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Jindal Stainless Ltd. & ANR. Vs. State of Haryana & Ors.

126 The legislative entries in the Lists of the Seventh Schedule to the Constitution delineate general fields of legislation separately from taxing heads. In the Union List taxing entries are contained from Entries 82 to 92C. The residual entry, Entry 97 deals with matters not enumerated in the state or concurrent lists, including any tax not mentioned in either of those lists. In the state list taxes are comprised in Entries 46 to 62. Fees are 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[127]" provides a jurisprudential foundation to the taxing power in the following observations : "Taxes 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 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 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 constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. The people of a State, therefore, give to their government a right of taxing themselves and their property; and as the exigencies of the government cannot be limited, they prescribe 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 defined. Article 366(28) of the Constitution defines the expression taxation to include "the imposition of any tax or impost, whether general or local or special" and provides that the expression tax "shall be construed accordingly". 128 Several decisions of this Court have regarded the taxing power as an essential attribute of government and sovereignty. In Rai Ramkrishna v. State of Bihar[128] it was held that :

"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 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 Raja Jagannath Baksh Singh v. State of U.P.[129] this principle was stated as follows:

"15...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 Amrit Banaspati Co. Ltd. v. State of Punjab[130] 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.[131] 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 sovereign Government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues."

(Id. at p. 702)

129 The limitation on the states' power to tax must as a consequence be found in constitutional 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 limitations imposed by other provisions of the Constitution.

Hence in Maharaj Umeg Singh v. State of Bombay[132] this Court held that the power of legislation that is vested in the state is plenary and the fetters or limitations on the exercise of legislative powers could only be imposed by the Constitution itself. The Court recognized that the Constitution may itself lay down fetters or limitations on the exercise of the power such as in Article 303 or Article 286(2). The fetter or limitation must however be traceable to the Constitution.

In Firm Bansidhar Premsukhdas v. State of Rajasthan[133] this Court adverted to the decision in Thakur Jagannath Baksh Singh v. United Provinces[134] 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 conditions of a previous contract or of a grant under which the liability of the Government of India or of the State Governments arises.

The legislative competence of Parliament or of the State Legislatures can only be circumscribed by express 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 or 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. 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 valid if it is enacted by a legislature which has competence to enact law on the subject. This is the consequence of the distribution of legislative power between the Union and the States under Articles 245 and 246 read with the lists contained in the Seventh Schedule.

The legislatures, whether at the national or the state level, are entrusted with the power of legislation in exercise of which they must confine themselves to the boundaries allocated by the Constitution. These boundaries are defined 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 Chapter on fundamental rights.

A law whether made before or after the advent of the Constitution is void to the extent of its inconsistency with Part XIII. Third, other constitutional limitations or restrictions may condition or contain the law making power including in the field of taxation. These constitutional provisions are a manifestation of the doctrine of constitutional limitations under which every organ of the state which is a creation of the Constitution operates in the field assigned 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 or purchase of goods other than newspapers, subject to the provisions of Entry 92(A) of the Union List. Entry 92(A) of the Union List was introduced by the Sixth amendment to the Constitution in 1956 to provide for 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. Under Entry 54 of the State List as it originally stood, the states possessed an unfettered area for imposing taxes on the sale or purchase 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[135]. 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 stipulates that a state law shall not impose or authorize the imposition of a tax on the sale or purchase of goods, where the sale or purchase takes place outside the state or in the course of import or export from or outside the territory of India. Article 286(1) provides an express bar. Article 269(3) empowers Parliament by law to formulate principles for determining when a sale or purchase or consignment of goods takes place in the course of inter-state trade or commerce. Parliament, in exercise 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 the power to enact legislation for the entire territory of India for implementing a treaty, agreement or convention with one or more countries or to implement a decision at an international conference association or other body. The non- obstante provision of Article 253 operates in relation to Articles 245 to 252. Hence, the legislative powers of the states including in the area of taxation may be eclipsed where Parliament has enacted a law to effectuate India's international obligations in pursuance 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 purchase of goods declared to be of special importance in inter-state trade or commerce by a law enacted by Parliament. Sub-clause (b) deals with a tax on the sale or purchase of goods falling under sub-clauses (b), (c) and (d) of Article 366(29A). Among other things, a tax on contracts for hire purchase and involving transfer of the right to use goods is subject to the restrictions and conditions which are provided by a law enacted by Parliament in regard to the system of levy rates and other incidents 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 Article 301 is not freedom from taxation. This submission has been adduced primarily on the foundation that the Indian Constitution contemplates the position of the states as constitutional units of a federal structure, each of whom is sovereign within the fields allotted. Taxation, it has been urged is a manifestation of sovereign power which is foundational to the existence of government. Tax revenues are required for welfare and developmental activities. Hence, it has been submitted that these are 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 states or powers are conferred upon Parliament to provide for limitations by law (Clauses 2 and 3 of Article 286).

There are at least five entries in the State List of the Seventh Schedule (Entries 50,51,54,55, and 57) which are specifically subject to limitations or principles prescribed by Parliament by a law made under List I and List III. In other words, it has been urged that wherever an exemption from taxes or a limitation on states' taxing powers is contemplated by the Constitution, this has 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 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 of Punjab[136] it has been urged that in a situation where the Constitution subjects even the trade or business of a state to tax, an exemption in favour of trade, commerce and intercourse carried on by private individuals cannot be contemplated particularly by implication.

