, for the territories of the respective states, is subject to the provisions of this Constitution. This expression would include Parts XII and XIII. Justice S K Das held thus : 13…. Article 245 which deals with the extent of laws made by Parliament and by the Legislatures of States expressly .....

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f taxation is subject to constitutional limitations which include Part XIII, Justice S K Das rejected what he described as a narrow interpretation which postulates that save and except for Article 304(a), none of the other provisions of Part XIII extend to taxing statutes. That submission was also not accepted by Justice Subba Rao. D.2.3 State sovereignty 68 The majority was conscious of the need to preserve the sovereignty of the states. State autonomy would be impaired by an extensive construc .....

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with regard to subjects in List II. The States must also have revenue to carry out their administration and there are several items relating to the imposition of taxes in List II. The Constitution-makers must have intended that under those items, the States will be entitled to raise revenue for their own purposes. If the widest view is accepted, then there would be for all practical purposes, an end of State autonomy even within the fields allotted to them under the distribution of powers envis .....

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ms may have an indirect effect on trade and commerce. Even laws other than taxation laws, made under different entries in the Lists referred to above, may indirectly or remotely affect trade and commerce. If it be held that every law made by the Legislature of a State which has a repercussion on tariffs, licencing, marketing regulations, price-control etc. must have the previous sanction of the President, then the Constitution insofar as it gives plenary power to the States and State Legislature .....

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rs on the Parliament and the State Legislatures extensive powers to make laws in respect of various matters. A glance at the entries in the Lists of the Seventh Schedule to the Constitution would show that every law so made may have some repercussion on the declared freedom. Property tax, profession tax, sales tax, excise duty and other taxes may all have an indirect effect on the free flow of trade. So too, laws, other than those of taxation, made by virtue of different entries in the Lists, ma .....

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on adult franchise the handmaid of the Central executive. (Id. at p. 550) 70 Justice Hidayatullah was also concerned about the consequence on state autonomy of the adoption of a view which subjugated all state legislations having a conceivable, if even remote, impact upon trade to Presidential sanction : 124… the financial independence of the States was secured by an elaborate division of heads of taxation, which were well thought out to provide the States with the means of independent ex .....

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axiomatic that all taxes which a tradesman pays must burden him, any tax which touches him must fall within Article 304, if the word restriction is given such a wide meaning, every such legislation will then be within the pleasure of the President, and this could not have been intended. Restriction must, therefore, mean something more than a mere tax burden. (Id. at p. 633-634) Every burden of tax, in this view would not be a restriction of trade and commerce. Justice Hidayatullah too shared thi .....

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Compensatory Taxes E.1 Original understanding 71 The judgment of the majority evolved the concept of compensatory taxes in response to its felt concern to preserve state autonomy. Compensatory taxes which are in the nature of a charge for the use of trading facilities would not be regarded as being a hindrance to the freedom of trade, so long as they are reasonable. By first devising the concept and then placing it beyond the pale of Article 301, the Court in Automobile Transport ensured that co .....

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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. 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. (Id. at p. 522) In this view, for a tax to become prohibited, it has to be a tax, the effect of which is to directly hinder the moveme .....

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d. at p. 528) In the view of the majority : 17….Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Article 301 and such measures need not comply with the requirements of the proviso to Article 304 (b) of the Constitution. (Id. at p. 533) Compensatory taxes were held to lie outside Article 301. Not being restrictions which hamper the freedom of trade, compensatory taxes would not f .....

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specific amount which is calculated is not actually used to provide facilities. The test on whether a tax is compensatory is formulated thus : 19…It seems to us that a working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having the use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities. (Id. at p. 536) Even if the proceeds from the tax are .....

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rt will have to ascertain whether the impugned law in a given case affects directly the said movement or indirectly and remotely affects it. (Id. at p. 550-551) A law which directly and immediately affects the free movement of trade in this view is a restriction on freedom. However, a measure which is compensatory or regulatory does not hinder trade : 40…. Of all the doctrines evolved, in my view, the doctrine of direct and immediate effect on the freedom would be a reasonable solvent to .....

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riction on the free movement of trade, except when it is compensatory or regulatory. On the other hand, a law may tax a vehicle as property, or the garage wherein the vehicle used for conveyance is kept. The said law may have indirect repercussions on the movement, but the said law is not one directly imposing restrictions on the free movement. 74 Justice Hidayatullah adopted the position that a tax would amount to a restriction when it is placed upon trade directly and immediately. But, in his .....

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d a tax, which being general, is paid by tradesmen in common with others. The first is a levy from the trade by reason of its being trade, the other is levied from all, and tradesmen pay it because everyone has to pay it. There is a vital difference between the two, viewed from the angle of freedom of trade and commerce. The first is an impost on trade as such, and may be said to restrict it; the second may burden the trader, but it is not a restriction' of the trade. To refuse to draw such .....

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er or restrict it. Similarly, an administrative fee may also be viewed as a part of regulation and would not fall to be classified as a restriction. A tax however, which is a condition precedent to the right to enter upon and carry on business stands on a different footing : 131. Let us now see whether the validity of taxation laws directly impinging on trade and commerce can be upheld on the ground that they are regulatory. Here, a distinction must be made between fees and taxes. Fees charged a .....

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urposes nor could it be justified as representing a payment for services. The object of the tax was to raise revenue, which distinguished it from a fee. 76 The correctness of the decision in Automobile Transport - as indeed of the earlier decision in Atiabari - lies at the heart of this reference. At this stage, it would be necessary to recapitulate the basic principles which emerged from Automobile Transport. The decision and the principles which it proceeds to formulate have their own logic. F .....

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dom guaranteed by Article 301 is whether the direct and immediate effect is to hinder the movement of trade. A law which has that effect, including a tax law must, where it has been enacted by the state legislature be subject to the provisions of Article 304. Fourth, compensatory taxes which are imposed in consideration of the facilities which are provided by the state to trade and commerce are outside the ambit of Article 301. Fifth, a compensatory tax does not hinder the freedom of trade and c .....

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. Ltd. v. State of Assam (1964) 5 SCR 975. 78 Justice Gajendragadkar who delivered the judgment of the majority held that the judgment in Automobile Transport introduced a clarificatory rider to the majority view in Atiabari Id. at p-985 and that it had substantially accepted the earlier decision Id. at p. 986. 79 The opinion of Justice Gajendragadkar in Khyerbari seems to indicate an element of reservation in regard to the concept of compensatory taxes. Compensatory taxes, the judge noted, were .....

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ted to the minority view of Justice Hidayatullah in Automobile Transport on this aspect. His observations on the concept of compensatory taxes are as follows : 13… Section 92 is absolute in terms and on its literal construction, admits of no exceptions. The Australian decisions, therefore, had to introduce distinctions, such as compensatory or regulatory tax laws in order to take laws answering the said description out of the purview of Section 92. In our Constitution, however, though Art .....

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ct of the matter. 80 In Khyerbari, the judgment of the Supreme Court noted in more than one place that the tax in question had not been supported by the State of Assam on the ground that it was compensatory. Justice Gajendragadkar held that if the enactment had been claimed by the state to be compensatory, it would have been necessary to constitute a larger Bench to reconsider the position. This was because the state law of 1954 was enacted as a consequence of the earlier law having been invalid .....

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resent case, it had been urged before us that the tax levied by the Act is compensatory in character, it would have been necessary to consider the question once again by constituting a larger Bench. It will be recalled that the Act with which we are concerned has been passed by the Assam Legislature directly as a result of the decision of this Court in Atiabari Tea Co. case [(1961) 1 SCR 809] ; that decision was that if the tax imposed by the Act was compensatory in character, then the Act could .....

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be open to the petitioners to contend that its compensatory character is irrelevant to the enquiry under Article 304(b). 81 A reference to the larger bench was however obviated since the High Court had held that Act not to be compensatory and no submission to the contrary was urged by the state. The new enactment of the Assam Legislature was upheld against the challenge that it violated Articles 14, 19 and 301 : 45. It is, of course, true that the validity of tax laws can be questioned the light .....

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of paramount character. In what case a taxing statute can be struck down as being unconstitutional is illustrated in the decision of this Court in K.T. Moopil Nair v. State of Kerala. [(1961) 3 SCR 77]……. It is in regard to such a taxing statute which can properly be regarded a purely confiscatory that the power of the court can be legitimately invoked and exercised . The law enacted by the state legislature was upheld in Khyerbari not on the ground that it was compensatory- such a .....

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AP[1972] 4 SCC 635; Bolani Ores Ltd v. State of Orissa[1974] 2 SCC 777; G. K. Krishnan v. State of TN[1975] 1 SCC 375; International Tourist Corpn. v. State of Haryana[1981] 2 SCC 318, 1981 SCC (Tax) 103; Malwa Bus Service (P) Ltd. v. State of Punjab[1983] 3 SCC 237, 1983 SCC (Tax) 162; Meenakshi v. State of KarnatakaAIR (1983) SC 1283 , (1984) Supp SCC 326, (1984) SCC (Tax) 206; B.A. Jayaram v. Union of India[1984] 1 SCC 168 and State of Maharashtra v. Madhukar Balkrishna Badiya[l988] 4 SCC 290 .....

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ernment and levy the fee according to the benefits received and the expenditure incurred, in the case of a regulatory and compensatory tax it would ordinarily be well nigh impossible to identify and measure, with any exactitude, the benefits received and the expenditure incurred and levy the tax according to the benefits received and the expenditure incurred. What is necessary to uphold a regulatory and compensatory tax is the existence of a specific, identifiable object behind the levy and a ne .....

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a judicially evolved doctrine. 84 In G K Krishnan v. State of Tamil Nadu[1975] 1 SCC 375, a tax on motor vehicles under the Motor Vehicle Taxation Act, 1931 was under challenge on the ground of a violation of Article 301. By a notification, the rate of tax which was imposed on a quarterly basis was enhanced. Justice K K Mathew who delivered the judgment of a Bench of three Judges of this Court observed that the judgment in Automobile Transport practically overruled the decision in Atiabari : 13& .....

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on 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. This distinction is described as regulation. The word regulation has no fixed connotation. Its meaning differs according to the nature of the thing to which it is applied. The true solution, perhaps, in any given case, could be found by distinguishing be .....

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s, equipment, weight/size of load, lights, which form the incidents of transportation, even if inseparable, do not give the transaction its essential character of trade or commerce. Laws for Government of such incidents regulate . (Id. at p. 381) 85 The Bench of three Judges, following the line of precedent in Automobile Transport held that for a law to become a prohibited tax, it has to be a direct tax, the effect of which is to hinder the movement part of trade. A tax which is compensatory or .....

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nterference with the movement. The expression reasonable compensation is convenient but vague. The standard of reasonableness can only lie in the severity with which it bears on traffic and such evidence of extravagance in its assessment as comes from general considerations. 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 facili .....

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; the maintenance of such roads will cost the government money. But, because the users of vehicles generally, and of public motor vehicles in particular, stand in a special and direct relation to such roads, and may be said to derive a special and direct benefit from them, it seems not unreasonable that they should be called upon to make a special contribution to their maintenance over and above their general contribution as taxpayers of the State. If, however, a charge is imposed, not for the p .....

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reasonable compensation , an expression, which however convenient, is but vague. The Court noticed the rationale for the doctrine of compensatory taxes: providing recompense to the state for the provision of services which facilitate trade. A compensatory tax is distinguished from a general measure of taxation. The state may impose the tax as a part of raising revenues in aid of the general expenditure of the state. Though, all revenues of the state in the ultimate analysis are expended for pub .....

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state legislature was held to pass muster of judicial review. 88 The judgment in G K Krishnan (supra) is also noteworthy because it raises the issue as to whether the restrictions contemplated by Article 304(b) would include the levy of a non-discriminatory tax. Justice Mathew held that it was strange that the power to impose a tax conferred upon the states should yet depend upon the sanction of the President under the proviso to Article 304(b) : 27. Whether the restrictions visualized by Articl .....

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inst outside goods is not a tax simpliciter but is a barrier to trade and commerce. Article 304 itself makes a distinction between tax and restriction. That apart, taxing powers of the Union and States are separate and mutually exclusive. It is rather strange that power to tax given to States, say, for instance, under Entry 54 of List II to pass a law imposing tax on sale of goods should depend upon the goodwill of the Union Executive. It is said that a tax on sale does not impede the movement o .....

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s unnecessary to pursue the matter any further as the tax imposed under the notification of the state in that case was held to be compensatory in character and hence not restrictive of the freedom. E.4 The breaking point 89 The judgment in Automobile Transport held that compensatory taxes lie outside the purview of Article 301. Justice Mathew while upholding that the Madras Motor Vehicles Taxation Act, 1931 had cautioned in G K Krishnan (supra) that the concept of reasonable compensation is conv .....

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ise Act, 1957. This Court held that though sugar was a commodity on which no sales tax is leviable because additional excise duty is payable, it was within the taxing provisions of the entry tax legislation. There was a challenge to the entry tax law on the ground that it violated Article 301 and that it was not regulatory or compensatory. A Bench of three Judges of this Court held that the figures which had been disclosed by the state as justification for the levy as a compensatory tax were not .....

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impost compensatory in nature, as augmentation of their finance would enable them to provide municipal services more efficiently, which would help or ease free flow of trade and commerce, because of which the impost has to be regarded as compensatory in nature, in view of what has been stated in the aforesaid decisions, more particularly in Hansa Corpn. Case. (Id. at p. 678) 90 These observations made a marked departure from the test which was adopted in the judgment of seven Judges in Automobil .....

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s compensatory was almost obliterated. The reference in Bhagatram to the earlier decision in State of Karnataka v. Hansa Corporation(1980) 4 SCC 697, clearly overlooks that in that case the state had made no effort to sustain the validity of the tax on the ground that it was compensatory in character. Hence, the Bench in Hansa Corporation expressly clarified that it was not necessary for the Court to examine whether the tax was compensatory. Yet, the decision in Hansa Corporation was construed i .....

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that the state had not disclosed material to justify that it was compensatory or regulatory nor had the state fulfilled the requirements of Article 304(b). The submission of the state in appeal was that the enactment was intended by the state legislature to offset atleast in part the loss of revenue caused to it, as a result of a decision of this Court in India Cement Ltd. v. State of Tamil Nadu(1990) 1 SCC 12. The state submitted that due to a loss of revenue from the cess on minerals, it was .....

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for the purpose of establishing the compensatory character of the tax, it is necessary to establish that every rupee collected on account of the entry tax should be shown to be spent on providing the trading facilities. It is enough if some connection is established between the tax and the trading facilities provided. The connection can be a direct one or indirect one, as held by this Court in Bhagatram Rajeevkumar v. CST [1995 Supp (1) SCC 673 : (1995) 96 STC 654] : (SCC p. 678, para 8) &helli .....

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State, we must also look to the facilities provided by the State for ascertaining whether the State has established the compensatory character of the tax. (Id. at p. 147) The Court in Bihar Chamber of Commerce held that so long as some connection is established between the tax and the trading facilities provided the levy would be held to be compensatory in character. 92 These decisions were doubted by a Bench of two-Judges in Jindal Stripe Ltd. v. State of Haryana(2003) 8 SCC 60. 93 Jindal Strip .....

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e accepted as the position in law, any tax could pass the test of a compensatory tax without infringing upon the freedom ordained by Article 301. The reference was heard by a Constitution Bench in Jindal Stainless Ltd.(2) v. State of Haryana(2006) 7 SCC 241, The Constitution Bench in Jindal Stainless elucidated the difference between regulatory and taxing powers. Taxing legislation, the Court ruled, is based on the concept of burden and on the principle of ability to pay. On the other hand, regu .....

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stage, we may clarify that in the above case of Automobile Transport [(1963) 1 SCR 491 : AIR 1962 SC 1406], this Court has equated regulatory charges with compensatory taxes and since it is the view expressed by a Bench of seven Judges, we have to proceed on that basis. The fallout is that compensatory tax becomes a sub-class of fees . (Id. at p. 264) Based on this distinction, the Constitution Bench held that if a law, fiscal or otherwise, operates upon the movement of trade or commerce and its .....

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vement of trade and commerce as the criterion of its operation and if the effect of the operation of such a law is to impede the activity, then the law is a restriction under Article 301. However, if the law enacted is to enforce discipline or conduct under which the trade has to perform or if the payment is for regulation of conditions or incidents of trade or manufacture then the levy is regulatory. (Id. at p. 266) 94 The Constitution Bench held that taxes are levied as a part of the common bu .....

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ue of trade and commerce which does not happen in the case of a tax as such. A tax may be progressive or proportional to income, property, expenditure or any other test of ability or capacity (principle of ability). Taxes may be progressive rather than proportional. Compensatory taxes, like fees, are always proportional to benefits. They are based on the principle of equivalence. However, a compensatory tax is levied on an individual as a member of a class, whereas a fee is levied on an individu .....

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and intercourse. Whenever a law is impugned as being violative of Article 301, the Court must determine whether the enactment facially or patently indicates quantifiable data on the basis of which the compensatory tax is sought to be levied. The statute must broadly indicate a proportionality to a quantifiable benefit. Even if the statute were not to indicate this, the state may discharge the burden cast upon it by producing material to indicate that the payment of the compensatory tax is a rei .....

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ies extended would suffice, whether direct or indirect , the judgments in the Bhagatram and Bihar Chamber of Commerce were held to have deviated from the settled concept of compensatory taxes and were hence overruled. E.5 Doctrinal concerns and inconsistencies 96 The theory of compensatory taxes was evolved in Automobile Transport to assimilate doctrinal concerns at several levels. Freedom of trade and commerce under Article 301 of the Constitution is expressly made subject to the provisions of .....

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s 302 and 304. The nature of the restrictions and the limitations on the power of Parliament and of the state legislatures while legislating to impose restrictions is conditioned by constitutional parameters. The conditions are based on the fulfilment of substantive and procedural norms: substantive such as the principle of non-discrimination, the element of public interest and reasonableness; PART E and procedural (if it can be regarded as a matter of procedure) by requiring the sanction of the .....

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ade. Trade also pre-supposes the existence of infrastructure and the provision of facilities for pursuing the avenues of commerce and trade. The state which provides those facilities has a legitimate interest in recovering the costs which it incurs. In the absence of resources generated by charges levied for the use of facilities, the state may not have the wherewithal to provide the facilities in the first place. Hence, when the concept of compensatory taxes was devised, Justice S K Das, in Aut .....

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purview of restrictions contemplated by Article 301 and did not have to comply with the requirements of the proviso to Article 304(b). 98 The judgment in Automobile Transport indicates that a second doctrinal PART E concern which weighed with the Court was a dilution of the sovereign power to tax conferred upon the states if all fiscal legislation was required to pass muster of a Presidential sanction under the proviso to Article 304(b). This concern was present to the mind of the Court in Auto .....

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Article 301. If a compensatory tax does not offend Article 301, the provisions of Article 304(b) are not attracted. In the same vein, Justice Subba Rao cautioned against a construction of Part XIII that would render the states as the handmade of the central executive . Besides the direct and immediate test which the learned judge considered to be a reasonable solvent , Justice Subba Rao also adverted to a tax which is compensatory or regulatory not operating as a restriction on the free movement .....

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nsatory taxes would encounter had their seeds in the formulation in Automobile Transport itself. The judgment of Justice Das used the concept in varying contexts as a tax for the use of facilities and, in other places, as a tax to provide facilities. Use relates to the availment of a facility. Providing for facilities emphasises the role of the state in terms of the investment which it incurs and the expenditure required for upkeep and maintenance. Use and provision may be two shades of the same .....

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acilities. The working test is that the trade which has the use of facilities for the better conduct of business does not pay patently much more than what is required for providing the facilities. Paying not patently much more is a concept which suffers from vagueness. How much more is within the ambit of the phrase not patently much more introduces an element of subjectivity. A standard which is subjective becomes uncertain and indefinite in its practical application. The lack of precision abou .....