138 While evaluating this submission, it would at the outset be necessary to notice that there are two extreme positions which lie at opposing ends of the spectrum. The first is the position adopted by Justice J 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 would run afoul of Part XIII [being violative of Article 304(a)] and, so long as a tax is non- discriminatory, it cannot be contrary to the provisions of Part XIII. This position would broadly correspond to the view espoused by Chief Justice Sinha. The middle ground which was sought to be advanced in the decision in Automobile Transport was that compensatory taxes would lie outside Part XIII since they facilitate rather than restrict trade. Taxes which are not compensatory and which in their direct 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 vie[WPoints, 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 a legal system which creates rights and provides remedies for redressal. Again, the free movement of goods, services, persons and capital requires the existence of public order and conditions which allow for trade and commerce to take place unhindered. Neither trade nor commerce can flourish amidst violence, unrest and social disorder. Taxes provide revenue for the state to sustain manifold activities which are geared to providing conditions of social order. The state provides infrastructure both 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 intercourse and that every tax necessarily hinders trade. Such a wide construction cannot be accepted simply because by raising revenues through the means of taxation, the state provides a political and legal order based on the rule of law where contractual transactions can be executed effectively.

The extreme position that every law which imposes a tax is to be regarded as a hindrance to trade, commerce and intercourse is unsustainable.

140 In the context of the relationship between the freedom 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[137] 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 from taxation in express terms. On the other hand, Entry 92 of the Union List of the Seventh Schedule empowers Parliament to make laws for levying taxes on sale or purchase of newspapers and on advertisements published therein.

The police power, taxation and eminent domain were held to be a form of social control essential for peace and good governance. Newspapers were held not to be free from the requirement of bearing a common fiscal burden, like others:

"43....Their newspapers have to be transported 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 of an ordinary taxing statute, a law may be questioned if it is openly confiscatory or a colourable device to confiscate. On the other hand, in the case of a tax on newsprint, it would be sufficient to show a "distinct and noticeable burdensomeness, clearly and directly attributable to the tax". While therefore holding that it was rejecting the submission that no tax could be levied on the newspaper industry, this Court held that any such levy was subject to judicial review under the provisions of the Constitution.

141 In Government of Tamil Nadu v. Ahobila Matam[138] 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[139] 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 alia, from measures of taxation. Apart from these decisions, there are judgments of this Court holding that a taxing statute is not per se a restriction on the freedom under Article 19(1)(g). In Federation of Hotel & Restaurant Association of India v. Union of India[140] this Court while laying down the above principle held that the mere excessiveness of a tax or a diminution of profit earnings does not per se without more constitute a violation of rights under Article 19(1)(g). (See also in this context : Express Hotels (P) Ltd. v. State of Gujarat[141] and Pankaj Jain Agencies v. Union of India[142]).

142 In Vrajlal Manilal & Co. v. State of M.P[143] 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 immediately impede the free flow of trade, commerce and intercourse so as to fall within the prohibition of Article 301.

A tax may in certain cases directly and immediately restrict or hamper the flow of trade. Whether the imposition of a tax does so in each case has to be judged on its own facts and in its own setting of time and circumstance. H.3.2 Articles 302, 303 and 304

143 Articles 302, 303 and 304 provide for restrictions on trade and commerce. The marginal note to each of the three articles 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 restrictions is not only confined to inter-state trade but extends to restrictions within any part of the territory of India.

However, Article 303 imposes a limitation both on Parliament and the state legislatures. Under Article 303, neither Parliament nor the legislature of a state can enact a law giving or authoring the giving of a preference to one state over another or making or authorising the making of 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. 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 interest under Article 302 is subject to the principle of non-discrimination and non-grant of preferences to one state over another under Article 303. 144 Be that it is may, the effect of the norm which Article 303 enunciates is that neither Parliament nor the legislature of a state can grant preferences while enacting law to one state over another or make any discrimination. Article 303 concludes with the words "by virtue of any entry relating to trade and commerce in any of the lists in the Seventh Schedule."

These words were held by Justice Subba Rao in 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...... 42. Inter-State trade and Commerce. Entry 26 of the State List is as follows : 26. Trade and commerce within the State subject to the provisions of Entry 33 of List III. 27. Production, supply and distribution of goods subject to the provisions of Entry 33 of List III. Entry 33 of the Concurrent list is as follows :

33. Trade and commerce in and the production, supply and distribution of - the products of any industry where the control of such industry by the Union is declared by Parliament by law to be expedient in the public interest, and imported goods of the same kind as such products; foodstuffs, including edible oilseeds and oils; cattle fodder, including oilcakes and other concentrates; raw cotton, whether ginned or unginned, and cotton seed; and 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 of the said entries". Therefore, any law under Article 303 made by virtue of any entry in any of the lists in the Seventh Schedule, if it relates to trade and commerce, would be covered by the exception. Accepting the submission, Justice Subba Rao held as follows : "42....The words "any entry relating to trade and commerce in any of the Lists" are of the widest import and they yield to a very liberal interpretation.

The phraseology used supports this interpretation. The reason of the exception 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 e[TC.

These entries do not expressly refer to trade and commerce, though they may directly affect trade and commerce. If a law made under entry 26 of List II giving preference or making discrimination among the states is objectionable, it should also be objectionable, if made by virtue of any other entry. I would, therefore, hold that any law made by Parliament by virtue of any entry imposing the said discrimination restrictions would be under the said article."

(Id. at p. 559- 560)

146 Justice Hidayatullah who delivered a dissenting judgment for and on behalf of himself and Justices Rajagopala Ayyangar and Mudholkar 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, Entries 29, 30, 81 of List I, Entry 29, 15 of List III (to mention only a few from each List).

Thus, is achieved one purpose which is paramount viz., that the exercise of the commerce powers, however derived is not to be exercised to create preferences and discrimination between one state and other State Legislature or both acting in union. No question of the content of the power or its source can arise in this context, because the prohibition is absolute. The article makes a great advance upon Section 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. The Article takes in its stride not only the passage of goods or their taxation but all other matters inherent in free trade, commerce and intercourse."

147 However, it has been urged that this interpretation would be contrary to the position which has been adopted since the judgment in MPV Sundararamier v. State of Andhra Pradesh[144] : In support, it has been submitted that the taxing entries in the lists of the Seventh Schedule are indicated separately from non-taxing entries. Hence, 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 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..... Construing Entry 42 in the light of the above scheme, it is difficult to resist the conclusion that the power of Parliament 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."

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. The expression "relating to" has a well-known connotation in law extending its ambit to all matters which are reasonably proximate or connected to the subject. While the constitution mandates the principle of non-discrimination between one state over another and the non-grant of preferences under Article 303, there is no basis to confine those words merely to the entries noted earlier (entries 41 and 42 of List I, entries 26 and 27 of List II and entry 33 of List III).

149 To recapitulate, the submission 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 other than a tax legislation;

(iii) the expression "any entry relating to trade and commerce has a comprehensive significance, meaning something that is associated with or having a nexus to. The words 'any entry relating to trade and commerce' are words of amplitude and cannot be construed in a restrictive sense. 150 In State of Madras v. NK Nataraja Mudaliar[145] a Constitution Bench of this Court, while construing the provisions of the Central Sales Tax Act, 1956 dealt with the submission 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 power under Article 303 could only be exercised so as to restrict the authority of the Parliament which arises by virtue of an entry relating to trade and commerce in the legislative lists and it was urged that an entry with respect to the levy of tax on trade and commerce and is not an entry relating to trade and commerce and therefore there is no prohibition against the Parliament exercising power or authorising the giving of any preference to one State over another or making or authorising the 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 matter.

It was also urged that the expression "an entry relating to trade and commerce in any of the Lists in the Seventh Schedule i.e. entries 41 & 42 of List I, entries 26 & 27 of List III and entry 33 of List III in the Seventh Schedule, and extended to no others. On the other hand, it was contended that all legislative entries which directly affect trade and commerce are also within the expression "entry relating to trade and commerce...... 13. We need to express no opinion on the two 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 of List II are entries relating to trade and commerce, for, in our opinion, an Act which is merely enacted for the purpose of imposing tax which is to be collected and to be retained by the State does not amount to 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, merely because of varying rates of tax prevail in different States."

151 In a subsequent judgment of a Constitution Bench in State of Tamil Nadu v. Sitolakshmi Mills[146] 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. In appeal, the Constitution Bench observed :

"8....Normally, a tax on sale of goods does not directly interfere with the free flow or movement of trade. But a tax can be such that because of its rate or other features, it might operate to impede the free movement of goods.

The majority judgment delivered by Shah, J., in State of Madras v. N.K. Nataraja Mudaliar proceeds on the basis that tax under the Central Sales Tax Act is in its essence a tax which encumbers movement of trade and commerce, 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 his judgment in the case said that if a tax on intra- State sales does not offend Article 301, logically, a tax on inter-State sales also cannot do so, that a tax does not operate directly or immediately on the free flow of trade or the free movement or transport of goods from one part of the country to the other, that the tax is on the sale, and that the movement is incidental and a consequence of the sale. He observed further that even assuming that the Central Sales Tax is within the mischief of 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 Committee would indicate that the main reason for enacting the provision was to canalize inter-State trade through registered dealers, over whom the appropriate government has a great deal of control and thus to prevent evasion of tax :

"Where transactions take place between registered dealers in one State and unregistered dealers or consumers in another, this low rate of levy will not be suitable, as it is likely to encourage avoidance of tax on more or less the same scale as the present provisions 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 at present."[See Report of the Taxation Enquiry Commission, 1953-54, Vol. 3, p. 57].......

In other words, it was to discourage inter-State sale to un-registered dealers that Parliament provided a high rate of tax, namely 10 per cent. But even that might not serve the purpose if the rate applicable to intra- State sales of such goods was more than 10 per cent. The rate of 10 per cent would then be favourable and they would be at an advantage compared to local consumers. It is because of 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 consequently upheld on the ground that as a measure for preventing the evasion of tax in the public interest, Parliament was competent to enact it under Article 302 even if it restricted inter-state trade and commerce. H.3.3 Construing Article 304 152 The area which assumes a great deal of importance in the present case is whether it would be correct to postulate that taxes, save and except for discriminatory taxes under Article 304(a) would lie outside the pale and purview of Part XIII. If this submission 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 consistent with Clause (a) would not need to meet the requirements of Clause (b).