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pensatory taxes being a means of recouping the states for the cost of providing facilities to the trade would tend to disappear. In fact, as the decision in Bhagatram indicated, the compensatory aspect of the tax which was upheld in that case was a loss which was sustained by the state as a result of sugar not being amenable to sales tax (being a commodity on which an additional duty of excise was leviable). Similarly, in Bihar Chamber of Commerce, the state had sought to sustain the tax as comp .....

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mpensation for the loss of state revenue under some other head, the theory which found acceptance in the two decisions of this Court had travelled far beyond the domain that was contemplated in Automobile Transport. Correctly, therefore, both the decisions in Bhagatram and in Bihar Chamber of Commerce were overruled in Jindal Stainless. However, both the decisions led to subjectivity, uncertainty and vagueness. 101 A close reading of the decision in Jindal Stainless indicates that while the earl .....

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ay for value . In holding that the collection on account of a compensatory tax must be broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred, the Constitution Bench was restating the working test of Automobile Transport. But the subsequent observations in Jindal Stainless make it evident that the Constitution Bench introduced a near mathematical formulation which would not be consistent with the test which was propounded in Automob .....

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oncept of a compensatory tax in line with a fairly strict application of a quid pro quo principle which had not been accepted in Automobile Transport. In fact, the Bench of PART E seven Judges in Automobile Transport had specifically clarified that the precise amount that is realized need not be spent on the provision of facilities and the only requirement is that the trade should not be made to pay patently much more than what is incurred for the provision of the facilities. The observations in .....

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state legislature of Assam in issue in Khyerbari had been struck down in the decision in Atiabari. The majority in Atiabari had held the tax to be invalid for want of compliance with the proviso to Article 304(b) despite its compensatory character. Justice Gajendragadkar held that if the new enactment, which had been brought into force after complying with the proviso to Article 304(b) was to be supported by the state as being compensatory in character, a reference to a larger Bench would have b .....

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tution Bench in Jindal Stainless was bound by the doctrine of compensatory taxes which had been formulated by a larger Bench of seven Judges in Automobile Transport. The validity of the compensatory tax theory was not under challenge. 103 The judicially evolved concept of compensatory taxes has created in its wake new problems in its search for solutions. If a strict reading of the doctrine of compensatory taxes in terms of the quantifiable/measurable benefits approach is adopted (as did the Con .....

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f compensatory taxes were to have a loose and undefined ambit, by the application of the some link or some connection test (as was adopted in Bhagatram and Bihar Chamber of Commerce), then any connection would suffice for a tax to be called compensatory. Both these approaches which are extreme in their own way are contrary to the law laid down by seven Judges in Automobile Transport. Bhagatram and Bihar Chamber of Commerce render the concept so loose and undefined as to denude it of its rational .....

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f both these extremes are to be avoided, we are left with the middle ground which the decision in Automobile Transport sought to adopt. However, the basic conception of compensatory taxes as propounded in Automobile Transport is vague and indefinite and has produced a maze of doctrinal uncertainty, if not chaos in constitutional litigation. As this batch of appeals indicates, the state legislatures have amended their entry tax legislation to incorporate specific statutory provisions indicating t .....

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e and enquiring into capital account investments made by the states. Such matters do not lie within the competence or ken of judicial review. More fundamentally, all tax revenues are utilised by the state for public purposes. All taxation being in aid of the creation of conditions of social order, a compensatory PART E element can never be disassociated from taxation. Equally insofar as fees are concerned, the payment which is required to be made is not always voluntary. The contribution exacted .....

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criminatory compensatory tax. Discriminatory taxes which single out goods originating in other states to hostile discrimination violate Article 304(a). If compensatory taxes as a class fall outside Part XIII, this would include even those compensatory taxes which are discriminatory. While holding that compensatory taxes fall outside Part XIII, the theory propounded by this Court did not account for the position that discriminatory compensatory taxes constitute an impediment to trade and commerce .....

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with interpretational and practical difficulties. A concept which is replete with such evident problems is best eschewed. F The content of freedom : goods, services, persons and capital 106 Article 301 has guaranteed the freedom of trade, commerce and intercourse (subject to the provisions of Part XIII). Article 19(1)(g) guarantees to every citizen the right to carry on any occupation trade or business. At a certain level, a distinction can be drawn between the two sets of freedoms. Article 19(1 .....

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e its own limitations. The freedom recognised by Article 301 is enforceable. Enforceability is at the behest of an individual. In the constitutional recognition of freedom dwells the constitutional right of the individual to enforce it and to secure remedies for enforcing wrongs. The real content of freedom lies in the right which inheres in it and in the protection of the individual to enforce the right. The freedoms guaranteed by Article 301 are enforceable at the instance of individuals who a .....

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ctive with regard to both sets of rights recognises that both reflect shades of the same universe of freedom. 107 Indian society and the economy have evolved between the advent of the Constitution and the present in a manner that would appear unrecognisable between 1950 and now. The entrepreneurial spirit of the nation has resulted in a diversification of the economy. A predominantly agricultural economy at the birth of the Constitution has increasingly found change in the last seven decades wit .....

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s by which they flourish. 108 Trade and commerce do not exist in a vacuum. The channels of trade and commerce require a stable social order for business transactions to be concluded, for contracts to be fulfilled and for commercial dealings to be enforced in law. The sanctity of contracts, secure conditions for trade and commerce and conditions which ensure an ease of doing business are supported by the state which has a vital PART F role in the preservation of the rule of law. The meaning of th .....

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constitutes the traditional domain of trade and commerce. Our Constitution in its recognition of the freedom of intercourse protects the movement of persons engaging in commercial intercourse. Trade and commerce has diversified into services which constitute a vital element in the economic life of the nation. The movement of capital is the foundation for trade and commerce. Capital provides the foundation for business. These four freedoms guaranteeing the free movement of goods, services, perso .....

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has evolved to incorporate federalism as one of its integral features. 110 The guarantee that trade, commerce and intercourse shall be free throughout the territory of India is subject to the provisions of Part XIII. The meaning of the expression throughout the territory of India is elucidated by Article 1 of the Constitution which stipulates that India, that is Bharat, shall be a Union of States . The Union which the Constitution postulates is defined in terms of a political union and an econom .....

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a balance between the guarantee of freedom on one hand and legislative control over trade and commerce on the other hand. While doing so, those articles define the powers of Parliament and the state legislatures, while subjecting them to restraints that are intended to preserve the power of regulating trade and commerce. 111 While the Constitution does in that sense subordinate the freedom under Article 301 to the provisions of Part XIII, it would not be correct to read the provisions of Part X .....

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No segment of the Constitution can be read in isolation. The scheme of the Constitution must hence be understood having regard to its history, text and context. 112 A Constitution Bench of this Court in Kihoto Hollohan v. Zachillhu(1992) Supp 2 SCC 651, emphasised the essential oneness of the Constitution when it held that: 26. In expounding the processes of the fundamental law, the Constitution must be treated as a logical whole. Westel Woodbury Willoughby in The Constitutional Law of the Unite .....

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hich all statutes are made….. (Id. at p.676) Words of the Constitution cannot be read in isolation and have to be read harmoniously to provide meaning and purpose (T.M.A Pai Foundation v. State of Karnataka(2002) 8 SCC 481). 113 The judgment of Justice Gajendragadkar, speaking for the majority in Atiabari, however construed the language of Article 301 to mean that the guarantee of freedom was subject only to the provisions of Part XIII. With respect, this does not constitute an appropriat .....

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creates a federal structure was debated upon in the Constituent Assembly. When the Draft Constitution was being discussed, T T Krishnamachari while supporting the view that the Constitution was to establish a federal structure observed thus : the first criterion is that the State must exercise compulsive power in the enforcement of a given political order, the second is that these powers must be regularly exercised over all the inhabitants of a given territory, and the third is the most importa .....

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The basic principle of federalism is that the legislative and executive authority is partitioned between the Centre and the States not by any law to be made by the Centre but by the Constitution itself. This is what the Constitution does. The States under our Constitution are in no way dependent upon the Centre for their legislative or executive authority. The Centre and the States are coequal in this matter. It is difficult to see how such a Constitution can be called centralism. It may be tha .....

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died in our Constitution. (Id. at p.22) 115 A Bench of six Judges of this Court in State of West Bengal v. Union of India(1964) 1 SCR 371 dealt with whether the property of a state in coal bearing areas is immune from acquisition by the Union. This Court held that in the structures of constitutional governance that are created by the Constitution full sovereignty does not reside in the states. Moreover, the Constitution contains a marked tilt in favour of the powers of the Union. Chief Justice B .....

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that context, this Court held that : 35. The normal corporate existence of States entitles them to enter into contracts and invests them with power to carry on trade or business and the States have the right to hold property. But having regard to certain basic features of the Constitution, the restrictions on the exercise of their powers executive and legislative and on the powers of taxation, and dependence for finances upon the Union Government, it would not be correct to maintain that absolut .....

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e is inevitable that the distribution of powers- both legislative and executive does not support the theory of full sovereignty in the States so as to render it immune from the exercise of legislative power of the Union Parliament particularly in relation to acquisition of property of the States. 116 The evolution of constitutional doctrine in the five decades that have elapsed since the judgment in State of West Bengal (supra) indicates a recognition that the Constitution does indeed create a f .....

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elds which are assigned to them, the states are intended to be integral elements of a federal structure. They are sovereign within their competence, subject to constitutional limitations. 117 This principle was set forth in the following terms in Special Reference 1 of 1964(1961) 1 SCR 413 under Article 143 of the Constitution: The supremacy of the Constitution is fundamental to the existence of a federal State in order to prevent either the legislature of the federal unit or those of the member .....

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utional position is authoritatively set forth in the judgment in S.R. Bommai v. Union of India(1994) 3 SCC 1. Justice K. Ramaswami construed federalism to be a basic feature, in the following observations : 247. Federalism envisaged in the Constitution of India is a basic feature in which the Union of India is permanent within the territorial limits set in Article 1 of the Constitution and is indestructible……Neither the relative importance of the legislative entries in Schedule VII .....

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h are coordinating institutions and ought to exercise their respective powers with adjustment, understanding and accommodation to render socio-economic and political justice to the people, to preserve and elongate the constitutional goals including secularism. (Id. at p. 205) Justice B.P. Jeevan Reddy accepted the same doctrinal position in the following terms : 276. The fact that under the scheme of our Constitution, greater power is conferred upon the Centre vis-a-vis the States does not mean .....

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though there are provisions under which the Centre has overriding powers over the states, our Constitution does create a federal structure. The states are sovereign in the fields which are left to them. 119 In ITC v. Agricultural Produce Market Committee(2002) 9 SCC 232, this Court emphasised that in interpreting the text of the Constitution the Court should ensure, where the language permits that the powers of the state legislatures are not diluted and that the principles of federalism are pre .....

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ed to them. Yet it is equally a matter of constitutional doctrine that here a particular provision (such as the proviso to Article 304(b) imposes a specific requirement (assent of the President before a Bill is introduced in the state legislature) which subjects the legislative power of the states to constitutional limitations, it would not be open to the Court to ignore the plain meaning and effect of such a provision. The text of the Constitution cannot be subverted on the basis of an abstract .....

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1 Article 245 of the Constitution provides for the extent of laws made by Parliament and the legislatures of the states. Clause 1 of Article 245 enables Parliament subject to the provisions of this Constitution to make laws for the whole or any part of the territory of India and for the legislature of a state to make laws for the whole or any part of the state. Implicit in Article 245, which defines the territorial extent of laws enacted by Parliament and the state legislatures, is the power to .....

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ake laws with respect to matters enumerated in List I of the Seventh Schedule. Subject to the law making powers of Parliament in List I, the legislature of a state has exclusive power to enact law for the state with respect to any of the matters enumerated in List II. Parliament and the state legislatures have concurrent powers to enact legislation in respect of matters enumerated in List III. Article 245 is the source of legislative power. Article 246 distributes legislative powers between Parl .....

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written constitution. The power to tax is subsumed in legislative power. Like all legislative power, fiscal legislation is subject to the mandate of the written constitution. This is the plain consequence of the opening words of Article 245(1) under which the conferment of legislative powers is made subject to the provisions of the Constitution. 123 The entries in the legislative lists of the Seventh Schedule are not sources of legislative power but only define the subjects or heads of legislat .....

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s of the Constitution. The language of Article 245 which subjects the conferment of legislative power to constitutional provisions is a recognition of the doctrinal principle that all constitutional power vesting in the organs of the state is subject to constitutional limitations. The Constitution which entrusts power conditions the entrustment to the observance of constitutional safeguards and limitations. All legislative power is subject to constitutional limitations. 124 In State of Kerala v. .....

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. The verb made once again finds place in the Head Note to Article 246. This article deals with distribution of legislative powers as between the Union and the State Legislatures, with reference to the different Lists in the Seventh Schedule. 37. Article 246, thus, provides for distribution, as between Union and the States, of the legislative powers which are conferred by Article 245. Article 245 begins with the expression subject to the provisions of this Constitution . Therefore, Article 246 m .....

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. The constitutional limitation emanating from Part XIII arises from the recognition which it contains of the guarantee of free trade, commerce and intercourse. Hence the first premise upon which legislative powers are conferred upon and distributed between the Centre and the states is that though the enactment of law is a manifestation of sovereignty, law making authority under the Indian Constitution is subject to constitutional restraints. Absolute power does not dwell in any constitutional a .....

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e dealt with under separate heads: in Entry 96 of List I, Entry 66 of List II and Entry 47 of List III. H.2 Sovereignty and constitutional limitations 127 The power to tax has been considered to be an essential attribute of government and a sovereign power vesting in the state. Thomas Cooley in his Treatise on the Constitutional Limitations which rest upon the Legislative power of the States of the American Union(Indian Reprint 2005) provides a jurisprudential foundation to the taxing power in t .....

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itrary government without regular and steady taxation could be anything but an oppressive and vexatious despotism, since the only alternative to taxation would be a forced extortion for the needs of government from such persons or objects as the men in power might select as victims. In the language of Chief Justice Marshall : The power of taxing the people and their property is essential to the very existence of government, and may be legitimately exercised on the objects to which it is applicab .....

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ribe no limits to the exercise of this right, resting confidently on the interest of the legislator, and on the influence of the constituents over their representative, to guard them against its abuse. (Id. at p.2-3) Under the Indian Constitution the conferment of legislative power to impose, collect and enforce the realization of taxes is specifically spelt out from and enumerated under constitutional provisions. Taxing entries in Lists I and II are specifically enumerated and their ambit defin .....

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y is an essential attribute of the Government and Government may legitimately exercise the said power by reference to the objects to which it is applicable to the utmost extent to which Government thinks it expedient to do so. The objects to be taxed so long as they happen to be within the legislative competence of the legislature can be taxed by the legislature according to the exigencies of its needs, because there can be no doubt that the State is entitled to raise revenue by taxation. In Raj .....

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e to carry it. In Amrit Banaspati Co. Ltd. v. State of Punjab(1992) 2 SCC 411, this Court held that : 10….taxation is a sovereign power exercised by the State to realise revenue to enable it to discharge its obligations. (Id. at page 424). In Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. (2000) 5 SCC 694, this Court held thus: 8…..the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sov .....

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l limitations. This follows the constitutional principle that all legislative powers conferred upon the Union Parliament and the state legislatures are an attribute of sovereignty. Hence the limitations on the exercise of those powers are such as have been crafted by the Constitution. These limitations which impose a fetter on the exercise of legislative powers may arise as a result of the guarantees of freedom in Part III; restraints arising from legislative competence and constitutional limita .....

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ation must however be traceable to the Constitution. In Firm Bansidhar Premsukhdas v. State of Rajasthan(1966) Supp SCR 81, this Court adverted to the decision in Thakur Jagannath Baksh Singh v. United Provinces(1946) FCR 111, and held that the limitation on the plenary powers of the legislature to enact law must be traced to an express provision in the Constitution : …It is well-established that Parliament or the State Legislatures are competent to enact a law altering the terms and cond .....

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he legislature is endowed with for legislating on the topics enumerated in the relevant lists. This view is borne out by the decision of the Judicial Committee in Thakur Jagannath Baksh Singh v. United Provinces. (Id. at p. 19) 130 The legislative power of the states to impose taxes is subject, in general, to the same constitutional parameters which govern the exercise of all legislative power. The containment of legislative power follows from three constitutional precepts. First, legislation is .....

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ined with reference to the competence to enact law governing a particular subject matter. Parliamentary legislative power has a residuary or catch all area: subjects not enunciated elsewhere fall in its ambit. Second, the enumeration of fundamental rights by Part III of the Constitution operates as a restraint on the sovereign power vesting in the legislatures to enact law. Article 13 of the Constitution stipulates that the state shall not enact law which violates the freedoms guaranteed by the .....

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signed to it. 131 In the field of taxation, the containment of legislative powers vesting in the states may take place through provisions which are in the nature of : (i) abstraction; (ii) eclipse; and (iii) limitations or restrictions. These categories, it must be noted are convenient reference points for understanding the source of constitutional restrictions. An illustration of an abstraction of legislative power is contained in Entry 54 of the State List which provides for taxes on the sale .....

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hase of goods other than newspapers. Arguably, this could extend to the exercise of taxing powers on inter-state trade on the strength of the explanation to Article 286. For the purposes of this judgment, it is not necessary to burden the record by referring to the judgment in The Bengal Immunity Company v The State of Bihar(1953) 1 BLJR 48. As a result of the sixth amendment, the ambit of Entry 54 is now expressly subject to the power of the Union under Entry 92(A) of List I. 132 Article 286 st .....

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e of its powers under Article 269(3) enacted the Central Sales Tax Act 1956. Sections 14 and 15 of that Act provide a list of goods of special importance, the manner of imposing taxes and the restrictions on the power of imposing taxes. 133 The second source of containment on the legislative powers of the states in the area of taxation is Article 253 of the Constitution under which Parliament, notwithstanding anything contained in the earlier provisions of Chapter 1 of Part XI is entrusted with .....

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ance of Article 253. 134 The third source of constitutional containment on the legislative power of a state is in the form of limitations of which Clause 3 of Article 286 provides an illustration. Under Clause 3, Parliament provides the restrictions and conditions in regard to the system of levy, rates and other incidents of tax upon which a law enacted by a state providing for a tax of the nature specified in sub-clause (a) and (b) is subject. Sub-clause (a) deals with a tax on the sale or purc .....

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ents of tax. 135 The constitutional containment of the legislative powers of the states also originates in the provisions of Part XIII which enable Parliament and the state legislatures to impose restrictions on inter-state trade or commerce subject to defining parameters. Whether, and if so, the extent to which taxes are within the purview of Part XIII is being dealt with separately below. H.3 Part XIII and taxation 136 The basic submission on the part of the states is that freedom under Articl .....

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strong reasons for not construing the freedom under Article 301 as freedom from taxation. 137 The next limb of the submission is that under Article 265, taxes can only be imposed under a law enacted by the competent legislature and the executive has no role to play in the levy and collection of tax, except under delegated legislative power. Under various Articles of Part XII [for instance Articles 276(2), 286(1) and 288(2)] the Constitution provides for limitations on the taxing powers of the st .....

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been expressly provided under Articles 285, 287, 288 and 289. Consequently, it has been urged that exemption from the taxing power cannot be a matter of inference or PART F implication and must be provided expressly and unambiguously. Moreover, under Article 289(2), a trade or business carried on by or on behalf of the government of a state can be subjected to tax to such extent as Parliament may by law provide. Based on this and the judgment of a nine Judge Bench of this Court in NDMC v. State .....

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C Shah in Atiabari that all taxation falls within the ambit and purview of Part XIII. This submission postulates that every tax constitutes a restraint on the freedom of trade, commerce and intercourse. The opposing end of the spectrum is that taxes per se can never be a restraint on free trade since it is through the raising of revenues that a state provides ordered conditions for the safe, secure and efficient means for transacting trade and commerce. In this view, only a discriminatory tax wo .....