153 Justice G P Singh in his seminal treatise, 'Principles of Statutory Interpretation'[147] states that marginal notes to constitutional provisions are, as a matter of interpretation, 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 intercourse throughout the territory of India shall be free, this guarantee is made subject to the other provisions of Part XIII. Part XIII has employed both the expressions "subject to" on the one hand and "notwithstanding anything" on the other. The expression "subject to" has a well-known legal connotation which conveys the idea of a provision yielding place to another provision or to other provisions to which it is made subject. This principle has been enunciated in the judgment of this Court in South Indian Corporation (P) Ltd. v Board of Revenue[148].

154 In State of Bombay v. The United Motors (India) Ltd[149] 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 State power of taxing goods imported from sister States, provided only no discrimination is made in favour of similar goods of local origin.

Thus the states in India have full power of imposing what in American State Legislation is called the use tax, gross receipts tax, e[TC. not to speak of the familiar property tax, subject only to the condition that such tax is imposed on all goods of the same kind produced or manufactured in the taxing State, although such taxation is undoubtedly calculated 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. Guram[150] this Court held that : "68...It is well settled that the expression 'notwithstanding' is in contradistinction to the phrase 'subject to', the latter conveying the idea of a provision yielding place to another provision or other provisions to which it is made subject."

(Id. at p. 478)

In South India Corporation v. Board of Revenue[151] while interpreting Articles 372 and 278 of the Constitution, this Court emphasised that the phrase "notwithstanding anything in the Constitution" is equivalent to stating 'inspite 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 301. A reasonable construction or meaning would have to be attributed to these two provisions. So construed, Article 304, in its non-obstante provision, must mean that it would permit what is contemplated by Clauses (a) and (b) even though it would otherwise be within the ambit of the freedom guaranteed by Article 301.

Similarly, in its application to Article 303, the non-obstante clause in Article 304 indicates that despite the prohibition that is 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 power of the states under Articles 245 and 246 of the Constitution read with the legislative entries in the State List.

Article 304(a) is a clear indication that though a tax may constitute a restriction within the meaning of Article 301, the imposition of a non-discriminatory tax is permissible to the state legislature. Article 304(a) lifts an embargo that would otherwise have existed but for the non-obstante provision. Article 304(a), however, mandates that a tax which is being imposed on goods 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 reasonable restrictions being imposed under a law enacted by the state legislature on the freedom of trade, commerce and intercourse with or within that state as are required in the public interest. The proviso operates only in relation to clause (b) and not clause (a). It stipulates 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.

The mandate of the proviso can however be cured 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 - where the recommendation required was that of the Governor, either by the Governor or by the President; where the recommendation or previous sanction required was that of the President, by the President." Hence even though the previous sanction which is required under the proviso to Article 304(b) before the introduction of a bill has not been obtained, this deficiency can be cured if assent to the Act passed by a legislature is given by the President.

158 Article 304 provides that the legislature of a state may by law (a) impose a non-discriminatory tax as provided in clause (a); and (b) impose reasonable restrictions on the freedom of trade, commerce or intercourse. The expression '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 discretion whether to impose a tax or to impose a restriction and is not bound to do so.

159 The word 'and' is normally used in the conjunctive sense (G P Singh on Interpretation of Statutes[152]). However, this is not always the case. Coupled with the use of the expression 'may, the expression 'and' in Article 304 should be construed to mean and/or. In other words, the legislature of a state may take recourse to both clauses (a) and (b) of Article 304 or either of them. 160 The nuances of statutory interpretation 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" 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 joint "and", every listed possibility must be included: both (a) and (b); all of (a), (b), and (c). In the case of a joint and several "and", all the possibilities may be, but need not be, included: (a) or (b) or both; (a) or (b) or (c), or any two, or all three. In other words, the joint and several "and" is equivalent to "and/or"..... Which meaning is appropriate depends on the context. When "and" is used before the final item in a list of powers, for example, it is joint and several : To carry out the purposes of this Act, the Governor in Council may make regulations respecting the conditions on which licences may be issued; the information and fees that firearm vendors may be required to furnish; and 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 obliged to make regulations respecting (a) conditions (b) information and (c) fees, the joint and several "and" becomes joint". In the context of Article 304(a) the use of the expression 'may' in the prefatory part together with 'and' which separates clauses (a) and (b) indicates that the true meaning and intent is conveyed by the joint and several and/or. The state legislature may impose a tax falling under clause (a) as well as a reasonable restriction falling under clause (b). Alternately it may impose 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 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 submission has been founded on more than one rationale.

First, it has been submitted that when Article 304 uses separate expressions, taxes and restrictions, there is no reason or justification to bring taxes within the ambit of restrictions.

Second, it has been submitted that clause (b) of Article 304(a) contemplates the imposition of a reasonable restriction in the public interest. Taxation, it has been urged is presumed to be in the public interest.

Third, it has been submitted that in the context 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 any tax to which similar goods manufactured or produced in that state are subject.