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and immediate effect restrict trade would be subject to the rigours of Article 304(b) of the Constitution. H.3.1 All taxes are not impediments 139 While evaluating the merits of the rival viewpoints, it cannot be gainsaid that an orderly society is a condition precedent for an environment in which trade, commerce and intercourse can flourish. Trade and commerce survive and flourish on the foundation of the rule of law. The sanctity of contracts must be recognized, protected and enforced through .....

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th tangible and intangible. Tax revenues form an essential part of the requirements necessary for states to govern. Taxes are required by Article 265 to be imposed by a law enacted by Parliament or the state legislatures. Without the power to raise revenues, the ability of the state to create conditions requisite for trade and commerce to exist would be denuded. Hence, as a matter of first principle it cannot be postulated that taxation in whatever form is a burden on trade, commerce and interco .....

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guaranteed by Part III of the Constitution and the taxing power, it has been the consistent position of this Court that fundamental rights [particularly, the freedom of trade and business under Article 19(1)(g)] do not confer an immunity from taxation. In Indian Express Newspapers v. Union of India(1985) 1 SCC 641, this Court held that the rights guaranteed by Article 19(1)(a) and Article 19(1)(g) are subject to clauses (2) and (6) and the newspaper industry has not been granted an exemption fr .....

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ansported by roads, railways and air services. Arrangements for security of their property have to be made. The Government has to provide many other services to them. All these result in a big drain on the financial resources of the State as many of these services are heavily subsidized. Naturally such big newspaper organizations have to contribute their due share to the public exchequer. They have to bear the common fiscal burden like all others. (Id. at p. 671) This Court held that in the case .....

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of the Constitution. 141 In Government of Tamil Nadu v. Ahobila Matam(1987) 1 SCC 38, this Court held that the imposition of an assessment on lands held by a religious denominational institution would not attract the right guaranteed by Article 26 of the Constitution. In All Bihar Christian Schools Association v. State of Bihar(1988) 1 SCC 266, this Court held that an unaided minority institution is not immune from the operation of the general laws of the land and cannot claim an immunity, inter .....

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(See also in this context : Express Hotels (P) Ltd. v. State of Gujarat(1989) 3 SCC 677, and Pankaj Jain Agencies v. Union of India(1994) 5 SCC 198). 142 In Vrajlal Manilal & Co. v. State of M.P(1986) Supp. 1 SCC 201, this Court held that an increase in the rate of tax on a particular commodity cannot per se be said to impede free trade and commerce in that commodity. The Court reaffirmed the principle that in order to be a restriction or impediment a legislative measure must directly or im .....

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es specifically contemplates restrictions on or with regard to trade and commerce. The marginal note to Article 302 refers to the power of Parliament to impose restrictions on trade, commerce and intercourse. Under Article 302 Parliament is empowered by law to impose restrictions in the public interest on the freedom of trade, commerce and intercourse between one state and another or within any part of the territory of the India. Consequently, Parliamentary power under Article 302 to impose rest .....

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ommerce in any of the lists in the Seventh Schedule. Article 303 has a non-obstante provision which overrides Article 302. The non-obstante clause in Article 303 is evidently inapposite in relation to the legislature of a state because Article 302 does not apply to a state legislature in the first instance. Evidently the non-obstante provision can have meaning only in relation to Parliament because it has the effect of stipulating that the power of Parliament to impose restrictions in the public .....

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venth Schedule. These words were held by Justice Subba Rao in PART F Automobile Transport to have the widest import. The entries which specifically refer to trade and commerce in the Seventh Schedule are entries 41 and 42 of the Union List, entries 26 and 27 of the State List and Entry 33 of the Concurrent list. Entries 41 and 42 of the Union List are as follows : 41. Trade and Commerce with foreign countries; import and export across customs frontiers; definition of customs frontiers…... .....

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by law to be expedient in the public interest, and imported goods of the same kind as such products; (b) foodstuffs, including edible oilseeds and oils; (c) cattle fodder, including oilcakes and other concentrates; (d) raw cotton, whether ginned or unginned, and cotton seed; and (e) raw jute. 145 In Automobile Transport it was urged that the expression by virtue of the entries relating to trade and commerce in any of the lists in the Seventh Schedule are of wider import than the words by virtue .....

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xception also sustains it. There cannot be any distinction on principles, from the standpoint of the mischief sought to be averted, between a law made by virtue of an entry ex-facie referring to trade and commerce and that made by virtue of any entry affecting trade and commerce. For instance, a law may be made by Parliament under entries relating to railways, highways, shipping etc. These entries do not expressly refer to trade and commerce, though they may directly affect trade and commerce. I .....

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lkar adopted a similar interpretation of the language of Article 303. The learned Judge held that in the Seventh Schedule there are many other entries apart from entries 41 and 42 of List 1, entries 26 and 27 of List II and Entry 33 of list III regulating inter-state trade. In that context, he observed that : 103….By the words of Article 303 by virtue of any entry relating to trade and commerce is meant not the five Entries last named by us but others also, e.g., Entry 8 of List II, Entri .....

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on 297 of the Government of India Act 1935. In the section, the inhibition was only against a Provincial Legislature or Government. Here the inhibition embraces not only these but is also against Parliament and the Central executive. The executive limb has been made powerless, because the source of restrictions must be law and if a law cannot be made, executive action per se would be ineffective without more. Further, Section 297 was concerned only with goods and their taxation differentially. T .....

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e, it is urged, the words of Article 303 cannot be interpreted to include taxing entries. This submission cannot be accepted as a matter of first principle. What the judgment in MPV Sundararamier lays down is that in the lists of the Seventh Schedule, the subjects of taxation are dealt with under distinct heads. Hence, the subject of a tax cannot be traced to a non-taxing entry. It was held that : 51. In List I, Entries 1 to 81 mention the several matters over which Parliament has authority to l .....

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r to impose a tax on sales in the course of such trade and commerce. 148 This principle would have no bearing on the interpretation of the words in Article 303 which restrain Parliament and the state legislatures from granting preferences to one state over another and from discriminating between one state and another by virtue of any entry relating to trade and commerce in any of the lists in the Seventh Schedule. These words namely entry relating to trade and commerce are of the widest import. .....

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mission that the scope of Article 303 is restricted only to the four entries noted above cannot commend itself for acceptance of the following reasons : (i) the key expressions in Article 303 are shall have the power to make any law making any discrimination between one state and another and by virtue of any entry relating to trade and commerce ; (ii) the expression power to make any law would on its plain and literal meaning include tax laws. There is no justification to read this as any law ot .....

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on that entries relating to trade and commerce in the legislative lists, within the meaning of Article 303 would not include entries with respect to the levy of a tax on trade and commerce. It was also urged that the words in Article 303 must be confined to entries 41 and 42 of List I, entries 26 and 27 of List II and entry 33 of List III. This issue was however kept open by the Constitution Bench, as is evident from the following extracts : 12. It was contended on behalf of the State that the p .....

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making of any discrimination between on State and another by exercise of taxing power. Reliance in support of that contention was placed upon the judgment in Sundararamier and Company v. State of Andhra Pradesh MANU/SC/0151/1958: [1958] 1 SCR 1422 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 matt .....

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questions argued before us. 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, is academic in the present case. Nor do we think it necessary to decide whether for the purpose of Article 303 entries relating to tax on sale or purchase of goods i.e. entry 92A of List I, and entry 54 .....

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tion Bench in State of Tamil Nadu v. Sitolakshmi Mills(1974) 4 SCC 408, the assesse had claimed before the Madras High Court that it was not liable to be taxed at the higher rate under Section 8(2)(b) of the Central Sales Tax Act, 1956 on the turnover of sales in the course of inter-state trade to government or to unregistered dealers even though they had not obtained the C and D forms because Section 2(B) violates Articles 301 and 303(1) of the Constitution. The High Court accepted those claims .....

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rce, but the tax imposed in the case in question was saved by the other provisions of Part XIII. The Court then said that the exercise of the power to tax would normally be presumed to be in the public interest and as Parliament is competent under Article 302 to impose restrictions on the freedom of trade, commerce and intercourse between one State and another or within any part of the territory of India as may be required in the public interest, the tax was saved. … 9. Bachawat, J., in h .....

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f Article 301, it is certainly a law made by Parliament in the public interest and is saved by Article 302…... 10. As already stated, Section 8(2)(b) deals with sale of goods other than declared goods and it is confined to inter-State sale of goods to persons other than registered dealers or governments. The rate of tax prescribed is 10 per cent or the rate of tax imposed on sale or purchase of goods inside the appropriate State, whichever is higher. The report of the Taxation Inquiry Com .....

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of Article 286 have done. If this is to be prevented, it is necessary that transactions of this type should be taxable at the same rates which exporting States impose on similar transactions within their own territories. The unregistered dealers and consumers in the importing State will then find themselves be unable to secure any advantage over the consumers of locally purchased articles, nor of course will they, under this system, be able to escape the taxation altogether, as many of them do .....

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this that Parliament provided, as a matter of legislative policy that the rate of tax shall be 10 per cent or the rate applicable to intra-State sales whichever is higher….. 11. If prevention of evasion of tax is a measure in the public interest, there can be no doubt that Parliament is competent to make a provision for that purpose under Article 302, even if the provision would impose restrictions on the inter-State trade or commerce. (Id. at 413-414) The statutory provision was consequ .....

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sion was to be accepted, the necessary consequence would be that only a discriminatory tax of the nature contemplated by Article 304(a) would offend the guarantee of freedom under Article 301. A non-discriminatory tax would lie outside the purview of Part XIII. Once a tax meets the parameters of Article 304(a), it would not breach the freedom of trade and commerce. Clauses a and b of Article 304 would - in the line of argument have to be treated in a disjunctive manner and a tax which is consist .....

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pretation, treated as being a part of the Constitution and as providing some guidance as to the meaning of a provision : Marginal notes appended to Articles of the Constitution have been held to constitute part of the Constitution as passed by the Constituent Assembly and therefore they have been made use of in construing the Articles, e.g. Article 286, as furnishing prima facie , some clue as to the meaning and purpose of the Article . While Article 301 stipulates that trade, commerce and inter .....

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Indian Corporation (P) Ltd. v Board of Revenue (1964) 4 SCR 280. 154 In State of Bombay v. The United Motors (India) Ltd (1953) 4 SCR 1069, Chief Justice Patanjali Sastri, speaking for a Constitution Bench spoke of the subordination of the freedom under Article 301 to the powers of the states to levy non-discriminatory taxes. The learned Judge held : 11….It will be seen that the principle of freedom of inter-State trade and commerce declared in Article 301 is expressly subordinated to the .....

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to fetter inter-State trade and commerce. In other words, the commercial unity of India is made to give way before the State-power of imposing any non-discriminatory tax on goods imported from sister Sates. (Id. at p.1081) 155 Article 304 begins with a non-obstante provision which takes effect notwithstanding what is contained in Articles 301 or 303. A non-obstante provision of this nature has a distinctive meaning. In Chandavarkar Sita Ratna Rao v. Ashalata S. Guram150, this Court held that : .....

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te of the other articles of the Constitution or that the other articles shall not to be an impediment to the operation of that particular article. 156 The use of the non-obstante clause in Article 304 in its application to Article 301 has been debated. That is because while Article 301 makes the guarantee of freedom of trade and commerce subject to the other provisions of Part XIII, Article 304 commences with a non-obstante provision which operates notwithstanding what is contained in Article 30 .....

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contained in Article 303, the state legislature is empowered to do something of the nature that falls within the ambit of the provision. The non-obstante provision of Article 304 governs both Clauses (a) and (b) that follow. By virtue of Clause (a), the legislature of a State can, despite the provisions of Article 301, impose a non-discriminatory tax. The power to impose a tax, it must be noted, is not conferred by Clause (a) of Article 304 but is a power which is traceable to the legislative po .....

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imported from other States or Union territories must be a tax to which similar goods manufactured or produced in that state are subject. Moreover, the tax shall not discriminate between goods that are imported and goods so manufactured and produced. H.3.4 Conjunctive or disjunctive : may ; and 157 Clauses (a) and (b) of Article 304 are separated by the use of the expression and . The issue is whether the expression and is to be construed as conjunctive or disjunctive. Clause (b) contemplates rea .....

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under Article 255 which provides as follows : Article 255 : No Act of Parliament or of the Legislature of a State and no provision in any such Act, shall be invalid by reason only that some recommendation or previous sanction required by this Constitution was not given, if assent to that Act was given - (a) where the recommendation required was that of the Governor, either by the Governor or by the President; (b) where the recommendation or previous sanction required was that of the President, .....

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sion PART F may in the prefatory part of Article 304 has to be read together with the expression and which separates clauses (a) and (b). The use of the expression may is indicative of the intent that the legislature of a state is not bound to levy an impost on goods imported from other states (though if it does so, the tax has to be non-discriminatory). Similarly, the state legislature has an enabling power to impose restrictions under clause (b). The legislature may do so. It has the discretio .....

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nterpretation when the expressions may and and are used together, have been succinctly summarised in Statutory Interpretation by Ruth Sullivan. The statement of legal position is thus : 2) And and Or a) Joint or Joint and Several and Both and and or are inherently ambiguous. And is always conjunctive in the sense that it always signals the cumulation of the possibilities listed before and after the and . However, and is ambiguous in that it may be joint or joint and several. In the case of a joi .....

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the purposes of this Act, the Governor in Council may make regulations respecting (a) the conditions on which licences may be issued; (b) the information and fees that firearm vendors may be required to furnish; and (c) the annual fees that firearm owners may be charged……. In this provision the Governor in Council is empowered to make regulations on any one or more of the listed subjects. However, notice what happens if may is replaced by shall . If the Governor in Council is obli .....

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one of them. These being enabling provisions, the legislature may not take recourse to either. However, when it imposes a tax and/or a restriction, the state legislature has to abide by the conditions of clauses (a) and (b) respectively. H.3.5 Article 304(a) not the universe of taxation PART F 161 The submission of the states is that Article 304(a) is the only provision which deals expressly with a tax measure and that clause (b) can never be construed to cover the imposition of a tax. This sub .....

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xt of Article 19, judgments of this Court which have held that the guarantee under Article 19(1)(g) does not confer an immunity from taxation. 162 A discriminatory tax is prohibited by Article 304(a). There is intrinsic material in the constitutional text to indicate that Article 304(a) does not exhaust the universe of taxation for the purposes of Part XIII. First, Article 304(a) provides that the legislature of a state may by law impose on goods imported from other states or union territories a .....

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the territory of India. If the freedom of trade and PART F commerce is restricted by a discriminatory tax - as Article 304(a) postulates is the case - the imposition of a discriminatory tax on internal movement within a state must by the same logic breach the freedom guaranteed by Article 301. Since Article 304(a) covers only a tax on goods imported from other states, a discriminatory tax on goods which do not traverse state boundaries would not fall within the ambit of Article 304(a). Yet it wo .....

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re contemplated by Article 304(a) which fall within the ambit of the Part. Article 304(a) only covers a tax on goods (goods imported from other states as seen above). A tax imposed by the state legislature otherwise than on goods, does not fall within the ambit of Article 304(a). The taxing entries of List II of the Seventh Schedule include various taxes that fall within the legislative competence of the state legislatures other than a tax on goods. Among the taxing entries of List II (entries 4 .....

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ectricity); Entry 54 (taxes on the sale or purchase of goods other than newspapers subject to Entry 92A of List I); Entry 56 (taxes on goods carried by road or on inland waterways); Entry 57 (taxes on vehicles, whether mechanically propelled or not, suitable for use on roads subject to Entry 35 of List III) and Entry 58 (taxes on boats). Entries which deal with taxes other than on goods are Entry 56 (taxes inter alia on passengers carried by road or on inland waterways); Entry 59 (tolls); Entry .....

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ting and gambling will not be governed by Article 304(a). Similarly, Article 304(a) will not apply to a tax on passengers carried on roads or inland waterways under Entry 56. Since the ambit of Article 304(a) is a non-discriminatory tax on goods imported from other states, it is evident that this provision is not exhaustive even of those discriminatory taxes which will offend Article 301. There are taxes which fall within the legislative competence of the states, other than on goods, which are o .....

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clude a legislative measure by way of a fiscal imposition, it cannot evidently be excluded from the ambit of the phrase restrictions in Article 304. 165 Fourth, this conclusion is buttressed by the non-obstante provision contained in Article 304. The plain meaning of the non-obstante provision is that state legislatures may enact legislation in exercise of their law making authority under Articles 245 and 246, of the nature contemplated by clauses (a) and (b) of Article 304, despite the fact tha .....

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301, it is permissible in view of Article 304(a). Article 304(a) lifts the embargo. 166 The use of the clause of subjection in Article 301 and the non-obstante provision in Article 304 have been criticised as a case of inartistic draftsmanship. A clause which makes a constitutional provision or, for that matter, a statutory provision subject to another makes the provision in which that clause is contained subordinate to the provision to which it is subjected. On the other hand, a non-obstante p .....

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04(a). 167 Having noticed this criticism, it is necessary to harmonise the text of Article 301 with Article 304. The guarantee of freedom under Article 301 is subject to Part XIII. Article 304 enables a state legislature in the exercise of its legislative power (under Articles 245 and 246) to enact a law despite the fact that it may otherwise fall within the ambit of Articles 301 or 303. Article 303 contains the mandate that neither Parliament nor the legislature of the state can grant preferenc .....

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s or to discriminate between one state and another. However, this embargo is lifted by clause (2) of Article 303 when Parliament is dealing with a situation of scarcity of goods in any part of the territory of India. In relation to the legislature of the state, Article 303(1) imposes the same mandate against the grant of preferences between states or the making of any discrimination. However, clause (2) of Article 303 does not apply to the state legislatures. Clause (1) of Article 303 is a restr .....

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mbodies a similar principle inter se between the states so as to ensure a uniformity of treatment between states when Parliament or the state legislatures enact a law in exercise of their law making power. A state legislature which enacts a law is required to confer a parity of treatment to other states and is prevented from granting preferences to one state over another or from making discrimination between one state and another, by the operation of Article 303(1). Article 304(a), however, allo .....

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(Seventh Amendment) Act, 1956) dealt with the power of certain states in Part B of the First Schedule to impose restrictions on trade and commerce. Article 306 before its deletion provided as follows : 306. Notwithstanding anything in the foregoing provisions of this Part or in any other provisions of this Constitution, any State specified in Part B of the First Schedule which before the commencement of this Constitution was levying any tax or duty on the import of goods into the State from othe .....

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f, after consideration of the report of the Finance Commission constituted under Article 280, he thinks it necessary to do so. The above provision clearly envisages that taxes and duties which were being levied on imports into and exports from Part B states were restrictions. Hence, a specific provision was incorporated, to provide for their continuance for a stipulated period. That such taxes and duties would otherwise have infringed Article 301 is evident from the non-obstante provision permit .....

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on. Article 304(a) has three defining characteristics. The first is that the tax is a tax on goods. The second is that it is a tax on goods imported from other states. The third is the non-discrimination norm in relation to similar goods produced or manufactured in the state. A tax which fails to meet the yardstick embodied in Article 304(a) will violate Article 301. But Article 304(a) cannot be a basis for holding that every fiscal measure (apart from a discriminatory tax) lies outside the purv .....

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atory tax may also become an impediment on the freedom of trade and commerce where the tax is so high as to render it confiscatory. Hence, a discriminatory fiscal imposition of the nature which offends Article 304(a) is illustrative of but not exhaustive of fiscal impediments on the freedom of trade and commerce. 171 The Constituent Assembly, while adopting Article 304 incorporated a marginal note which describes the ambit of the provision as : restrictions on trade, commerce and intercourse amo .....

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the meaning intended. 172 For these reasons, it would be untenable to postulate as a general principle that it is only a discriminatory tax falling within the ambit of Article 304(a) that is subject to Part XIII of the Constitution. I Tax legislation - Judicial review and Part XIII I.1 Taxation and Part XII 173 In early decisions of this Court, the issue as to whether the legislative power to tax was subject to constitutional control independent of Article 265 was analysed. The initial view was .....