The ambit of clause (a) is a tax on goods, the origin of the goods being a state other than the state which is imposing the tax. Article 301 (over which the non-obstante clause contained in Article 304 operates) has a geographical coverage which extends throughout the territory of India. Article 301 guarantees the freedom of trade and commerce not only across state boundaries but equally freedom within any part of the territory of India. If the freedom of trade and 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 would offend Article 301. A state may conceivably have a justification in the public interest in doing so or for imposing such a tax and if it were to do so, it must meet the requirements of Article 304(b). If Article 304 (b) were to be construed to not include taxes, such a course of action would be barred, however legitimate be the state interest.

163 There is a second reason why the language and scheme of Part XIII must lead to the conclusion that it is not only discriminatory taxes of the nature 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 46 to 62) are several which deal with aspects of taxation of goods. They include Entry 51 (providing for duties of excise on (i) alcoholic liquors for human consumption; and (ii) opium, hemp and other narcotics drugs and narcotic manufactured and produced in the state and countervailing duties on similar goods manufactured or produced elsewhere in India); Entry 52 (taxes on the entry of goods into a local area for consumption, use or sale);

Entry 53 (taxes on the consumption and sale of electricity); 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 60 (tax on professions, trades, callings and employments); Entry 61 (capitation taxes) and Entry 62 (taxes on luxuries, including taxes on entertainments, amusements, betting and gambling). Article 304(a) applies only to taxes on goods.

A tax which is not on goods or on aspects bearing on goods is not governed by Article 304(a). A discriminatory tax which is not on goods is not within the prohibition of that article. For instance, a discriminatory tax on luxuries, entertainments, amusements, betting 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 outside the purview of Article 304(a). If those taxes impede the freedom of trade, commerce and intercourse they would infringe Article 301 though they do not fall within Article 304(a). 164 Third, Article 302 has been held to enable Parliament to impose Central Sales Tax (Sitolakshmi Mills) (supra). The expression "restrictions" in Article 302 has been construed not to exclude a restriction by way of a taxing measure.

If the expression 'restriction' for the purposes of Article 302 does not exclude 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 that such a legislative measure would otherwise fall within the ambit and purview of Article 301.

The non-obstante provision in Article 304(a) refers to Article 301. Obviously, unless something falls within the ambit of Article 301, there is no reason to incorporate the non-obstante clause in Article 304(a). In other words, what Article 304(a) does is to indicate that despite the fact that a legislative measure falls under Article 301, it is permissible if it adheres to Article 304. Despite Article 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 provision commencing with the word 'notwithstanding' is intended to indicate that the text in which the provision is contained overrides another. The criticism is that the expressions "subject to the other provisions of this Part" in Article 301 and "notwithstanding anything in Article 301" in Article 304(a) are incongruous.

For, the former expression subjects Article 301 to the other provisions of Part XIII [including Article 304(a)]. Hence, it was unnecessary to use a non-obstante clause in Article 304(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 preferences to one state over another or discriminate between one state and another by virtue of the entries relating to trade and commerce in the lists of the Seventh Schedule. Article 303 postulates (in relation to Parliament) that the power conferred upon Parliament under Article 302 to impose restrictions on the freedom of trade, commerce or intercourse, in the public interest between one state and another or over any part of the territory of India cannot be exercised so as to grant preferences 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 restraint on discriminating between one state over another or from granting preferences between them. In other words, the treatment which is extended to one state has to be extended to every other state.

The grant of preferences or the making of discrimination is proscribed. Article 303(1) is akin to a provision in international trade parlance conferring a 'most favoured nation' treatment. Under such an 'mfn' clause, treatment extended to one nation state has to be extended to the other. Article 303(1) embodies 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, allows the legislature of a state to impose a tax on goods imported from other states or union territories so long as the tax is one which is imposed on similar goods manufactured or produced in that state. Article 304 (a) in other words has the effect of lifting an embargo which would arise under Article 301. The clause of subjection in Article 301 and the non-obstante clause of Article 304 can hence be harmonised. 168 Article 306 of the Constitution (prior to its repeal by the Constitution (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 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 as may be specified in the agreement : Provided that the President may at any time after the expiration of five years from such commencement terminate or modify any such agreement if, 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 permitting their continuance. 169 Article 306 as it was originally incorporated into the Constitution provided a clear indicator that the founding fathers did not intend to use the expression 'restrictions' in contradistinction to taxes or duties on the import or export of goods between states. 170 Article 304(a) elaborates that a particular form of taxation - a non- discriminatory tax on goods - shall not be construed to violate Article 301. But Article 304(a) is not exhaustive of the universe of taxation. 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 purview of Part XIII. For one thing, the rate of tax is but one element of taxation. There are other elements in a fiscal exaction including assessment, the machinery for collection and set offs and exemptions which can have an important bearing on whether the tax operates in a manner that impedes the freedom of interstate trade and commerce. Moreover, as we have noticed earlier, a discriminatory tax otherwise than on goods, does not attract the provisions of Article 304(a). Finally, a non-discriminatory 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 amongst states". The marginal note is a broad indicator of constitutional intent. It is a constitutional indicator of the position that a restriction on the freedom of trade and commerce can be fiscal or non-fiscal in origin. The marginal note evidently utilizes the expression "restrictions" in relation to the entirety of the article.