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meaning of Article 31(1), then there was no point in making a separate provision again as has been made in Article 265. It, therefore, follows that clause (1) of Article 31 must be regarded as concerned with deprivation of property otherwise than by the imposition or collection of tax, for otherwise Article 265 becomes wholly redundant. In the United States of America, the power of taxation is regarded as distinct from the exercise of police power or eminent domain. Our Constitution evidently h .....

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eld that Article 265 imposes a limitation by which a tax cannot be levied or collected by a mere executive fiat. Under Article 265, a tax can be imposed only with the authority of law which, it was held, must mean a valid law. For a law to be valid, it must be enacted by a legislature which possesses legislative competence and the tax must accord with Article 13. Hence, the Constitution Bench ruled that if the enactment imposing a tax violates Article 14, it would have to be struck down since th .....

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the legislative competence of the legislature enacting it, it could be a law under which a person could be deprived of property under Article 31 or regarding which the Supreme Court could not be approached for relief under Article 32. The Constitution Bench held that it was also not possible to accept a more limited proposition that once a tax law is covered by an entry in the legislative lists and does not contravene a direct prohibition such as Article 276 (2) or Article 286, such a law is imm .....

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hts guaranteed in Part III could not be invoked in respect of a taxing statute, a consensus had emerged in subsequent decisions of this Court that a law imposing a tax could be challenged not only for want of legislative competence but also on the ground of its violating the freedoms contained in Part III. 176 A law which imposes a tax is not immune from constitutional challenge merely because taxation is a manifestation of the sovereign power of the state or because there is a presumption that .....

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the power to determine the objects on which a tax should be levied and to classify persons or properties for the purposes of the levy. If the classification is rational, a taxing statute cannot be challenged merely because different rates of taxation are prescribed for different categories of persons or objects. The validity of a taxing statute cannot be challenged merely on the ground that the rate of taxation is excessive. However, if the statute is a colourable piece of legislation or a fraud .....

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itutional challenges based on a lack of legislative competence, a breach of fundamental rights or a violation of a constitutional limitation or provision. But the standard of judicial review in relation to fiscal statutes recognizes that the legislature must possess a wide latitude to classify persons or objects for the purposes of the levy. 179 In Federation of Hotel and Restaurant Association of India v. Union of India (1989) 3 SCC 634, the Constitution Bench applied the test of palpable arbit .....

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examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so .....

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ent of Chief Justice Sinha in Atiabari broadly enunciated four reasons for excluding taxes from Part XIII of the Constitution : i) imposition of taxes is a manifestation of the sovereign power of the state which possess the inherent power to impose taxes to raise revenues; ii) taxation is specifically governed by Part XII which is a self-contained code and the validity of a taxing statute cannot be assessed with reference to a provision outside Part XII; iii) taxes provide for resources to impro .....

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xercise of sovereignty is subject to the constitutional limitations of a written constitution. Enactment of law by a law making body which possess a legislative competence over the subject matter upon which it legislates is one of the constitutional limitations. The Constitution distributes legislative powers between the Union and States. While doing so it carves out fields of legislation which are reserved to the Union and the States respectively. Legislative powers in relation to taxation are .....

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omprehend within that conceptualisation, the limitations which the Constitution imposes upon all legislative power of which the taxing power is a part. 181 The second ground which weighed in the decision of Chief Justice Sinha in Atiabari has been considered earlier. Article 245 mandates that all laws are subject to the provisions of the Constitution. From that basic premise, it must follow that the limitations on the taxing power are not only those which are referable to Part XII. A subject suc .....

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e. This, however, does not confer an immunity from a challenge that a law which is enacted in pursuance of the taxing power breaches specific provisions of the Constitution. 183 While the concept of public purpose is implicit in tax law, it is also implicit in all legislation which is presumed to be in the public interest. Yet the presumption of constitutionality or of legislation being in the public interest does not confer a protection or immunity against a specific challenge on the ground tha .....

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within a state are construed to include a legislative measure imposing a tax, this would constitute a substantial encroachment on the power of the states to impose taxes. The requirement of obtaining prior Presidential sanction to a bill which is to be introduced or moved in the legislature of a state it is urged will, it is urged dilute the sovereign power of the states to impose taxes in the fields reserved for them and make them subservient to the Union. 185 While evaluating this submission, .....

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ed in the case of Parliament by clause 2. In the case of a state legislature, Article 303(1) is attracted where it grants preferences or makes a discrimination between one state and another. Article 304 in its non-obstante clause refers inter alia to Article 303. Consequently, where a state legislature seeks to enact legislation granting a preference to one state over another or to make a discrimination of the nature referred to in Article 303(1), it must comply with the requirements of a Presid .....

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e for decision has undoubtedly shaped and refined the jurisprudence on the subject. Successive Benches have fleshed out the content of its language. While understanding Article 304 (a), this Court has to analyse the meaning of the expressions (i) goods imported from other states ; (ii) any tax to which similar PART F goods manufactured or produced in that state are subject ; and (iii) so, however, as not to discriminate between goods so imported and goods so manufactured . While defining the mea .....

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urage the growth of its own industries by the grant of incentives, rebates and exemptions through fiscal legislation? J.1 Precedent : 1963 to 1980 188 An early decision arose in State of Madhya Pradesh v. Abdeali AIR (1963) SC 1237. The state government issued a notification under the Madhya Bharat Sales Tax Act, 1950, exempting the sale of footwear from the payment of sales tax subject to three conditions : (i) The foot-wear had to be hand-made and not manufactured on a power machine; (ii) The .....

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g hand-made shoes of a small value who may be unable to compete with large manufacturers was valid. Significantly, in relation to Article 304(a) it was held that the exemption notification made no discrimination between out-of state manufacturers and in-state manufacturers since its conditions applied equally to both. A manufacturer situated outside the state could also claim the benefit of the exemption upon fulfilling the conditions of the exemption. Hence Article 304(a) was held not to have b .....

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on hides and skins tanned and sold within the state. Moreover, hides or skins imported from outside the state after purchase in a raw condition and then tanned inside the state were subject to higher taxes than those purchased in a raw condition within the state and tanned there. The Constitution Bench rejected the submission that Article 160 (1963) Suppl.(2) SCR 435 PART F 304(a) is attracted only when the goods enter the state while crossing its border. In other words, the imposition provided .....

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price only. If the dealer purchases raw hides or skins from outside the State and tans them within the State, he will be liable to pay sales tax on the sale price of the tanned hides or skins. He too will have to pay more for tax even though the hides and skins are tanned within the State, merely on account of his having imported the hides and skins from outside and having not therefore paid any tax under sub-rule (1). Significantly, the Constitution Bench also dealt with the submission of the s .....

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bdul Shakoor v. State of Madras AIR (1964) SC 1729, this Court held that Section 2(1) of the Madras General Sales Tax (Special Provisions) Act, 1953 discriminated against imported hides and skins sold upto 1 August 1957. The rate of tax on the sale of tanned hides and skins was: 10…..2 per cent on the purchase price of those hides and skins in the untanned condition, while the rate of tax on the sale of raw hides and skins in the State during 1955 to 1957 is 3 pies per rupee. Referring to .....

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ased in the untanned condition, but on account of the fact that the rate of tax on the sale of tanned hides and skins is higher than that on the sale of untanned hides and skins. The rate of tax on the sale of tanned hides and skins is 2% on the purchase price of those hides and skins in the untanned condition while the rate of tax on the sale of raw hides and skins in the State during 1955 is 3 pies per rupee. The difference in tax works out to 7/1600th of a rupee, i.e. a little less than, &fra .....

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accepted by the High Court on the ground that the imposition of varying rates of tax in different states on similar inter-state transactions constituted an impediment, thereby offending Article 301. While tracing the history of the legislation Justice J.C. Shah speaking on behalf of three judges held that the enactment encumbered the movement of trade and commerce for the following reasons : 10. Tax under the Central Sales Tax Act on inter-State sales, it must be noticed, is in its essence a ta .....

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ained by the state did not either grant a preference to one state or another or make any discrimination merely because varying rates of tax prevailed in different states. This Court rejected the view which had prevailed in the High Court that different rates of tax on the sale of the same or similar commodities by different states placed an unequal burden on inter-state trade: 14…The flow of trade does not necessarily depend upon the rates of sales tax: it depends upon a variety of factor .....

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per cent but if the benefit of that low rate is offset by the freight which a merchant in another State may have to pay for carrying that commodity over a long distance, the merchant would be willing to purchase the goods from a nearer State, even though the rate of tax in that State may be higher. Existence of long-standing business relations, availability of communications, credit facilities and a host of other factors - natural and business - enter into the maintenance of trade relations and .....

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nsactions which had an inter-State content. Amendment of Article 286 and the enactment of the Sales Tax Validation Act 1956, and the Central Sales Tax Act, 1956, were all intended to serve a dual purpose: to maintain the source of revenue from sales tax to the States and at the same time to prevent the States from subjecting transactions in the course of inter-State trade so as to obstruct the free flow of trade by making commodities unduly expensive. 193 The leading judgment held that Article 3 .....

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giving of a preference or making of a discrimination. Justice R.S. Bachawat while agreeing with the order passed by the leading majority judgment, however, held that just as a sales tax on intra-state sales would not normally offend Article 301, similarly a tax on inter-state sale would not do so. In his view, a tax on sale did not directly or immediately operate on the free flow of trade or the free movement of the transport of goods from one part of the country to another. Justice K.S. Hegde .....

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to a levy imposed by the state of Orissa under the Bihar and Orissa Excise Act, 1915 at a rate of ₹ 40/- per L.P. Gallon on foreign liquor of Indian manufacture imported into the state from other parts of the country. Subsequently, acting under the Bihar and Orissa Excise Act, 1915, the duty was enhanced to ₹ 70/- per L.P. Gallon. Under Section 27 of the Bihar and Orissa Excise Act, 1915, a countervailing duty was provided on an excisable article imported into the state. Countervail .....

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me rate as excise duties or at a lower rate, presumably to equalise the burden after taking into account the cost of transport from the place of manufacture to the taxing State. It seems therefore that countervailing duties are meant to equalise the burden on alcoholic liquors imported from outside the State and the burden placed by excise duties on alcoholic liquors manufactured or produced in the State. If no alcoholic liquors similar to those produced or manufactured imported into the State a .....

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le 304. The reasonableness of the restriction had to be adjudged having regard to the purpose for imposing the restriction in the public interest. In that case, it was held that since no foreign liquor was produced or manufactured in the State of Orissa the power to legislate under Article 304(a) is not available : 7…Without entering upon an exhaustive categorization of what may be deemed required in the public interest , it may be said that restrictions which may validly be imposed under .....

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le 304 is not available and the restriction which is declared on the freedom of trade, commerce or intercourse by Article 301 of the Constitution remains unfettered. 195 The notification enhancing the duty was held to violate Article 301 and was found not to have complied with Articles 304(a) and (b). The judgment in Kalyani Stores was explained and confined to the facts of the case in a subsequent decision in State of Kerala v. A.B. Abdul Khadir (1970) 1 SCR 700. In Abdul Khadir this Court held .....

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context of a challenge to the Punjab General Sales Tax (Amendment and Validation) Act, 1967 and the Punjab Sales Tax (Haryana Amendment and Validation) Act, 1967. The Constitution Bench held that so long as the rate of tax is the same between goods imported from other states and similar goods, produced or manufactured within the state, Article 304 is satisfied. 197 In V. Guruviah Naidu and Sons v. State of Tamil Nadu (1977) 1 SCC 234, a Bench of two Judges of this Court repelled a challenge to .....

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ial was shown to indicate that despite this lower rate of tax, imported hides and skins were subjected to discrimination. Upholding the levy, the Division Bench held as follows :- 9…. The question as to when the levy of tax would constitute discrimination would depend upon a variety of factors including the rate of tax and the item of goods in respect of the sale of which it is levied. The scheme of Items 7(a) and 7(b) of the Second Schedule to the State Act is that in case of raw hides a .....

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ther States in raw form and thereafter tanned and then sold inside the State as dressed hides and skins, the levy of the tax is at the rate of 11/2 per cent at the point of first sale in the State of the dressed hides and skins. This levy cannot be considered to be discriminatory as it takes into account the higher price of dressed hides and skins compared to the price of raw hides and skins. It also further takes note of the fact that no tax under the State Act has been paid in respect of those .....

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dges in State of Karnataka v. Hansa Corporation (1980) 4 SCC 697, involved a challenge to the constitutional validity of an entry tax legislation, namely, the Karnataka Tax on Entry of Goods Into Local Areas for Consumption, Use or Sale Therein Act, 1979. The law was enacted under Articles 245 and 246 read with Entry 52 of the State List. Explaining the ambit of Article 304(a), this Court held that : 30. Article 304 lifts the embargo placed on the legislative power of State to enact law which ma .....

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State to levy tax on such imported 167 (1980) 4 SCC 697 PART F goods in the same manner and to the same extent as may be levied on the goods manufactured or produced inside the State. If a State tax law accords identical treatment in the matter of levy and collection of tax on the goods manufactured within the State and identical goods imported from outside the State, Article 304(a) would be complied with. There is an underlying assumption in Article 304(a) that such a tax when levied within the .....

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l area it cannot be gainsaid that its immediate impact would be on movement of goods and the measure would fall within the inhibition of Article 301. Can it, however, be said that this tax imposes restrictions which in the facts and circumstances of the case could not be said to be reasonable? (Id. at p. 713) The Court held that the petitioners were unable to establish before the High Court that the burden of the tax was so heavy as to constitute an unreasonable restriction on the freedom of tra .....

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n of the President under clause (b) of Article 304, this was cured under Article 255 by the grant of Presidential assent and hence the legislation fell within the purview of Article 304(b). Being not discriminatory, it was held that Article 304(a) was not breached. The constitutional validity of the legislation was thus analysed on both the anvil of clauses (a) and (b) of Article 304 by the Bench of two Judges. J.2 Exemptions and incentives : Video Electronics and Mahavir 199 A Bench of two Judg .....

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ce of the state that the rate of tax was reduced for locally manufactured goods by way of an incentive, placing reliance on clauses (b) and (c) of Article 39 of the Constitution. This in the view of the Court did not provide a justification for a discrimination between imported goods and goods which were locally manufactured or produced. The prescription of a lower rate of tax for the latter was held to be invalid. This Court held : … An exception to the mandate declared in Article 301 an .....

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ideo Electronics Pvt. Ltd. v. State of Punjab (1990) 3 SCC 87. The judgment of this Court, inter alia, dealt with a challenge to the constitutional validity of notifications issued under the Uttar Pradesh Sales Tax Act, 1948, as well as under the Punjab General Sales Tax Act. Under the notification issued under the Uttar Pradesh legislation, an exemption from the payment of sales tax was granted for goods manufactured in new industrial units, where the date of commencement of production fell bet .....

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ales tax law, the rate of sales tax payable by electronic manufacturing units producing goods specified thereunder was brought down from 12 per cent to 1 per cent. The reduction in sales tax was defended on the ground that it was an incentive to a backward industrial state. While affirming the legality of the exemption notifications, a Bench of three learned Judges observed that this was not a case involving a naked blanket preference in favour of locally manufactured goods, as against goods com .....

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State, is incorrect. Under the notifications in case of U.P., only newly set up units are eligible to claim the benefits thereunder for a limited period of 5 years and that also only if they strictly comply with the terms and conditions set out in the notification. (Id. at p. 113) 201 A close reading of the judgment in Video Electronics would thus indicate that both sets of notifications involving the States of Uttar Pradesh and Punjab were carefully structured to cover one or more of the follow .....

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s Court distinguished, inter alia, the judgment in Weston Electroniks (supra) and similar cases in the following observations : 30…… These cases were not at all concerned with granting of exemption to a special class for a limited period on specific conditions of maintaining the general rate of tax on the goods manufactured by all those producers in the State who do not fall within the exempted category at par with the rate applicable to imported goods as we have read these cases. .....

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s. (Id. at p. 110) (emphasis supplied) However, in the same judgment, the following observations have been made : 20….. In our opinion, Part XIII of the Constitution cannot be read in isolation. It is part and parcel of a single constitutional instrument envisaging a federal scheme and containing general scheme conferring legislative powers in respect of the matters relating to List II of the Seventh Schedule on the States. It also confers plenary powers on States to raise revenue for its .....

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y. (Id at p. 104) 203 The substratum of the judgment in Video Electronics, clearly is that Article 304(a) would not be breached by a classification brought about by a carefully structured notification which grants incentives to local industry of a specified class of units, with reference to a specific category of manufactured goods and for a stipulated period. If the observations in paragraph 20 (quoted above) are however, construed to set a broad principle, that would defeat the primary objecti .....

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t of tax to the extent and for the period specified. Subsequently, edible oils in general were shifted from Schedule D to Schedule C attracting tax at 8 per cent. There were in fact no large industries in Jammu and Kashmir producing edible oil. Out-of state manufacturers unsuccessfully impugned the notification before the High Court. Explaining the ambit of Article 304, the Bench of two learned Judges observed thus : 8….The idea was not really to empower the State Legislatures to levy tax .....

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mind - the clause tells the State Legislatures - tax you may the goods imported from other States/Union Territories but do not, in that process, discriminate against them vis-à-vis goods manufactured locally . In short, the clause says: levy of tax on both ought to be at the same rate. This was and is a ringing declaration against the States creating what may be called tax barriers - or fiscal barriers , as they may be called - at or along their boundaries in the interest of freedom of t .....

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can be called - around themselves and/or insulate themselves from the remaining territories of India by erecting such tariff walls. (Id. at p. 45) 204 The judgment in Video Electronics was distinguished on the ground that in that case the notifications of the States of Uttar Pradesh and Punjab were carefully circumscribed : 22…..So far as the Uttar Pradesh notification was concerned, it was held that inasmuch as it was a case of grant of exemption to a special class for a limited period .....

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at : 23. All the above observations were made to justify (1) grant of incentives and subsidies and (2) exemption granted to new industries, of a specified type (small-scale industries commencing production within the two specified dates) and for a short period. They were not meant to nor can they be read as justifying a blanket exemption to all small-scale industries in the State irrespective of their date of establishment. The case before us clearly falls within the ratio of the Constitution Be .....

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ve the effect of robbing the salutary principle underlying Part XIII of its substance. Indeed, it has been the contention of Shri Salve that, on principle, the exception carved out in Video Electronics is unsustainable. For the purpose of this case, it is not necessary for us to say anything about the correctness of Video Electronics. Suffice it to say that the limited exception carved out therein cannot be widened or expanded to cover cases of a different kind. It must be held that the total ex .....

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other states to sales tax at 8 per cent was held to violate Article 304(a) of the Constitution. 206 The judgment in Shree Mahavir Oil Mills expressly left open the correctness of the view in Video Electronics. In Shree Mahavir Oil Mills an exemption from the payment of sales tax altogether granted to local industry was set aside as violating Article 304(a). The earlier decision in Video Electronics was distinguished on the ground that it related to a case not involving a blanket preference. J.3 .....

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any tax to which similar goods manufactured or produced in that state are subject. This is followed by the further requirement that the imposition of such a tax shall so however not discriminate between goods so imported and goods so manufactured or produced. The principle which underlies clause (a) of Article 304 is non-discrimination between goods imported from another state and goods produced or manufactured within. Clause (a) enables the state legislature to impose a tax on goods imported, i .....

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nufactured in the state are subject can be imposed on goods imported into the state from other states, clause (a) contains the mandate that there should be no discrimination between goods, that are imported and goods that are manufactured within. The judgment in Video Electronics construed Article 304(a) as not precluding a state from taking steps to promote the growth of its own nascent industry. In the case of the State of Punjab, the defence of the State was that a reduced rate of sales tax w .....