Though a marginal note cannot override constitutional text nor can it control the specific meaning of the words used in the text, it is a broad indicator or pointer to 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. 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 that the power of taxation was subject to exclusively to Article 265 under which a tax can be imposed only with the authority of law. Consequently, a Constitution Bench of this Court in Ramjilal v. Income Tax Officer, Mohindargarh[153] held that the protection against imposition and collection of taxes save by authority of law directly comes from Article 265 and is not secured by clause (1) of Article 31: "11... If collection of taxes amounts to deprivation of property within the 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 has also treated taxation as distinct from compulsory acquisition of property and has made independent provision giving protection against taxation save by authority of law."

174 However, in Kunnathat Thathunni Moopil Nair v. The State of Kerala[154] Chief Justice Sinha speaking for a Constitution Bench rejected the submission that Article 265 of the Constitution was "a complete answer" to the validity of a state taxing law (The Travancore- Cochin Land Tax, 1955). The Constitution Bench held 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 the guarantee of equal protection of law must extend even to taxing statutes. Another Constitution Bench in Balaji v. Income Tax Officer, Special Investigation Officer[155] rejected the submission that taxing legislation was immune to a challenge on the ground of a violation of Article 19.

In Chhotabhai Jethabhai Patel & Co. v. Union of India[156] a Constitution Bench ruled that the judgment in Ramjilal could not have meant that if a law imposing a tax is outside 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 immune from a challenge under Part III of the Constitution. A taxing legislation could be impugned on the ground of :

(i) lack of legislative competence;

(ii) violation of a prohibition under a specific article of the Constitution; or

(iii) repugnancy to the fundamental rights guaranteed by Part III. 175 In Raja Jagannath Baksh Singh v. State of U.P.[157] the Constitution Bench held that though in Ramjilal (supra) there were general observations which indicated that the fundamental rights 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 a tax is imposed by the legislature in public interest. Taxing legislation is subject to constitutional restraints originating in the legislative competence of the legislature to enact the law, the guarantees of fundamental freedoms contained in Part III and constitutional limitations originating in the provisions of the Constitution.

I.2 The standard of judicial review 177 The standard of judicial review in relation to taxing legislation however recognizes that there inheres in the legislature 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 on legislative power, it would be open to challenge on the ground that while enacting the law, the legislature has adopted a cloak or devise to confiscate the property of a citizen who is taxed. But such a conclusion cannot be reached merely on a finding that the tax which is imposed is unreasonably high or excessive. 178 Conceptually, the availability of judicial review in regard to taxing legislation is distinct from the standard of judicial review. Taxing legislation is not immune from constitutional 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[158] the Constitution Bench applied the test of palpable arbitrariness when a fiscal statute is challenged on the ground of Article 14. The Court held : "46. It is now well settled though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy, the legislature enjoys a wide latitude in the matter of selection of persons, subject matter, events, e[TC., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous.

In 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 long as it refrains from clear and hostile discrimination against particular persons or classes."

(Id. at p. 658-659)

I.3 Limitations of Sinha CJ's view in Atiabari

180 Part XIII of the Constitution uses the expression "law" in Articles 302, 303 and 304, among others. There is no reasonable basis for holding that Part XIII includes all laws enacted by Parliament or the State legislatures except laws falling under Entries 82 to 96C of the Union List and Entries 46 to 62 of the State List. The judgment of Chief Justice Sinha in Atiabari broadly enunciated four reasons for excluding taxes from Part XIII of the Constitution : imposition of taxes is a manifestation of the sovereign power of the state which possess the inherent power to impose taxes to raise revenues; 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; taxes provide for resources to improve facilities for trade and do not constitute a restriction on the movement of trade; and the concept of public purpose being implicit in every tax law, it cannot form a part of Article 301.

With the greatest of deference to the view of the learned Chief Justice, it is difficult to subscribe to the general proposition that tax laws per se lie outside the ambit of Part XIII. Taxation is indeed a manifestation of the sovereign power of the state to raise revenues for public purposes. But the exercise 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 also distributed between the Union and the States. Hence, all legislative power (of which the legislative power to impose a tax is a part) is subject to the distribution provided in the Constitution. Exercise of sovereign power is governed by the norms of a written Constitution. Taxing statutes, like other legislation, are subject to constitutional limitations including those contained in Part XIII. Hence, the general notion that taxation is a manifestation of sovereign powers must also comprehend 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 such as taxation may be referable to a specific part of the Constitution, such as Part XII. This does not mean that its validity must be assessed only with reference to the provisions of that Part. The provisions of the Constitution are not isolated or watertight compartments. Constitutional provisions do not rest in silos.

182 As regards the third rationale undoubtedly, the revenues which the state raises from fiscal exactions generate resources which are also utilized to augment trade and commerce. 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 that it violates a constitutional limitation such as that originating in legislative competence, the fundamental rights or constitutional provisions. I.4 Presidential sanction : the proviso to Article 304(b)

184 There is an aspect of the submission of the states bearing on the impact of the requirement of Presidential sanction under the proviso to Article 304(b), which requires close scrutiny. The submission is that if "reasonable restrictions" on the freedom of trade, commerce or intercourse with or 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, it must be emphasised that the proviso attaches to clause b of Article 304. Article 303 prohibits both Parliament and the legislature of a state from enacting laws granting preferences to one state over another or making discrimination between one state over another. 186 Article 303(2) makes an exception in respect of Union legislation enacted to deal with a situation of scarcity of goods in any part of the territory of India. The prohibition contained in clause 1 of Article 303 is, hence, lifted 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 Presidential sanction under the proviso to Article 304(b). Where the law enacted by the state legislature would result in a preference or discrimination prohibited under Article 303(1), the embargo can be lifted upon obtaining the previous sanction of the President under the proviso to Article 304(b). J Article 304(a) : The principle of non-discrimination Article 304(a) has been analysed and applied in judicial precedent over the last six decades. The context in which each of the decided cases arose 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 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 meaning of these expressions, judicial review is confronted with the basic question of when Article 304(a) would apply and the situations in which the requirement of a non-discriminatory tax is fulfilled. An important aspect of Article 304(a) is whether it permits a classification by the state legislature based on the need to achieve the economic development of the state. If development is a legitimate priority, to what extent does Article 304(a) condition the power of the state legislature to encourage 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[159]. 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 sale price should not exceed a stipulated amount; and

(iii) The sale must be by a manufacturer or a member of his family.

189 A Constitution Bench of this Court held that the notification did not discriminate between foot-wear manufactured or produced in the state and that which was imported from other states since the three conditions of the notification equally applied to all foot-wear irrespective of its origin. A notification granting an exemption for the benefit of small manufacturers making 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 been breached.

190 In Firm A.T.B. Mehtab Majid v. State of Madras[160] the validity of Rule 16 of the rules framed under the Madras General Sales Tax Act, 1939 was challenged by the petitioner who was a dealer in hides and skins. The petitioner sold material which was tanned outside the state as well as what was tanned inside. The contention was that tanned hides and skins imported from outside the state and sold within were subject to a higher rate of tax than the tax imposed 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 304(a) is attracted only when the goods enter the state while crossing its border. In other words, the imposition provided under clause (a) must not be only at the point of entry. The plea of discrimination was upheld by this Court since the sale of hides or skins which had been purchased in the state and then tanned within the state was not subject to any further tax.

This Court found that there was a breach of Article 304(a) for the following reasons : "17.....If the dealer has purchased the raw hide or skin in the State; he does not pay on the sale price of the tanned hides or skins; he pays on the purchase 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 state that the circumstance of hides or skins tanned within the state and on which tax had been paid earlier at the time of their purchase in a raw condition was sufficient to consider them to be different from hides or skins tanned outside the state. This Court held that : "18...The similarity contemplated by Article 304(a) is in the nature of the quality and kind of the goods and not with respect to whether they were subject of a tax already or not."

191 In a subsequent decision in A Hajee Abdul Shakoor v. State of Madras[161] 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 the judgment in Mehtab Majid, this Court held that:

"10. In the earlier case, discrimination was brought about on account of sale price of tanned hides and skins to be higher than the sale price of untanned hides arid skins, though the rate of tax was the same, while in the present case, the discrimination does not arise on account of difference of the price on which the tax is levied as the tax on the tanned hides and skins is levied on the amount for which those hides and skins were last purchased 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, 1/2 naya paise per rupee. Such a discrimination would affect the taxation upto the 1st of August 1957 when the rate of tax on the sale of raw hides and skins was raised to 2% of the sale price."

192 Another judgment of a Constitution Bench in State of Madras v. N.K. Nataraja Mudaliar[162] involved a case where the provisions of the Central Sales Tax Act, 1956 were challenged on the ground that the Act permitted the levy of tax at varying rates in different states. This challenge was 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 tax which encumbers movement of trade or commerce, since by the definition in Section 3 of the Act, a sale or purchase of goods is deemed to take place in the course of inter-State trade or commerce, if it-

(a) occasions the movement of goods from one State to another;

(b) is effected by a transfer of documents of title to the goods during their movement from one State to another."

However, the judgment held that the Central Sales Tax Act which was enacted for imposing a tax to be collected and retained 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 factors, such as the source of supply, place of consumption, existence of trade channels, the rates of freight, trading facilities, availability of efficient transport and other facilities for carrying on trade. Instances can easily be imagined of cases in which notwithstanding the lower rate of tax in a particular part of the country and goods may be purchased from another part, where a higher rate of tax prevails. Supposing in a particular State in respect of a commodity, the rate of tax is 2 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 the free flow of trade cannot necessarily be deemed to have been obstructed merely because in a particular State the rate of tax on sales is higher than the rates prevailing in other States."

(emphasis supplied)

The object of enacting a central legislation on the subject was explained thus:-

"17.....But since the power of taxation could be exercised in a manner prejudicial to the larger public interests by the States, it was found necessary to restrict the power of taxation in respect of transactions 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 304 prohibits the imposition of differential rates of tax by the same state on goods manufactured or produced in the state and similar goods imported into the state. But where the rates of tax imposed on imported goods by a taxing state are not different from the rates of tax on goods manufactured or produced within, Article 304(a) has no application. Consequently, the prevalence of different rates of sales tax in the states under the Central Sales Tax Act, was held not to be determinative of the 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 concurred with the majority the ground that the provisions of the Central Sales Tax Act had no direct or immediate impact on inter-state trade or commerce since sufficient safeguards were provided - firstly, by providing for the levy of sales tax in the state in which the goods are produced and secondly, by placing restrictions on the power of the states in fixing the rates.