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interest in ensuring the growth and development of its own industry. Levels of industrial growth and economic development are not uniform across the country. A state legislature can have a legitimate interest, in the exercise of its law making power, to ensure balanced development and growth of its industry, particularly, in the nascent stage of industrial development. Yet, while doing so and granting incentives the legislature or as its delegate, the state government must ensure that the grant .....

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ernance under the same legal regime and the application of the same legal principles. Uniform application of law fulfils the norm of formal equality. Substantive equality looks beyond formal equality. That which may satisfy the requirements of formal equality may be inadequate and insufficient to meet the vision of substantive equality. Substantive equality recognises that there are histories of discrimination based on social background, gender and access to resources. They determine the pursuit .....

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omprehend an understanding of their past histories of discrimination, disability and injustice. 210 Regions within a nation are not equal in a real sense in terms of economic advancement and social development. Typically, economic development has spread PART F along areas which developed around the availability of infrastructure and resources. As ports and railways developed over the last century and a half, the benefits of development permeated to regions where economic opportunity was availabl .....

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ination-construes the need for development in terms of mitigating regional histories of suffering and strife, and of denial, deprivation and discrimination. 211 Article 304(a) is an amalgam of formal as well as substantive norms of equality. At a formal level, the provision requires that when a state imposes a tax on imported goods, the tax must likewise be imposed on similar goods which are manufactured or produced in the state. Parity of tax between domestic goods produced and manufactured in .....

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rastructure while another state may be predominantly agricultural. Article 304(a) does not prohibit a state from taking steps that are necessary for development and growth within its territories. But the submission is that while a state is at liberty to adopt policies which lead to its own economic advancement, it cannot utilise tax treatment as a measure to do so in a manner that would be forbidden by Article 304(a). This submission undoubtedly carries a degree of weight. But equally, parity of .....

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cs was a situation where a rebate of sales tax was carefully structured to cover industrial units of a well-defined class over a measurable period of time and for rational reasons. This was not an unrestricted or blanket preference to domestic goods. Article 304(a) was intended to protect freedom of trade and commerce from protectionism and parochial demands in the interest of the economic unity of the nation. Hence, while Article 304(a) cannot be read to prohibit a classification, it cannot be .....

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rticle 304(a) is not in the nature of a countervailing duty. Entry 51 of List II of the Seventh Schedule on the other hand, provides for countervailing duties and is as follows : 51. Duties of excise on the following goods manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India- (a) Alcoholic liquors for human consumption; (b) Opium, Indian hemp and other narcotic drugs and narcotics; But not includin .....

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duced or manufactured elsewhere in India. In the context of a countervailing duty, this Court in Kalyani Stores held that it postulates the actual production or manufacture of goods. This principle cannot be extrapolated to Article 304(a) where the tax which is imposed is not in the nature of a countervailing duty. Article PART F 304(a), when it refers to a tax on goods, covers taxes on any aspect of goods which fall within the legislative competence of the state legislature. The latter part of .....

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m other states. This, however, does not preclude a state from imposing a duty on imported goods where it does not actually produce or manufacture goods of that description. The observations of this Court in Kalyani Stores were made in the context of a countervailing duty under Entry 51 of List II which is distinguishable. A state, in other words, is not confined by Article 304(a) to impose a tax on imported goods, confined only to the basket of goods actually produced or manufactured within that .....

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does not manufacture or produce goods similar to the imported goods on which a tax is imposed, no question of PART F discrimination will arise. The object of Article 304(a) is to prevent disparity of treatment between goods that are produced or manufactured in a state and goods which a state imports from other states. Where a state does not actually produce or manufacture goods of that description. no issue of discrimination qua Article 304(a) would arise. K Entry Tax 214 Entry 52 of List II to .....

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powers of the provincial legislatures. Under the Devolution Rules, the following provisions were contained in Item Nos. 7 and 8 of the Second Schedule : Item No. 7. An octroi Item No. 8. A Terminal tax on goods imported into or exported from a local area save where such tax is first imposed in a local area in which an octroi was not levied on or before 6 July, 1917. In the Government of India Act, 1935, Entry 49 of the legislative lists (list II) provided as follows : 49.Cesses on entry of good .....

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hat the expression taxes is used instead of cesses . 217 The imposition of octroi has a historical significance both in India and elsewhere. Tracing its history, a Constitution Bench of this Court in Diamond Sugar Mills Ltd. v. The State of Uttar Pradesh(1961) 3 SCR 242, explained the meaning of octroi thus : Octroi is an old and well known term describing a tax on the entry of goods into a town or a city or a similar area for consumption, sale or use therein. According to the Encyclopaedia Brit .....

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could not but have been present to the minds of the framers that the expression octroi which was used in the Devolution Rules had been replaced subsequently in Entry 49 of List II in the Government of India Act of 1935 with a description rather than label : the label being descriptive of the entry of goods into a local area; the purpose being consumption, use or sale therein. The expression therein also indicates that the goods enter for the purpose of being used, consumed or sold within the lo .....

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rea within the meaning of Entry 52. The Constitution Bench held thus : The etymological meaning of the word "local" is "relating to" or "pertaining to" a place. It may be first observed that whether or not the whole of the State can be a "local area", for the purpose of Entry 52, it is clear that to be a "local area" for this purpose it must be an area within the State. On behalf of the respondents, it is argued that "local area" in Ent .....

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try of goods into any area of the State........." some area would be specified for the purpose of the law levying the cess on entry. If the Constitution makers were empowering the State Legislatures to levy a cess on entry of goods into any specified area inside the state, the proper words to use PART F would have been "entry of goods into any area.........." It would be meaningless and indeed incorrect to use the words they did use "entry of goods into a local area". Th .....

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al area, the Constitution Bench observed that : It was with the knowledge of the previous history of the legislation that the Constitution-makers set about their task in preparing the lists in the seventh Schedule. There can be little doubt therefore that in using the words tax on the entry of goods into a local area for consumption, use or sale therein , they wanted to express by the words local area primarily area in respect of which an octroi was leviable under item 7 of the Schedule tax rule .....

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2 having used the expression local area rather than area , the Constitution did not intend that the entry of goods into just any area in the state would attract the entry. The entry had to be into a local area. A local area is an area administered by a local authority such as a municipality, a district or a local board or a panchayat or some other body constituted by law for administering the governance of local affairs in any part of the state. Whether the entire state could be declared as a lo .....

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ulated that nothing in Articles 301 and 303 shall affect the provisions of any existing law except in so far as the President may by order otherwise direct. The Constitution Bench accepted the submission and held that there was no contravention of Article 301. 222 In Burmah Shell Oil Storage and Distribution Co. India Ltd. v. The Belgium Borough Municipality(1963) Supp. 2 SCR 216, the appellant had unsuccessfully moved the High Court for a writ seeking to prohibit the municipality from charging .....

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cipality where they were produced and consumed by others. 223 Under Section 73 of the Bombay Municipal Boroughs Act, 1925, the municipality was empowered to impose an octroi on animals or goods brought within the octroi limits for consumption, use or sale therein. The Constitution Bench took note of the legislative history relating to terminal taxes and octroi. Terminal Taxes were concerned only with the entry of goods into a local area irrespective of whether or not they were used there. Octroi .....

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l area for consumption in that sense, no matter by whom, they satisfy the requirements of the Boroughs Act and octroi is payable. Added to the word "consumption" is the word "use" also. There may be certain commodities which though put to use are not 'used up' in the process. A motor-car brought into an area for use is not used up in the same sense as food-stuffs. The two expressions use and consumption together therefore, connote the bringing in of goods and animals .....

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quot; does not mean that all the act of consumption must take place in the area of the municipality. It is sufficient if the goods are brought inside the area to be delivered to the ultimate consumer in that area because the taxable event is the entry of goods which are meant to reach an ultimate user or consumer in the area. (Id. at. P. 233) Hence, the appellant was held to be liable to pay octroi duty on goods brought into a local area : (i) To be consumed by itself or sold directly by it to c .....

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legislation, enacted with reference to Entry 52 of List II (read with Articles 244, 245 and 246). Octroi, however, assumed an obnoxious character and was a subject of comment by this Court in Hansa Corporation (supra). Octroi duty became associated with check posts installed by local bodies. The octroi barriers became notorious for long queues of fully laden vehicles awaiting entry into local limits. Worse still, octroi became a vexed symbol of the misdeeds of local officials or contractors tas .....

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fy at the outset that the detailed provisions of each state legislation pertaining to entry tax do not fall for consideration. It is sufficient for the purposes of the present reference to consider some of the important aspects of entry tax legislation vis-à-vis Part XIII which are of common concern. 227 The first significant aspect of the matter is the inter-play between entry tax legislation and Article 304 (a). The interface between the two arises because entry tax is levied on the ent .....

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state any tax to which similar goods produced or manufactured in the state are subject. The object is to ensure that there is no discrimination between the goods so imported and the goods so produced or manufactured . The critical requirement of Article 304 (a) is that the tax must be origin neutral. Hence, where the state legislature levies an entry tax on goods entering a local area (without making any discrimination based on whether or not the goods originate in the state or are imported from .....

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ch are subject to tax and goods produced or manufactured within the state which are not subject to the levy. Such an act of discrimination may take place, for instance, in a situation where state law defines the entire area of the state as a local area or by incorporating a specific definition of the expression dealer or importer to mean an importer of goods from outside the state. For instance, goods may be subject to entry tax only when they cross the state boundary. Movement of goods exclusiv .....

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treated as a local area for the purposes of Entry 52 of List II, was specifically kept open for consideration in the judgment of the Constitution Bench in Diamond Sugar Mills. The issue was, however, dealt with in a judgment of three learned Judges of this Court in Shaktikumar M. Sancheti v. State of Maharashtra (1995) 1 SCC 351. In that case an entry tax was levied under Section 3 of the Maharashtra Tax on Entry of Motor Vehicles into Local Areas Act, 1987. The Act was challenged by contractor .....

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mely, 3, 12, 245(1), 246, 277, 321, 323A, and 371(D). They indicate that the constitutional intention was to understand the 'local area' in the sense of any area which is administered by a local body, may be corporation, municipal board, district board etc. The High Court on this aspect held, and in our opinion rightly that the definition does not comprehend entire State as local area as the use of the word 'a' before 'local area' in the Section is significant. The taxabl .....

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appellant, on entry of vehicle in any part of the State but in any local area in the State. It cannot, therefore, be struck down on this ground. (Id. at p. 355) 231 The Seventy-third amendment to the Constitution has incorporated Part IX which deals with Panchayats while the Seventy fourth amendment has incorporated Part IXA which deals with Municipalities. Article 243(d) defines Panchayats as institutions of self-government constituted under Article 243(b) for the rural areas. Article 243(b) re .....

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a Municipality to levy, collect and appropriate such taxes duties, tolls and fees in accordance with such procedure and subject to such limits. With these amendments, local areas now have assumed a constitutional context and significance. 232 In the judgment in Diamond Sugar Mills, the Constitution Bench emphasized that in using the expression local area, the framers of the Constitution were aware of the previous legislative history and meant an area administered by a body (such as Municipaliti .....

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.4 Severability 233 On behalf of the states, it has been urged that where a state legislature provides for the levy of an entry tax only upon goods brought from outside the state, the offending words may be treated as severable and struck down so as to allow for the imposition on goods entering a local area both from within or outside the state. Such an exercise would clearly be impermissible. Where the state legislature has evinced a clear intent to levy a tax only upon the entry of goods origi .....

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w making authority. This Court in the exercise of its power of judicial review can hold that a discrimination between goods imported from outside the state and goods produced or manufactured within the state for the levy of a tax would be violative of Article 304(a). Where the state legislature has committed an act of hostile discrimination by imposing a tax only upon goods originating outside PART F the state upon their entry within it, the court must strike down such a provision which violates .....

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ed from other states, similar goods which are produced or manufactured within the taxing state must be subjected to a five per cent tax. If a higher rate of tax is imposed on goods originating in other states which are imported into the taxing state, this would result in a discrimination against imported goods. Such a discrimination is sought to be obviated by the requirement that the rate of tax should be the same as between similar goods produced or manufactured within the taxing state and goo .....

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bmission is that unless the taxing state imposes it on similar local goods, an entry tax cannot be imposed on goods imported from other states. If goods manufactured or produced in the taxing state are not subject to entry tax, that will result in a discrimination if imported goods of other states are so subject. 236 The example which has been set out above of the application of differential rates of tax, for the same tax imposed on domestic as opposed to imported goods presents a simple applica .....

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ent providing for both entry tax and sales tax at equal rates. Some other states provide for set offs and statutory exemptions to goods paying local sales tax. Certain states provide a similar set off for goods imported from another state, if they are sold in the taxing state. The legislation of some states provides for a reduction of tax liability under the sales tax law by the amount of entry tax paid while in other cases, state legislation provides for a reduction of entry tax by the amount o .....

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ncurs liability under value added tax legislation, by virtue of the sale of imported goods or the sale of goods manufactured by consuming such imported scheduled goods, is entitled to a set off. State legislation in certain cases exempts goods from entry tax if after entry in a local area, the goods are sold there and become liable to pay value added tax. In other cases, manufacturers in a local area are exempt from paying entry tax on raw material imported from another local area or another sta .....

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of this reference, it is sufficient for the court to lay down broad principles governing the area without going into individual facts or detailed provisions covering each case in relation to the period at issue in the respective states. 239 Article 304(a), in so far as is material, authorises the legislature of a state to impose on goods imported from other states any tax to which similar goods manufactured or produced in that state are subject . Several aspects of Article 304(a) merit emphasis .....

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ure is competent to enact by virtue of its legislative powers. The expression any tax must mean what it says: it means any levy which the state is constitutionally competent to legislate. The second aspect of Article 304(a) is the latter part which provides that the state shall act : so, however, as not to discriminate between goods so imported or goods so manufactured or produced. 241 The fundamental reason for the incorporation of this provision is to prohibit discrimination being practiced by .....

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. Vol. 19A), the expression however has been explained as indicating an alternative intention, a contrast with a previous clause and a modification of it under circumstances (IInd Ed. Vol. II, p. 59). The Oxford dictionary defines the expression however to mean in any case, at all events, at any rate. Another meaning attributed to the phrase is used by itself, or followed by points of suspension, as an interjection or as a formula concluding, introducing or modifying an utterance in some context .....

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tive re-affirmation that in any case, at all events and at any rate there shall be no discrimination between goods manufactured or produced within the taxing state and goods imported from other states. This narrative is the dominant theme of Article 304 (a). Fourthly, an expression of some significance that is used in the latter part of Article 304(a) is between . That expression has been employed so as to mandate that there shall be no discrimination between goods imported into the taxing state .....

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ods produced or manufactured within the taxing state should also not be discriminated against. In seeking parity of treatment, it is as much the obligation of the taxing state to ensure that there is no discrimination against goods originating in other states, as much as it is its concern to ensure that domestic goods are not discriminated against. The former is a matter of constitutional obligation. However, it does not exclude a similar obligation and concern of the taxing state in respect of .....

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A law enacted by the state legislature imposing a fiscal levy may cover more than one subject of legislation falling within its legislative competence in List II. In contrast, Section 55 of the Australian Constitution mandates that there shall be one tax law on one subject. Article 55 of the Australian Constitution reads as follows: Article 55 : Laws imposing taxation shall deal only with the imposition of taxation and any provision therein dealing with any other matter shall be of no effect. L .....

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actment to draw sustenance from more than one entry which falls within the legislative competence of the enacting legislature. [See in this context: Ujagar Prints (II) v. Union of India(1989) 3 SCC 488, All India Federation of Tax Practitioners v. Union of India(2007) 7 SCC 527, and State of A.P. v. NTPC(2002) 5 SCC 203]. 243 As a matter of constitutional doctrine, there is no restraint on the plenary powers of Parliament as well as the state legislatures which requires the legislative body enac .....

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breach the notion of non-discrimination as between goods that are imported from other states and goods which are produced or manufactured within. It is legitimately entitled to ensure that the tax burden should not discriminate between locally produced or manufactured goods of that state and goods originating in other states. The substance must prevail over form. Once there is no constitutional necessity that the form in which legislation is enacted in India must cover only one legislative entry .....

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lish that the legislative provision which it has enacted maintains the principle of non-discrimination between goods produced and manufactured within the state and goods imported from other states while at the same time bringing about parity in terms of tax burden between domestic and imported goods. Sales tax is referable to Entry 54 of List II ( taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92A of List I ). Entry tax is referable to Entry 52 o .....

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tax recognises the full panoply of taxes on goods falling within List II. If a law can cover Entry 52 and Entry 54 of List II, there is no reason to prohibit the state law making authority from having due regard to the tax burdens imposed on domestic goods and goods imported from other states under entry tax and sales tax legislation, taken as a composite whole. Any tax does not mean a tax under one entry of List II as a discrete and isolated legislation independent of any another entry. Any ad .....

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s practiced discrimination against goods imported from other states will commence with an investigation into whether the state legislation has made any differentiation between the two sets of goods. This is not merely in terms of the rate of tax but there are other important aspects including : (i) procedures and machinery including aspects such as licencing, recognition and compliance: (iii) Measure of the tax; and (iv) Exemptions or set offs; Beyond this enquiry, the court would need to analys .....

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oods imported into India, it is urged that until the goods become a part of the land mass, they can be subjected to a law under Entry 83 of List I and to a duty of import. It is only where a Bill of entry for home consumption is filed that the goods cease to be imported goods. Until then, it is urged, no entry tax would be leviable. 247 The taxable event referable to a law enacted under Entry 83 of List I (in relation to an import customs duty) is the act of import by which goods originating in .....

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home consumption, to include any owner or any person holding himself out to be an importer. 248 Section 46 provides that the importer of any goods (other than goods for transit or transhipment) shall present to the proper officer a bill of entry for home consumption or warehousing in the prescribed format. The bill of entry can be presented at any time after the delivery of the import manifest or import report. Section 47 provides for clearance of goods for home consumption upon the satisfaction .....

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Section 58 provides for the licencing of private warehouses where dutiable goods may be deposited. Section 59 provides for the execution of a warehousing bond. Section 60 deals with the grant of permission to deposit goods in a warehouse. Section 61 provides for the period during which goods can remain in a warehouse. Under Section 64, the owner s right to deal with warehoused goods has been statutorily recognized to the extent mentioned therein. Section 65 enables the owner of any warehoused go .....

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lation including, amongst them, those covering fiscal matters between the Union and the States. The fields or subjects of legislation are elaborately defined so as to exclude the possibility of overlapping between entries in List I and those in List II. Even where the fields may appear to overlap, they must be construed to be mutually exclusive. The submission of the petitioners proceeds on the basis that if entry into any part of India from outside India is an entry into a local area, it would .....

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distinct fields of operation. Entry 41 of List I deals with trade and commerce with foreign countries; import and export across customs frontiers; and definition of customs frontiers. The distribution of powers with reference to the taxing entries in List I and II is mutually exclusive. 251 In a decision rendered in 1942 by the Federal Court in Province of Madras v. Messrs. Boddu Paidanna & Sons1942 F.C.R.90, it was held that if a tax payer who pays sales tax is also a manufacturer subject t .....

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or General in Council v. Province of MadrasAIR (1945) PC 98. The Privy Council held that : The two taxes, the one levied upon a manufacturer in respect of his goods, the other upon a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when .....

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vents : whereas excise duty is a tax on manufacture, octroi duty is a tax on the entry of goods into a local area. In The Jiyajeerao Cotton Mills Ltd. v. State of Madhya Pradesh(1962) Supp. 1 SCR 282, a textile mill which was generating electricity for running the mill (and not for sale) questioned the levy of electricity duty on the ground that this would amount to a levy of excise duty which fell exclusively within the competence of Parliament under Entry 84 of List I. Rejecting the submission .....

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but its consumption. If a producer generates electrical energy and stores it up, he would not be required to pay any duty under the Act. It is only when he sells it or consumes it that he would be rendered liable to pay the duty prescribed by the Act. The Central Provinces and Berar Electricity Act was enacted under Entry 48-B of List II of the Government of India Act, 1935. The relevant portion of that Entry read thus: Taxes on the consumption or sale of electricity Entry 53 of List II of the .....

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de the legislative competence of a State legislature, e.g. a tax on one's entire wealth. That entry would not authorise a tax imposed on any of the components of the assets of the assessee. A tax directly on one's lands and buildings will not therefore be a tax under Entry 86….. 8….If, therefore, a tax is directly imposed on buildings , it will bear a direct relation to the buildings owned by the assessee. It may be that the building owned by an assessee may be a component .....

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ellip;..These two taxes are separate and distinct in nature and it cannot be said that there was any overlapping, or that the State Legislature was not competent to levy such tax on lands and buildings merely on the ground that they have been subjected to another tax as a component of the total assets of the person concerned. (Id. at p. 111) 255 In M/s R R Engineering Co. v. Zila Parishad Bareilly(1980) 3 SCC 330, a tax was imposed on circumstances and property under the UP Kshettra Samitis & .....

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rty by holding that it is not a tax on income but is a tax on a man's financial position, his status as a whole, depending upon his income from trade or business. Earlier, another Full Bench of the Allahabad High Court had held in Zila Parishad, Muzaffar Nagar v. Jugal Kishore that the tax on circumstances and property is fundamentally distinct from and cannot be equated with income tax, that it is not covered by item 82, List I, Schedule VII, of the Constitution and that it is essentially a .....

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when an entry speaks of a levy of a tax on goods, it does not include the right to impose taxes on taxable events which have been separately provided for under other taxation entries. The tax in respect of goods has sometimes been referred to as a tax on an aspect of the goods and sometimes as the taxable income. (See Federation of Hotel Restaurant v. Union of India (1989) 3 SCC 634= AIR 1990 SC 1637, (Pr. 13, 14, 16). (Id. at p. 544) 256 The principle of law is hence well-settled : the taxing p .....

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nine Judges speaking through Sinha, CJ held as follows : Similarly in the case of duties of customs including export duties though they are levied with reference to goods; the taxable event is either the import of goods within the customs barriers or their export outside the customs barriers. They are also indirect taxes like excise and cannot in our opinion be equated with direct taxes on goods themselves. Now, what is the true nature of an import of an import duty? Truly speaking, the imposit .....

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oms Act, 1962 has made a beneficial provision for allowing goods to be deposited in public or private warehouses and for the clearance of goods for home consumption. These provisions cannot and do not detract from the power of the state legislatures under Entry 52 nor do they denude the states from levying an entry tax once the taxable event under state law has occurred. 258 In the present case, the grievance of the states is that the petitioners have not stated in the pleading that there is any .....

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ively adjudicate upon the issues raised relating to the facts of the above cases. Hence, it is only appropriate and proper that all the facts are fully established before the regular bench adjudicating upon the cases relating to goods imported from abroad. However, the constitutional position in respect of Entry 83 of List I and Entry 52 of List II has been clarified above. The taxable event for the imposition of a duty of customs is distinct from the taxable event in respect of an entry tax, wh .....

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e tax regime and the state taxing power would be controlled by Part XIII of the Constitution. The states which are sovereign within their own sphere would in the exercise of their constitutional power to raise revenues by way of taxation be subject to the rigours of Part XIII. Such an extreme view is not acceptable either from the stand point of textual construction or from its consequence for the federal structure of the Constitution. All taxes do not impede the freedom of trade, commerce and i .....

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creating infrastructure and amenities, both direct and incidental, through which trade and commerce can effectively be transacted and can flourish. Hence, the extreme proposition that all taxes constitute a restriction or impediment upon trade has been eschewed. 261 At the other end of the spectrum lies the view that taxes do not constitute a restriction upon the freedom of trade, commerce and intercourse. If this view were to be accepted, Part XIII would have no role as a constitutional limitat .....

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legislation; (ii) The constitutional validity of Parliamentary legislation imposing sales tax has been upheld on the basis of the provisions of Article 302 which enables Parliament to impose restrictions on the freedom of trade and commerce in the public interest. If taxing legislation is regarded as a restriction for the purposes of Article 302, there is no reason to exclude the same interpretation for the purposes of Article 304; (iii) Article 304(a) deals with a specific area of taxation - t .....

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er-state trade as well as trade and commerce within a state is guaranteed. Article 304(a) covers only taxes imposed on goods imported from other states. Article 304(a) in other words does not cover imposts on goods traversing within a state; (v) Article 306 of the Constitution, as it stood prior to its repeal contemplated that restrictions could take the form of duties and imposts; and (vi) The expression restrictions has been utilized in Part XIII of the Constitution, as the provisions of Artic .....

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law, the learned judge held thus : Taxes can and do sometimes, having regard to their effect and impact on the free flow of trade constitute restrictions on the freedom under Article 301. But the restriction must stamp from the provisions of the law imposing the tax which could be said to have a direct and immediate effect of restricting the free flow of trade, commerce and intercourse . It is not all taxes that have this effect. (Id. at p. 697) 262 Nearly, five decades of jurisprudence having d .....

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the exercise of their legislative powers, utilise taxation not only as a means of raising revenues to support their developmental activities but also as a measure of achieving social objects. Whether the pursuit of those social objects or the pursuit of social regulation infringes upon the area of free trade and commerce cannot be decided a priori. The power of taxation is capable of being used in a manner which can constitute, in a given case, a restraint or impediment on the freedom of trade a .....

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g upon the validity of a law providing for bank nationalization overruled the judgment in A K Gopalan v. The State of Madras(1950) 1 SCR 88 which had taken the view that it was the object of the action of the state in relation to the fundamental right of the individual and not the effect of the action that was relevant. This Court held that : 49…..But it is not the object of the authority making the law impairing the right of a citizen, nor the form of action that determines the protectio .....

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ts. (Id at p. 288) In Bennett Coleman & Co. v. Union of India(1972) 2 SCC 788, the same principle was formulated in the following statement of law : ..First, it is not the object of the authority making the law impairing the right of the citizen nor the form of action that determines the invasion of the right. Secondly, it is the effect of the law and the action upon the right which attracts the jurisdiction of the court to grant relief. The direct operation of the Act upon the rights forms .....

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ect consequence and effect of the State action on the fundamental right of the petitioner and does not use the word inevitable in this connection. But there can be no doubt, on a reading of the relevant observations of Shah, J., that such was the test really intended to be laid down by the Court in that case. If the test was merely of direct or indirect effect, it would be an open-ended concept and in the absence of operational criteria for judging directness , it would give the Court an unquant .....

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ntal rights is direct and inevitable, then a fortiori it must be presumed to have been intended by the authority taking the action and hence this doctrine of intended and real effect. (Id. at p. 299) 265 In order to determine whether a law providing for the imposition of a tax constitutes a restriction on the freedom of trade, commerce and intercourse, the principle that must be applied is whether the direct and inevitable effect or consequence of the law is to impede trade and commerce. The bur .....

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ranteed as a fundamental freedom. When a legislative measure seeks to curtail that freedom, the test is whether the right of the individual has been infringed or eviscerated. In the context of Part XIII, the matter is looked at from the perspective of trade and commerce as a whole. Hence, in a case which falls under Part XIII of the PART M Constitution it is for the petitioner to demonstrate and establish that the direct and inevitable effect of the law imposing a tax is to impede or restrict th .....

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ommerce is not sufficient in itself lead to the consequence that it is a restriction or impediment of trade and commerce. The petitioner with such a grievance must cross the threshold of establishing in cogent terms before the Court that the direct and inevitable effect of the tax law is to constitute an impediment of trade and commerce. 267 In the context of entry tax, it is said on behalf of the petitioners that, there cannot be an entry into a local area of goods for consumption, use or sale .....

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e statute an impediment of trade and commerce. Similarly, in the fiscal arena, the fact PART M that a tax liability has to be discharged as an incident of or a pre-condition for engaging in a line of activity does not by itself - and without actual proof of impediment or restraint - constitute a restriction. A conclusion that the inevitable consequence and effect of the legislation is to impede or restrict trade and commerce can be drawn only on the basis of demonstrable material that establishe .....

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ng or registration before a commercial activity which it regulates can be undertaken. Licencing or registration norms may stipulate financial and other requirements which need to be fulfilled as a pre-condition for carrying on an activity or business. The fact that a statute allows for or prescribes such norms which constitute a condition precedent is not reason enough to hold that they constitute restrictions in themselves or an impediment of trade and commerce. The right to carry on trade and .....

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onsequence of its operation a restriction of trade or commerce. Every regulatory requirement does not restrict or impede trade and commerce even if at the threshold, its fulfilment is a condition enabling a person or entity to engage in a regulated activity. 269 In a fiscal context, the payment of an impost or levy is attracted when the taxing event occurs. The tax may be on persons, activities or things. It is the taxing event which incurs the charge or liability to tax. The charge may be assoc .....

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ing the nature of the product, availability of raw material, transportation and infrastructure, the nature and extent of competition, market cycles as well as the elasticity of demand and supply. The tax structure is one ingredient which has a bearing on the allocation of resources. For a tax to constitute a restriction, there must be demonstrable material to indicate that its direct and inevitable effect or consequence is to obstruct or impede trade or commerce. Before the tax is held to be a r .....

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at the mere fact that the charge of the tax is associated with an aspect of the movement of trade and commerce indicates that it is a restriction in every case. The burden lies upon the individual or entity asserting the existence of a restriction to demonstrate its impact in terms of the direct and inevitable effect test as adopted above. Hence, there can be no a priori assumption that an entry tax constitutes a restriction or impediment to trade and commerce. N Conclusion The conclusions of th .....

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uaranteed by Article 301 is not absolute but is subject to legislative control by Parliament and the state legislatures. Articles 302, 303 and 304 define the ambit of the restrictions which Parliament and the state legislatures may impose by laws enacted in pursuance of their legislative powers under Articles 245 and 246. Besides providing for permissible restrictions, those articles lay down the limits which govern the law making authority. 272 Articles 245 and 246 together constitute the sourc .....

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hat the enacting body must possess legislative competence on the subject on which it enacts law, that the law which it enacts must not infringe fundamental rights and that it must abide by other norms prescribed by the Constitution. 273 Part XIII of the Constitution enunciates a set of constitutional limitations on the legislative power to regulate trade, commerce and commerce. 274 The federal structure is one of the basic features of the Constitution. Judicial interpretation of Part XIII must f .....

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fields assigned to the centre and the states, the Constitution subjects its sovereign arms to constitutional limitations which are designed to preserve the balance which it has created. Hence all legislative power, including of a fiscal nature has to abide by the norms of the written constitution. Judicial review of fiscal legislation however recognises the wide latitude which inheres in the legislatures both at the national and state level to classify persons, objects and things for the purpose .....

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and except for a discriminatory tax which violates Article 304(a)) does not reflect a valid constitutional principle. Article 304(a) does not constitute the entire universe of taxation for the purpose of Part XIII. Article 304(a) deals with a species of non- discriminatory taxes : non-discriminatory taxes on goods imported from other states. 279 As a statement of constitutional principle, neither of the two positions which lie at the extreme ends of the spectrum is valid : at one end is the posi .....

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a restriction on the freedom guaranteed by Article 301. Unless this threshold is crossed, the proviso to Article 304(b) will have no application for, it is only when there is a restriction that the question of its reasonableness can arise. 281 The expression 'may' in Article 304 has to be read in conjunction with the expression 'and' which separates clauses (a) and (b). The true construction of the expressions is in the sense of a joint and several "and/or". 282 Article .....

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ormal and substantive notions of equality. Formal equality would be met when the same rate of tax is prescribed for goods imported from other states as is levied on goods produced and manufactured within. Apart from the rate of tax, other significant aspects include procedural provisions such as licensing and registration, the machinery for assessment and set-offs and exemptions. Substantive equality recognises the need for the development of underdeveloped areas of the country. A balance has to .....

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ng a tax under one entry while formulating a fiscal law. Hence, Article 304(a) does not fetter the state legislatures from ensuring an equality of tax burden between goods that are imported from other states and goods manufactured or produced within. 285 While enacting entry tax legislation referable to Entry 52 of List II, it is permissible for the state legislature to have regard to the equalisation of tax burdens between goods imported from other states and goods manufactured or produced with .....

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e. Local area postulates an area within a state administered by a local body under relevant state legislation. JUDGMENT ASHOK BHUSHAN, J. Before this Constitution Bench of Nine Judges of the Apex Court of this country which have time and again, when there arose serious debates and doubts on the Constitutional provisions of our country, authoritatively concluded the debates and quenched the doubts, a galaxy of lawyers by their illuminating arguments engaged the Court for long twenty one days hear .....

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ssed different opinion. Looking to the vital Constitutional issues having a far reaching impact on economic unity of the country, I consider it my duty to express my views in my own way on all issues raised before us. I begin my task in following manner. 3. This larger Bench has been constituted on a reference made by a Constitution Bench of this Court in Jindal Stainless Ltd & another Vs. State of Haryana & Other, 2010 (4) SCC 595, expressing doubts on correctness of Constitution Bench .....

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mmerce and intercourse as envisaged by Constituent Assembly, to the interpretation of various articles of Constitution including Article 301 - 306 contained in Part XIII, have arisen before us in this bunch of cases. 4. For answering the questions which have arisen before us, various aspects related to the issues noticed above are to be deliberated with reference to relevant precedents. We have thus identified certain broad steps for our discussion before attempting to answer the specific questi .....

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vidual life. We have divided our discussion into parts which are; firstly, the facts leading to this reference. Secondly, two Constitution Bench judgments in Atiabari Tea Company and Automobile Transport. Thirdly, submissions made before us by learned counsel appearing for various parties. Fourthly, the discussion on the subjects relevant on questions falling for our considerations. Fifthly, our conclusions, and sixthly, our answers. Fourth part contains following subjects:Page A. LEGISLATIVE HI .....

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D ARTICLE 304(b). G. ENTRY 52, LIST II OF VIITH SCHEDULE. H. MEANING OF RESTRICTION AS USED IN PART XIII. I. WHETHER DIRECT AND IMMEDIATE EFFECT TEST AS LAID DOWNIN ATIABARI & APPROVED IN AUTOMOBILE TRANSPORT IS NO LONGER A CORRECT TEST. J. COMPENSATORY TAX THEORY. PART I FACTS AND EVENTS LEADING TO REFERENCE TO THIS NINE JUDGES BENCH 6. For fully appreciating the issues and questions raised in this batch of cases, certain facts and events preceding the Reference to this larger Bench need to .....

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dated 21.12.2001 upheld the validity of the Act which judgment came to be challenged in Civil Appeal No.3453 of 2002 with connected matters; Jindal Stainless Ltd. & Anr. vs. State of Haryana & Ors. In the above appeals, appellants were Industries or Association of Industries manufacturing their products within the State of Haryana. The raw materials for their respective products were brought from outside the State. The above 2000 Act was enacted to provide for levy and collection of tax .....

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of Assam& Ors., (1961) 1 SCR 809, and larger Bench judgment of Seven Judges in Automobile Transport (Rajasthan) Ltd. vs. The State of Rajasthan and Ors., (1963) 1 SCR 491. 8. In Atiabari Tea Co.Ltd.(supra) the Assam Taxation(on goods carried by Roads and Inland Waterways) Act, 1954 was challenged. The Assam High Court upheld the validity of that Act against which the matter was taken to this Court, the appellant contended that Act violated the freedom of trade and it was without previous Pre .....

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me for consideration before larger Bench in Automobile Transport (supra). In which case Rajasthan Motor Vehicles Taxation Act, 1951 came to be challenged on the ground that it violates Article 301. The Rajasthan High Court has upheld the validity of that Act. The larger Bench in the Automobile Transport case by majority approved the ratio of Atiabari Tea Co.Ltd. Subject to an exception which was judicially crafted that compensatory taxes are not hindrance to any body's freedom. It was held t .....

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more than what is required for providing the facilities. 11. The above two judgments, around which discussion before us has centered shall be noted hereinafter in some detail including the views expressed by the majority and minority. 12. What is compensatory tax came for consideration by this Court in the context of M.P. Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976 in M/s. Bhagatram Rajeevkumar vs. Commissioner of Sales Tax, M.P. and others, (1995) Supp. (1) SCC 673. The Three Jud .....

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or Consumption, Use or Sale Therein) Act, 1993. Two Judge Bench reiterated the position that some connection between the tax and the trading facilities is sufficient to mention it as compensatory tax. 13. Now reverting back to Jindal Stripe Ltd.and another vs. State of Hayana and others, (2003) 8 SCC 60, before the Two Judge Bench of this Court, submissions on behalf of State of Haryana that tax is compensatory in nature and submissions by the appellant that the Act violates Article 301 was note .....

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need to be laid down by a Constitution Bench. Following was laid down in paragraph 26 and 27: 26.The decisions in Bhagat Ram and Bihar Chamber of Commerce now say that even if the purpose of imposition of the tax is not merely to confer a special advantage on the traders but to benefit the public in general including the traders, that levy can still be considered to be compensatory. According to this view, an indirect or incidental benefit to traders by reason of stepping up the developmental a .....

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Commerce(supra), we are of the view that the interpretation of Article 301 visavis compensatory tax should be authoritatively laid down with certitude by the Constitution Bench under Article145(3). 14. Consequent to Reference made to the Constitution Bench in Jindal Stripe Ltd.(supra), a Five Judges Bench answered the Reference by its judgment dated 13th April, 2006 reported in Jindal Stainless Ltd.(2) and another vs. State of Haryana and others, (2006) 7 SCC 241, the Constitution Bench overrul .....

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iabari Tea Co. Ltd. v. State of Assam and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan for deciding whether a tax is compensatory or not vide para 19 of the report, will continue to apply and the test of "some connection" indicated in para 8 of the judgment in Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. and followed in the case of State of Bihar v. Bihar Chamber of Commerce, is, in our opinion, not good law. Accordingly, the co .....

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n the proper perspective as they were bound by the judgments of Bhagatram Rajeevkumar and Bihar Chamber of Commerce. Referring to the Constitution Bench judgment in Jindal Stainless Ltd.(2) (supra) this Court in Jindal Stainless Ltd.(3) and another vs. State of Haryana and others, (2006) 7 SCC 271, permitted the parties to place the data in the writ petitions before the High Court and the High Courts were requested to decide the aforesaid issues within five months. Following was stated in paragr .....

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arties within a month from the date of the decision in each case pursuant to our direction. 6.Place these matters for further hearing in third week of January, 2007. 16. Different High Courts in consequence to directions by this Court in Jindal Stainless Ltd.(3) (supra) decided the matter one or other way. Some of the High Courts held the Act, which were under challenge, compensatory in nature whereas other High Courts relying on the Constitution Bench judgment in Jindal Stainless Ltd.(2), held .....

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considering the importance of the issues relating to Articles 301 and 304 and Part XIII of the Constitution, it is necessary to refer the matter to a larger Bench in terms of Article 145(3) of the Constitution. In Reference order following was stated in paragraphs 8 and 9: 8.The concept of compensatory tax is judicially evolved and in a way provides a balancing factor between federal control and State Taxing Board. The concept really had its matrix in transportation cases and does not apply to .....

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their validity and whether Clause (a) of Article 304 is conjunctive with or separate from Clause (b) of Article 304? (2) Whether imposition of Entry Tax levied in terms of Entry 52 List II of 7th Schedule is violative of Article 301 of the Constitution? If the answer is in the affirmative whether such levy can be protected if Entry Tax is compensatory in character and if the answer to the aforesaid question is in the affirmative what are the yardsticks to be applied to determine the compensator .....

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ticle 266 and there is nothing express or explicit in Entry 52, List II, 7th Schedule which would compel the State to spend the tax collected within the local area in which it was collected? (4) Will the principles of quid pro quo relevant to a fee apply in the matter of taxes imposed under Part XIII? (5) Whether the Entry Tax may be levied at all where the goods meant for being sold, used or consumed come to rest (standstill) after the movement of the goods ceases in the local area'? (6) Wh .....

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ory indirect State Tax which is capable of being passed on and has been passed on by traders to the consumers infringes Article 301 of the Constitution? (9) Whether a tax on goods within the State which directly impedes the trade and thus violates Article 301 of the Constitution can be saved by reference to Article 304 of the Constitution alone or can be saved by any other Article? (10) Whether a levy under Entry 52, List II, even if held to be in the nature of a compensatory levy, it must, on t .....

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Jaiprakash Associates Limited vs. State of Madhya Pradesh and others, (2009) 7 SCC 339, the matter again came to be listed before a Constitution Bench of Five Judges. The Constitution Bench again heard the entire batch of cases including the appeals against the judgment dated 21.12.2001 of the Punjab and Haryana High Court where the validity of 2000 Act was upheld. The Constitution Bench by its order dated April 16, 2010, reported in Jindal Stainless Ltd. and another vs. State of Haryana and oth .....

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that some of the High Courts before which the State Entry Tax stood challenged had taken the view that Clause (a) and Clause (b) of Article 304 of the Constitution of India are independent of each other and that if the impugned law stood saved under Article 304(a) then it need not be tested with reference to Clause (b) for determining its validity. 2.Accordingly, on 18th December, 2008, the Division Bench of this Court referred to the Constitution Bench 10 questions, the most important of which .....

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f Haryana and Ors. When the hearing commenced before the Constitution Bench, we found that the assessees (original petitioners in the High Courts) are heavily relying upon the tests propounded by a 5Judge Bench of this Court in Atiabari Tea Co. Ltd. v. The State of Assam and Ors., which tests subject to the clarification, stood reiterated in the subsequent judgment delivered by a larger Bench of this Court in the case of The Automobile Transport (Rajasthan) Ltd. v. The State of Rajasthan and Ors .....

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effect: 11.Some of these aspects which need consideration by larger Bench of this Court may be briefly enumerated. Interplay/interrelationship between Article 304(a) and Article 304(b). The significance of the word "and" between Article 304(a) and 304(b). The significance of the non obstante clause in Article 304. The balancing of freedom of trade and commerce in Article 301 visàvis the States' authority to levy taxes under Article 245 and Article 246 of the Constitution re .....

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s violative of Article 301 should be judged only in the light of the test of nondiscrimination? Does Article 303 circumscribe Article 301? Whether "internal goods" would come under Article 304(b) and "external goods" under Article 304(a)? Whether "per se test" propounded in Atiabari's case (supra) should or should not be rejected? Whether tax simpliciter constitutes a restriction under Part XIII of the Constitution? Whether the word "restriction" in Ar .....

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tiabari Tea Co. Ltd. and Automobile Transport (Rajasthan) Ltd. (supra) came to be delivered 49 years ago, a doubt was expressed about the tests laid down in those two judgments even in the year 1975 in the case of G.K. Krishnan and Ors. v. State of Tamil Nadu and Ors. by Mathew, J., vide para 27, which reads as under: 27.Whether the restrictions visualized by Article 304(b) would include the levy of a nondiscriminatory tax is a matter on which there is scope for difference of opinion. Article 30 .....

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x and restriction. That apart, taxing powers of the Union and States are separate and mutually exclusive. It is rather strange that power to tax given to States, say, for instance, under Entry 54 of List II to pass a law imposing tax on sale of goods should depend upon the goodwill of the Union Executive. (emphasis supplied) 14.For the aforestated reasons, let this batch of cases be put before Hon'ble Chief Justice of India for constituting a suitable larger Bench for reconsideration of the .....

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pearing for the parties have reframed the questions to be considered. Four main issues which have been framed by this Bench are as follows: 1. Can the levy of a nondiscriminatory tax per se constitute infraction of Article 301 of the Constitution of India? 2. If answer to Question No.1 is in the affirmative, can a tax which is compensatory in nature also fall foul of Article 301 of the Constitution of India. 3. What are the tests for determining whether the tax or levy is compensatory in nature? .....

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s in the affirmative, does Article 246 of the Constitution of India recognise the sovereign power of States to make laws including laws levying taxes on subject matters enumerated in Entry II of 7th Schedule? 3. Is the power to make laws and levy taxes reserved in favour of the States under Article 246 read with ListII subject to PartXIII of the Constitution? 4. In case answer to Question No.3 is in the negative, would any interpretation of provisions of Article 301 of the Constitution that make .....

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would such levies not come under judicial scrutiny for determining whether the levy is reasonable and in public interest? 8. If answer to the Question No.7 is in the affirmative, would it not affect the separation of powers between the legislature on the one hand and the judiciary on the other? 9. In the absence of anything to show that Article 301 excludes only such taxes as are compensatory in nature, would the compensatory tax theory not bring about a dichotomy that is inconsistent with the l .....

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nd Waterways) Act, 1954 (hereinafter referred to as the Assam Act, 1954 ). Under the Assam Act, 1954, appellants who were growers of tea in the West Bengal or in Assam and carried out their tea to the market in Calcutta were asked to pay tax on goods in their journey in part of territory of Assam. 24. The appellant had challenged the vires of the Assam Act, 1954 before the Assam High Court on various grounds including the ground that provisions of the Assam Act, 1954 are violative of rights give .....

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ore the Constitution Bench, the principal submission which was made by the appellants/petitioners was that Article 301 of the Constitution of India grants the freedom of trade, commerce and intercourse throughout the territory of India and the Assam Act, 1954 levies tax on carrying out the tea throughout the State of Assam, and it had the effect of interfering with the above freedom. The respondent contended that the Act in pith and substance, a legislature to levy tax on certain classes of type .....

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ax laws are outside Part XIII. Following was observed as under: ……. Thus the intrinsic evidence furnished by some of the Articles of Part XIII shows that taxing laws are not excluded from the operation of Art.301; which means that tax laws can and do amount to restrictions freedom from which is guaranteed to trade under the said part….. 26. Further, question posed by P.B. Gajendragadkar J. was that whether all tax laws attract the provisions of Part XIII? Whether their impac .....

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ade that would fall within the purview of Article 301. The argument that all taxes should be governed by Article 301 whether or not their impact on trade is immediate or mediate, direct or remote, adopts, in our opinion, an extreme approach which cannot be upheld….. Further, it was observed that: ……. We are, therefore, satisfied that in determining the limits of the width and amplitude of the freedom guaranteed by Article 301 a rational and workable test to apply would be: D .....

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on trade itself. The effect of the Act on the movement of trade is direct and immediate; it is not indirect or remote; and so legislation under the said Entry must be held to fall directly under Article 301 as legislation in respect of trade and commerce…… 28. B.P. Sinha, C.J. in his minority opinion held that freedom declared by Article 301 does not mean freedom of taxation simpliciter but it does mean freedom from taxation which has the effect of directly impeding the free flow .....

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example, by imposing a high tariff wall, or by preventing imports into or exports out of a State, such a law is outside the significance of taxation, as such, but assumes the character of a trade barrier which it was the intention of the Constitutionmakers to abolish by Part XIII…… 30. Sinha J. upheld the Assam Act, 1954. The third opinion of the Constitution Bench was expressed by Shah J. Shah J. held that taxation was one of the restrictions from the imposition of which by the gu .....

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urse vested by the legislative lists in the Parliament or the State Legislatures, is circumscribed by Part XIII of the Constitution and if the exercise of that power does not conform to the requirements of Part XIII, it would be regarded as invalid...... 31. As noted above, by the majority opinion expressed by Gajendragadkar, J. with whom Shah J. concurred, the provisions of Assam Act, 1954 were held to be infringing the Article 301 and since the Bill had not received the assent of President as .....

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nconstitutional and void as they contravened the freedom of trade, commerce and intercourse throughout the territory of India as guaranteed by Article 301 of the Constitution of India. 34. The Division Bench of the High Court referred the matter to the Full Bench. The Full Bench took the view that taxation under the aforesaid Act cannot be said to offend Article 301 for its effect on trade, commerce is only indirect and consequential and it may be regarded only as remote. 35. The matter was take .....

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gment for himself, J.L. Kapur, J., A.K. Sarkar J. and K. Subba Rao, J. delivered separate opinion concurring with the opinion expressed by Das J. 36. Justice M. Hidayatullah delivered minority judgment on behalf of himself and N. Rajagopala Ayyangar, J., J.R. Mudholkar, J., Dass J. and SubbaRao J. Das, J. upheld the provisions of the Act, upholding the provisions of the Act as regulatory and compensatory. However, while upholding the provisions of the Act, the majority judgment approved the earl .....

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nstitution. 37. Das, J. held that tax for use of a road or for the use of bridge is not barrier or burden or deterrent to traders. It was held that such taxes are compensatory taxes which do not hinder anybody s freedom. Following was observed by Das, J.:- ......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 .....

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n freedom (Article 301) and restrictions (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 between that which would really be a charge for a facility provided and that which would really be a deterrent to a trade; but the distinc .....

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on of the Act. It was held that Section 4 of the Act makes it clear that tax is imposed on a motor vehicle which is to be used in any public place or kept to be used for in the State of Rajasthan. What should be the test to enquire as to whether a tax is a compensatory or not, following was stated as under:- .....It seems to us that a working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having the use of certain facilities for the better cond .....

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ere legal and High Court had rightly dismissed the writ petitions. Subba Rao J., agreed with the conclusion arrived by Das, J. 41. It was held, that the arguments cannot be accepted that law of taxation is outside the scope of freedom enshrined under Article 301 of the Constitution. Subba Rao, J. also laid down that the doctrine of direct and immediate effect is the most important doctrine to find out whether there is restriction on the free movement of trade. It was further held that compensato .....

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ed upon a trade directly and immediately may be admitted. But there is a difference between a tax which burdens a trader in this manner and a tax, which being general, is paid by tradesmen in common with others. The first is a levy from the trade by reason of its being trade, the other is levied from all, and tradesmen pay it because every one has to pay it. There is a vital difference between the two, viewed from the angle of freedom of trade and commerce. The first is an impost on trade as suc .....

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om of action to the States, subject, however, to the needs of the unity of India. Just as unity cannot be allowed to be frittered away by insular action, the existence of separate States is not to be sacrificed by a fusion beyond what the Constitution envisages. No doubt, Part XIII ensures economic unity to India and combines the federating States into the larger State called India. The Constitution also permits independent powers of taxation. What the Constitution does not permit is that trade, .....

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ia. PART III SUBMISSIONS 44. The arguments on behalf of the petitioners, who have challenged various Entry Tax Legislations, have been led by Shri Harish Salve, learned senior counsel. For the petitioners, we have also heard several other eminent Senior Advocates and other counsel who have additionally made substantial submissions, however, to avoid repetition of submissions while referring to the submissions of other counsel we have not noted the submissions which have already been covered by S .....

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elaborate submissions on various aspects of Part XIII of the Constitution of India. Shri Salve traced the legislative history of Part XIII of Constitution by referring to the Government of India Act 1919 and Government of India Act, 1935. It is submitted by Shri Salve that a Tax commonly known as Octroi was enforced in 1901 even before the Government of India Act, 1935. 47. It is contended that Article 301 of the Constitution of India was originally framed as Draft Article 16 which was included .....

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erican pattern which only declared rights, rather our constitution has a strict balance between powers granted to Parliament and State to frame law. It is contended that there is a clear federal slant in favour of Union which is clear from the scheme of the Constitution. 48. Shri Salve contended that tax legislations were also contemplated to be covered by Part XIII of the Constitution. He submitted that textual reading of various articles in Part XIII indicate that framers of the Constitution c .....

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commerce and intercourse throughout the territory. He submitted that historically there were various tax barriers in different independent states prior to enforcement of the Constitution and to remove the barriers, the freedom of trade, commerce and intercourse was included in Part XIII. 49. Referring to majority view in Atiabari case (supra) he contended that the tax laws are covered by Part XIII of the Constitution. He submitted that above majority view in Atiabari was not doubted by subsequen .....

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e subject which directly impede Freedom of trade and commerce. 50. Answering Question No. 1, Shri Salve contends that in a set of circumstances nondiscriminatory tax may violate Article 301. Shri Salve coming to incidental questions contended that taxation is an attribute of the sovereignty however differences lie in a case where legislative power is limited by Constitution. He contends that source of legislative power is Article 245 (1) which is subject to the provisions of the Constitution . I .....

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zes the sovereign powers of the State to make laws including laws levying taxes on such matters elaborated in List II of VIIth Schedule. 52. Answering to subsidiary Question No. 3, he contends that powers to make laws and levying of taxes reserved in favour of the State under Article 246 read with List II of VIIth Schedule are subject to Part XIII of the Constitution. 53. Replying to the incidental Question 4, he contends that freedom guaranteed under Article 301 is a limitation envisaged in the .....

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s limitation on the legislative power of the State. There are various provisions in the Constitution which work as limitation on the legislative power of the state and limitation envisaged by different provisions of the Constitution being part of the Constitutional scheme it cannot be said that States are denuded with their sovereign power. 54. Answering to incidental Question No. 5 and 6 Shri Salve contends that taxes are always presumed to be in public interest, but however, the levy of taxes .....

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ate with one limitation that the Bill is to be moved with the previous sanction of the President. State autonomy is in no manner affected. The judicial review being a basic structure of the Constitution, the Court is fully empowered to examine whether a law framed by State complies with Part XIII of the Constitution. He submits that there is no question of affecting separation of powers merely on the ground that State Legislation can be judicially scrutinized regarding compliance of Part XIII of .....

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i Salve answering Question Nos.2 and 3 contends that tax which is said to be compensatory may also fall foul of Article 301. It is contended that compensatory theory has not worked well and it has created more problem than solved. All States have picked up compensatory theory and have made statements in the statute that Entry Tax collected shall be spent for the benefit of the trader. The statutes have only made facial compliance. The test as approved by Automobile Transport that is direct and i .....

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provision of Article 304 subclause (b) proviso was limitation which was consciously put in the larger interest by the economic unity of India. The President normally does not veto any tax proposed by the State under Article 304(b) nor any such instances before the Court has come, to come the conclusion that a State's autonomy in legislation has in any manner affected. Power given under Article 304(b) proviso is the power to oversee the restrictions put by the State viz larger object and purp .....

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ubmitted that any tax viz. by its legal structure and practical effect may impede the trade and have a immediate and direct effect. Shri Salve also posed a question as to whether goods imported from other countries entering into a local area are liable to pay Entry Tax under legislation covered by Entry 52 List II ? He submits that in the above case the Entry Tax, if any, has to be justified under Article 304(b). Goods not covered by Article 304(a) should satisfy Article 304(b). The precondition .....

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sions in Atiabari and Automobile is not warranted. 62. Relying on Constitution Bench judgment in Keshav Mills case(Keshav Mills Vs. Commissioner of Income Tax 1965 (2) SCR 908) he submits that when this court decides questions of law which are binding under Article 141 on all courts, it must be constant endeavor and concern of this court to introduce and maintain an element of certainty and continuity. In the interpretation of law in the continuity, he submits that review excise is to be underta .....

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ference to larger bench. 64. The compensatory theory as evolved by Automobile Transport has worked well and need not be touched. However, he submits that there should be broad corelation between the compensatory tax and facilities extended to traders. 65. Referring to Article 304(a) and 304(b), Shri Ganguly submits that both the above subclauses of Article 304 are gateway to go out from the clutches of Article 301. Article 304(b) is a federal check and has come due to the historical reasons. Sh. .....

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, even if a State law is not discriminatory under Article 304(a), it is still required to comply with the requirement of Article 304(b). 67. Shri Andhyarujina submitted that one of the tests to be applied for finding out as to whether the tax poses any tariff barrier is that when the tax is more than the value of the goods, it is a tariff barrier which is hit by Article 301. 68. Shri S.K. Bagaria, learned senior counsel submits that under Article 304(a) tax can be imposed on interState trade, wh .....

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ided by Steel Authority of India. In township in Bhilai, there are no facilities being provided by the State. He referred to the details of expenditures spent by Steel Authority of India during the years 199596 to 20082009. He submits that the State Government do not provide any facility and expenditure currently is more than 200 crores every year. He submits that the State not providing municipal/civil facilities is not entitled to levy Entry Tax as a tax compensatory in nature. 70. Shri Arvind .....

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which it is carried on after the impugned enactment. He submits that the restrictions as referred to in Part XIII can be of multiple applications. They can be fiscal, environmental, commercial and in the form of labour law. Entry Tax cannot be levied on entry of the goods in the State. Referring to the word and used in Article 304(a) and 304(b), he submits that and be interpreted as joint and several. He submits that a nondiscriminatory tax which does not violate Article 304(a) may still violate .....

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ential assent is required. In Article 204, 255, 304 and 349 the Presidential sanction is required. 72. Mr. V. Laxmikumaran, learned senior counsel, contends that free trade, commerce and intercourse means free movement of goods, services, persons and capital(investment). Article 304(a) relates to tax on goods and Article 304(b) relates to other taxes and measures. Article 304(a) mandates that a state can impose tax on goods imported from other states less than or equal to taxes imposed on likego .....

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t even if a tax levied by the state is nondiscriminatory, it may impede right guaranteed under Article 301. Learned counsel supports his submission by giving an illustration. In a state laptops and Ipads are manufactured. A State which wants to encourage the manufacturing of laptop has put only 0.5 % tax on laptop but has imposed 50 % tax on Ipad with an intent to discourage the import of Ipad. The said state's above action may not be violating Article 304(a), however, procedure prescribed i .....

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s 304(a) and 304(b) have to be complied with. 73. Shri Jagdeep Dhankar, learned senior counsel, contends that Part XIII of the Constitution is a basic structure of the Constitution. He contends that nothing can be more basic than economic unity of the country. Learned senior counsel submitted that compensatory theory cannot be supported which shall only lead to right to litigate. Words tax and restrictions are employed in Part XIII separately. These are not interchangeable and there can be no co .....

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omobile case, he contended that if a tax is imposed solely on the basis of movement of goods, it is violative of Article 301, however, if it is a common burden it does not violate Article 301. Elaborating the concept of tax he submitted that there are two concepts for imposition of tax that are (i) AbilitytoPay Principle and (ii) Benefit Principle . He submitted that examination of each legislation / tax legislation is necessary having regard to the provisions of a particular Act to arrive at co .....

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s restricted in many ways. Legislative power in different entries of List II are subject to legislative power of the Union under List I. He has referred to power under Entry 54 List II, which is made subject to the power of the Union under Entry 92A, List I. 76. He further submits that Article 254 clarifies State's power of taxation. Further, Article 286 subclause (3)(a) and (3)(b) restricts the State's power of taxation. Similarly, Part XIII is restriction on the State legislative power .....

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ods. The above Bill indicates that we have now moved to real economic unity. 78. Shri Dhruv Agrawal, learned senior counsel, submits that freedom of trade, commerce and intercourse is a basic structure of the Constitution. Referring to the Preamble of the Constitution learned senior counsel submits that the unity and integrity of the Nation is a basic feature of the constitutional structure. Part XIII has been inserted in the Constitution to achieve the economic unity of the country. Shri Agrawa .....

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t contended that the opinion expressed by Justice Hidayatullah be accepted. Shri Tandon submitted that he adopts the arguments of Shri Harish Salve and Shri Ravindra Srivastava, learned senior counsel. 81. Smt. Suruchi Aggarwal, learned counsel submitted that Article 301 is a restriction on the legislative power of the State. Referring to Article 304(a) she contends that Article 304(a) is resorted since it is presumed that the law would be a restriction under Article 301. She referring to provis .....

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nterState trade. Hence,they must, therefore, pass the test of clause (a) and clause (b) cumulatively. Article 304(a) does not apply to goods imported into India and not manufactured or produced in any other State. 83. Coming to the Entry Tax levied to Indian Oil Corporation, Shri Mehta submits that Indian Oil Corporation transports crude oil from its own underground pipelines from A to B State. The States are not manufacturing crude oil but they are still demanding Entry Tax. The States where In .....

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ion he will bring on record necessary pleading on behalf of the Indian Oil Corporation in the appeal before this Court. 84. Shri Mukul Rohatgi, learned Attorney General has made his submissions. Shri Rohatgi submitted that power to tax in List II is Sovereign and Plenary Power which can be curtailed only by express provisions of the Constitution of India. Part XIII of the Constitution does not deal generally with tax except, in so far as, it makes reference under Article 304(a). Entire ethos of .....

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that federal structure is a basic feature of our Constitution. Though India is described as a QuasiFederal or a Federation with strong central bias, this does not militate from the fact that states are sovereign in the field which is left to them under the Constitution. Shri Rohatgi submitted that Constitution is to be read as a whole. Part XIII of the Constitution must be interpreted with reference to other parts of the Constitution, including Part III of the Constitution, Part XII and Article .....

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l submitted that GST Bill having been passed on 3rd August, 2016 in the Rajya Sabha, after ratification by the states, the only issue relevant in the present batch of cases shall be with regard to Entry Tax as was enforced in past. Entry 52 List II providing for Entry Tax shall stand deleted after Bill becomes a Law. He submitted that passing of the GST Bill indicates that we have proceeded to economic unity. 87. What is prohibited by Part XIII is pernicious or hostile discrimination by or betwe .....

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ns and Taxes differently. A clear dichotomy was intended between taxes on the one hand and restrictions on the other hand. Article 302 does not refer to tax, whereas, concept of tax is well known to the Constitution and has been used in Part XII in several articles. Article 304(b) does not refer to taxes, word Tax is found in Article 304(a) which cannot be imported in Article 304(b). It is obvious that reference under Article 304(b) is to restrictions other than tax. Coming to the Compensatory T .....

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d. He further submits that no entry in the VIIth Schedule of the Constitution should be so read as to rob the entry of its content. He submits that in a federal system of governance, the power to levy tax is an inherent attribute of a sovereign function of a State. 90. Clause(a) and Clause(b) of Article 304 are mutually exclusive. Taxes are covered in Clause(a) whereas restrictions other than taxes are covered in Clause(b). It is only discriminatory taxes visavis goods of other States and Union .....

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of Article 304(b). For imposing a tax on goods coming from other State, it is not essential that similar goods produced and manufactured in the State should be taxed. The only restriction is that the tax shall not be discriminatory. Taxes per se are not restrictions. Only taxes which suffer from the vice of protectionist discrimination visavis goods imported from other States and Union Territories interfere with the freedom of trade, commerce and intercourse mentioned in Article 301. The whole s .....

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provided by Article 304(b).... , he submits that the above observations cannot be said to laying down a law since the issue never arose in the above case. He submits that the above observations are not the ratio decidendi and do not constitute a precedent. Shri Rao further submits that the concept of compensatory taxes as laid down in Automobile Transport case is alien to the Constitution and is unsustainable. The discrimination which is referred to in Article 304(a) is hostile discrimination. .....

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n is imposed that all agriculturebased industries shall take rawmaterials only from within the State. He submitted that this is an example of 'trade barrier' by a protectionist measure. Article 304(a) has a limited scope and ambit. 95. Power both in (a) and (b) can be exercised or either (a) or (b) can be exercised or none can be exercised. There is no necessity that power under 304(a) and 304(b) are to be exercised necessarily together. Shri Divan further submitted that there is differe .....

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f this Court in Atiabari and Automobile Transport be not revisited. Shri Dwivedi submits that there were fundamental errors in both the above decisions. He submits that following fundamental errors are, in the above two cases : I. (i) Both the cases confined on economic unity as sole factor for trade, commerce and intercourse; (ii) whereas, a perusal of various provisions of the Constitution indicates that economic unity depends on the continuity of political unit; and (iii) Territory of Union i .....

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overnance and peace. These differences in our Constitution and the Constitutions of Australia and US have been completely overlooked. Law as developed in Australia and US i.e. direct and immediate effect for finding out impediment in the trade has now been given a go by both by Australian and US Courts. Both the Courts have moved to a discriminatory test. IV. In both the above cases one does not find any detailed consideration of history of Part XIII as emerging from Constituent Assembly Debates .....

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ivities by the State. (iii)Tax can neither be imposed by implication nor taxing power can be limited by implication. (iv) The tax can only be for a public purpose which has its roots in Article 265 of the Constitution. (v) Taxing powers of the State and the Union are mutually exclusive except to the extent as mentioned in the respective Entries in List II and any other provision of Constitution. Even Parliament cannot restrict the taxing power of a State flowing from Entries of List II. (vi) Art .....

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wer, despite the limited width of its field is plenary in nature. Wherever,exemption from taxes were contemplated they were expressly provided as under Articles 285, 287,288 and 289. Referring to Part III of the Constitution, he submits that Part III does not confer freedom from taxation. A fortiori, Article 301, which is not a fundamental right cannot result in conferring a freedom of trade, commerce and intercourse from tax. He submits that there are inherent limitations on taxation by a State .....

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ctive where the legislative intent as gathered from the words of the provision and the context indicate that it was used in the disjunctive sense. Learned counsel elaborating his submissions contends that Article 304 relates to interState trade which is apparent from marginal heading. 99. He submits that by use of the words within that State alongwith with , it is clearly meant that the words within that State was used in relation to interState trade. He submits that interState does not come to .....

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the legislative power of the State. 101. Learned counsel further submits that mere excessiveness of rate of taxes does not violate Article 14 and 19 as has been held by this Court in a large number of cases which principle has also to be applied for examining the challenge that high quantum of tax impedes the trade. 102. Shri Dwivedi further submits that in the event submission is not accepted that tax is out of Article 301, alternatively tax simpliciter is outside the Article 301. He submits th .....

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riminately. That is why, they separately provided for restricting the taxing power under Article 304(a). He, however, submits that there shall be an onerous burden on the petitioner to prove that the tax is an impediment. 103. Coming to the Australian cases relied by this Court in Atiabari Tea Company Ltd and Automobiles, he submits that 'direct and immediate effect test' which was propounded in above two cases based on earlier cases of Australian High Court, including James Vs. Commonwe .....

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el submits that trend of cases indicates that effort is on shifting the test of discrimination. He submits that in the Complete Auto Transit Vs. Charles R Brady 430 U.S. 274, it was held that it was not the purpose of commerce clause to relieve those engaged in interstate commerce from their just share of State tax burden, even though, it increases the cost of doing business. 105. Coming to Entry 52 List II, learned counsel contends that, even if, we apply the Test laid down in the Automobile, t .....

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, answering the Question No. 1 submits that levy of NonDiscriminatory Tax per se does not constitute infraction of Article 301. He further submits that the question regarding the Compensatory Tax need not be answered since compensatory nature of tax is outside the Constitutional Scheme and has to be struck down. Learned counsel submits that the Constitution is a living organism and each part of it throws light on other part of the Constitution. Every part of the Constitution has to be looked int .....

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Constitution. 108. Shri Giri submits that at the time of payment of Sales Tax, the credit of Entry Tax is to be given. He submits that with regard to goods produced and manufactured within the State and manufactured from outside the State the tax burden is almost similar and tax being nondiscriminatory does not fall foul to Article 301. 109. Shri Ajit Kumar Sinha, learned senior counsel has made his submissions on behalf of State of Jharkhand. Shri Sinha submits that the Bihar Entry Tax Act, 199 .....

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Gilda, learned Advocate General of the State of Chhattisgarh has addressed his submissions on behalf of State of Chhattisgarh. Learned Advocate General has at the very outset stated that he adopts the submission made by Sh. P.P.Rao and Shri Rakesh Dwiwedi. 112. Shri Dev Dutt Kamath, learned Additional Advocate General has raised submissions on behalf of State of Karnataka. He submits that Constitution validity of Karnataka(Tax on entry of goods) Act 1979 has already been upheld by this Court in .....

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f Goods Into Local Areas Act, 1999 had been upheld against which Special Leave Petition had been filed by Assesses in the year 2001. Subsequently, after the judgment of this Court in Jindal Stainless Steel (2) division Bench dated 21st August, 2007, declared Act 1999 as ultra vires to Article 301 against which judgment the appeal has been filed by the State which is pending. 115. Shri Harish Salve, learned senior counsel in rejoinder to the submissions made by learned Attorney General, learned c .....

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ot mean that such sanction affects the sovereignty of the State. The proviso to 304(b) operates in a very narrow field. 117. Shri Salve further contends that Sinha, J developed Tariff Wall Theory, as impediment of trade since he was of the opinion that taxing legislation can not be challenged under Part III. Shri Salve referring to judgment of this Court in K. K. Kochuni and Others Vs. State of Madras and Others, (1960) 3 S.C.R. 887 and K. T. Moopil Nair Vs. State of Kerala and Others(1961) 3 S. .....

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faced with an exorbitant rate of Entry Tax in one State, the company cannot contend that freedom to carry out its profession as guaranteed under Article 19(1)(g) have been affected. Whereas a trader carrying on business in that State may be affected by an exorbitant tax and can contend that the exorbitant tax impedes the trade under Article 301. 119. Shri Salve submits that entry tax legislations of different States in the country can be characterized in different groups. He submits that one gro .....

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s, but legislation contains a devise by which there is setoff\ exemptions to the local goods which result in nonimposition of Entry Tax on the local goods, leading to another kind of discrimination which also violates Article 304(a). In the second category, State of Assam, Bihar, Jharkhand and few other States are included. There is third category of legislation where discrimination is practiced in several manners, for example, manufacturers are given setoff of Entry Tax on rawmaterials like Sta .....

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itution. Shri Salve further submits that Article 304(a) has two parts. Under first part of the Act 'State by law may impose on goods imported from other States, any tax to which similar goods manufactured or produced in that State are subject.' He submits that the second part provides for nondiscrimination, which is indicated by words 'as not to discriminate'. 121. Lastly, Shri Salve replying to the submission of unjust enrichment contends that presumption that tax has been passe .....

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t Assembly clearly indicates that Part XIII of the Constitution contemplated taxation to be a 'restriction' on the freedom of trade, commerce and intercourse and restrictions were permitted only to a limited exemption in the form of Article 302 - 306. Coming to Entry 52 list II, Shri A. K. Ganguly submits that contemplated entry of goods into a local area, the framers of the Constitution were well aware of the State boundaries and did not deliberately choose entry into a State boundary. .....

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123. Shri S. K. Bagaria, Shri Arvind P. Datar, Sri Ravindra Srivastava, Sri B. Laxmikumaran and Shri N. Venkataraman have also made their submissions in rejoinder. 124. Shri S. K. Bagaria, learned senior counsel, in his rejoinder submits that Article 304(a) has two conditions. He further submits that Entry 92(a) and 92(b) of List II cover the entire interstate trade and all facets of interstate movement. 125. Shri Arvind P. Datar, learned senior counsel, in his submissions reiterated that tax l .....

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violative of Entry 52 List II which permits Entry Tax only on entry into local areas . Article 304(b) could also include taxes when rate of tax is same but there were other features which are restrictions. High rate of tax may not militate Article 19(1)(g) but it may violate Article 304(b). He submits that the question of tax barrier, as propounded in Atiabari has to be left to case to case. Restrictions contemplated under Part XIII can both be fiscal and nonfiscal. As on date 42 per cent of tax .....

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ng to question of unjust enrichment, learned counsel submits that the issue has to be left to be considered by the assessing authorities. He submits that the States have different laws and facts which in each case are different and have to be examined for applying the theory of unjust enrichment. Learned counsel submits that in the event of this Court overruling Atiabari and Automobile today, overruling of the judgments has to be prospective so that position regarding tax settled already be not .....

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goods enter into the local areas from the other States and the local goods within the States. Equalising the total quantum of the Entry Tax levied on imported goods and some other local taxes within the States which is not in the nature of Entry Tax, is not permissible. Various parameters are to be looked into for the purposes of understanding discrimination. He further contends that Article 304(b) can cover tax law in addition to other law. 128. Shri N. Venkataraman,learned senior counsel in hi .....

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ree aspects, namely: a. Legislative history of freedom of trade, b. Freedom of trade as it emerges from the debates in the Constituent Assembly, c. Tax, whether was treated as 'restriction' on the freedom of trade by Constituent Assembly. 131. During the British Rule, by the end of 19th Century efforts for drafting a Constitution for India had begun. Under the inspiration of Shri Bal Gangadhar Tilak, the Swaraj Bill, 1885 was the first nonofficial attempt of drafting the Constitution. Th .....

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shall be no preference given to any province or provinces. 132. In the British India, freedom of trade was in practice with no internal provincial duties or other trade barriers whereas in the Indian States internal custom and other trade barriers were there. The above practice took statutory form in Section 297 of Government of India Act, 1935 which prohibited provincial Government from imposing barriers on trade within country. Section 297 reads as under: 297. (1) No Provincial Legislature or .....

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goods manufactured or produced in the Province and similar goods not so manufactured or produced, discriminates in favour of the former, or which, in the case of goods manufactured or produced outside the Province, discriminates between goods manufactured or produced in one locality and similar goods manufactured or produced in another locality. (2) Any law passed in contravention of this section shall, to the extent of the contravention, be invalid. 133. Declaration of Cabinet Mission Plan on .....

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lian Constitution, which were to the following effect: 92.Trade within the Commonwealth to be free On the imposition of uniform duties of customs, trade, commerce, and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free.... 99. Commonwealth not to give preference The Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof. .....

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rent States of tariffs and border regulations; this was described as the old intercolonial trade war. 136. Section 92 was interpreted as to mean free trade means,in ordinary parlance freedom from tariffs . Professor David P. Derham, of Melbourne University dealing on the subject; Some Constitutional problems arising under Part XIII of the Indian Constitution has expressed his views on Section 92 of the Australian Constitution in following manner: In its Australian origins there is no doubt whate .....

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of the Indian Constitution although took inspiration from Section 92 above, but even at initial stages the freedom of trade was contemplated with restriction and with permission to levy only certain taxes. The SubCommittee on fundamental rights submitted a report dated 16.04.1947 to the Advisory Committee in Para 6 of which following was stated: 6. We are of the opinion that every citizen is entitled to free trade, commerce and intercourse within the territories of the Union unburdened by any i .....

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hts with a view to their ultimate elimination within a period to be prescribed by the Constitution. Thereafter, there will be untrammeled free trade within the Union. 138. The Advisory Committee considered the report of the subcommittee on fundamental rights. Shri Sardar Vallabhbhai Patel, Chairman Advisory Committee sent report dated 23rd April, 1947 to the Constituent Assembly, in paragraph 5 of which following was stated: 5. Clause 10 deals with the freedom, throughout the Union, of trade, co .....

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me, up to a maximum period to be prescribed by the Constitution, by which internal customs could be eliminated and complete free trade established within the Union. 139. Constituent Assembly on 1st May 1947 considered the report on fundamental rights. 140. Shri K. M. Munshi made following statement with regard to Custom Duties and Taxes: The proviso contemplates that a Unit can impose certain customs duty with a view to bring up the level of the price of goods imported to the level of the price .....

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ore, the words 'and under regulations and conditions which are nondiscriminatory' have to be added, so that conditions must not be such as to force up the price of the goods imported. Therefore, the whole point is that there should not be any regulation or any conditions of such a nature which would favour the goods produced in the Unit as against those produced and imported from outside. Certain amendments on 01st May 1947 were adopted. 141. In the Draft Constitution finalized by Drafti .....

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243. Prohibition of preference or discriminat ion to one State over another by any law or regulation relating to trade or commerce. No preference shall be given to one State over another nor shall any discrimination be made between one State and another by any law or regulation relating to trade or commerce, whether carried by land, water or air. The committee is of opinion that the provisions contained in articles 243 and 244 should more appropriately be included in this Chapter than I Part III .....

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such reasonable restrictions on the freedom of trade, commerce or intercourse with that State as may be required in the public interests: Provided that during a period of five years from the commencement of this Constitution the provisions of clause (b) of this article shall not apply to trade or commerce in any of the commodities mentioned in clause (a) of article 306 of this Constitution. 245. Appointment of authority to carry out the provisions of articles 243 and 244. Parliament shall by law .....

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s and Article 16 being subject to the law of the Parliament, how it can be fundamental right and whether there is any right at all reserved. 144. Dr. B. R. Ambedkar replied the objections of Shri Subramaniam and explained as to why Article 16 was placed in fundamental rights. Dr. Ambedkar stated that Constituent Assembly when began its task, there were limitations since the States were to join the Union only on three subjects, namely, foreign affairs, defence and communication, said Dr. Ambedkar .....

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Indian States would join the Union only on three subjectsforeign affairs, defence and communications. On no other matter they would agree to permit the Union Parliament to extend its legislative and executive jurisdiction. So he will realise that the Constituent Assembly, as well as the Drafting Committee, was placed under a very serious limitation. On the one hand it was realised that there would be no use and no purpose served in forming an AllIndia Union if trade and commerce throughout India .....

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and commerce in List I, which means that Parliament will have the executive authority to make laws with regard to trade and commerce throughout India, we would not have found it necessary to bring trade and commerce under article 16, in the fundamental rights. But as that door was blocked, on account of the basic considerations which operated at the beginning of the Constituent Assembly, we had to find some place for the purpose of uniformity in the matter of trade and commerce throughout India, .....

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at at all. 146. The Constituent Assembly resolved to adopt the motion making Article 16 as a part of the Constitution. On 08th September 1949, Dr. Ambedkar moved a motion for inserting a Part XA consisting of Article 274A, 274B, 274C, 274D and 274E. Part XA included provisions as contained in Article 16 as Article 274A as was passed in the fundamental rights and Article 274B to 274E as was earlier contained in provisions of Article 244 - 245 in the Draft Constitution. Dr. Ambedkar, while moving .....

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of Article 274DD, which was to the following effect: 274DD. Notwithstanding anything contained in Power of certain States in Part III of the First schedule in impose restrictions on trade and commerce by the levy of certain taxes and duties on the import of goods into or the export of goods from such States. the foregoing provisions of this Part or in any other provisions of this Constitution, any State which before the commencement of this Constitution was levying any tax or duty on the import .....

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f five years from such commencement terminate or modify any such agreement if, after consideration of the report of the Finance Commission constituted under article 260 of this Constitution, he thinks it necessary to do so. 148. While discussing Article 274DD, one of the Members of the Constituent Assembly Shri Raj Bahadur has expressed his concern about continuance of custom duties and taxation which according to him were great restrictions to the trade and commerce. Following views were expres .....

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e of the Indian States and their movements were set against the imposition of customs duties on both imports and exports. It was because of a particular feeling amongst the people that this opposition was there. We have felt all through that all our trade, our industries have been crippled because of these Customs Duties. Even today we are not going to be benefited by it. Somehow or other , because these States were not viable units and they had to balance their budget the customs taxation was r .....

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.R. Ambedkar stated that imposition of sales tax has created lot of difficulties in the matter of freedom of trade and commerce. Dr. B.R. Ambedkar further stated that imposition of sales tax shall not be in conflict with provisions of Part XA (Now Part XIII). Following was stated by Dr. Ambedkar: Sir, as everyone knows, the sales tax has created a great deal of difficulty throughout India in the matter of freedom of trade and commerce. It has been found that the very many sales taxes which are l .....

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that there ought to be some specific provisions laying down certain limitations on the power of the provinces to levy sales tax. The first thing that I would like to point out to the House is that there are certain provisions in this article 264A which are merely reproductions of the different parts of the Constitution. For instance, in subclause( 1) of article 264A as proposed by me, subclause (b) is merely a reproduction of the article contained in the Constitution, the entry in the Legislati .....

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it. It merely says that if any sales tax is imposed it shall not be in conflict with the provisions of Part XA. 150. The moving idea and inspiration for framing relevant articles pertaining to freedom of trade and commerce was and is the realization that a federal union needs the creation and the preservation of national economic fabric