194 The judgment of the Constitution Bench in Kalyani Stores v. The State of Orissa[163] involved a challenge to a levy imposed by the state of Orissa under the Bihar and Orissa Excise Act, 1915 at a rate of Rs.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 Rs.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. Countervailing duties are provided for in Entry 51 of List II to the Seventh Schedule to the Constitution. This Court noted that countervailing duties can only be levied if similar goods are actually produced or manufactured in the state on which excise duties are being levied :

"4..... The fact that countervailing duties may be imposed at the same or lower rates suggests that they are meant to counterbalance the duties of excise imposed on goods manufactured in the State. They may be imposed at the same 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 are produced or manufactured, the right to impose counterbalancing duties of excise levied on the goods manufactured in the State will not arise. It may therefore be accepted that countervailing duties can only be levied if similar goods are actually produced or manufactured in the State on which excise duties are being levied." During the course of discussions, the Constitution Bench held that the restriction on the freedom guaranteed by Article 301 could only be justified if it fell within Article 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 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 similar goods manufactured or produced in that State are such that there is no discrimination against imported goods. As no foreign liquor is produced or manufactured in the State of Orissa. The power to legislate given by Article 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[164]. In Abdul Khadir this Court held that the earlier decision did not intend to lay down a proposition of universal applicability that the imposition of a duty or tax in every case would per se be an infringement of Article 301 and only such restrictions which directly or immediately impede the free flow of trade fall within the prohibition of Article 301.

196 A Constitution Bench of this Court in Rattan Lal & Co. v. The Assessing Authority[165] applied the test formulated in N.K. Nataraja Mudaliar (supra) in the 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[166] a Bench of two Judges of this Court repelled a challenge to the validity of a tax imposed under the Madras General Sales Tax Act, 1959 on raw hides and skins and on dressed hides and skins. In that case the rate of sales tax for raw hides and skins was three per cent, whereas for dressed hides and skins it was one and a half per cent. The Court held that a lower rate of tax in the case of dressed hides and skins was prescribed to offset the difference between the higher price of dressed hides and skins and the lower price of raw hides and skins. No material 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 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 such sales as those hides and skins have already been subjected to local tax at the rate of 3 per cent when they were purchased in raw form. As against that, in the case of hides and skins which have been imported from other 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 hides and skins. The legislature, it seems, calculated the price of hides and skins in dressed condition to be doubled 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 legislature therefore prescribed a rate of tax for sale of dressed hides and skins which was half of that levied under Item 7(a) in respect of raw hides and skins." (Id. at p. 239-240)

198 A subsequent judgment of a Bench of two Judges in State of Karnataka v. Hansa Corporation[167] 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 may infringe the freedom of inter-State trade and commerce if its requirements are fulfilled. Article 304(a) imposes a restriction on the power of legislature of a State to levy tax which may be discriminatory in character by according discriminatory treatment to goods manufactured in the State and identical goods imported from outside the State.

The effect of Article 304(a) is to treat imported goods on the same basis as goods manufactured or produced in a State. This Article further enables the State to levy tax on such imported 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 constraints of Article 304(a) would not be violative of Article 301 and State legislature has the power to levy such tax."

(Id. at p. 712)

The Court considered whether the Act being leviable on the entry of goods into a local area, it had a direct and immediate impact on the movement of goods thereby infringing the freedom of inter-state trade guaranteed in Article 301. In that context, the Court observed thus : "32....To the extent, the impugned tax is levied on the entry of goods in a local 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 trade and commerce. The Court held that a levy which was reasonable in its impact on the movement of goods and was imposed for augmenting municipal finances which had been adversely affected due to the abolition of octroi could not be held to be an impediment to inter-state trade and commerce. Even if the tax imposed an economic impediment to the activity taxed, it was held not to be unreasonable or against public interest.

The Court observed that though the Bill had not received the sanction 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 Judges of this Court in Weston Electroniks v. State of Gujarat[168] dealt with the validity of an exemption granted under the Gujarat Sales Tax Act, 1969. A notification was issued under Section 49(2) of the Act by which sales tax on television sets imported from outside the state was fixed at 10 per cent, whereas it was one per cent for goods manufactured within the state. Adverting to the judgment of the Constitution Bench in Mehtab Majid, a Bench of two learned Judges noted the defence 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 and the prohibition contained in clause (1) of Article 303 can be sustained on the basis of clause (a) of Article 304 only if the conditions contained in the latter provision are satisfied. In the result, the discrimination effected by applying different rates of tax between goods imported into the State of Gujarat and goods manufactured within the State must be struck down."

200 The judgment in Weston Electroniks was considered but distinguished by a larger Bench of three Judges of this Court in Video Electronics Pvt. Ltd. v. State of Punjab[169]. 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 between two stipulated dates.

The exemption was for a stipulated period reckoned from the date of first sale if such sale took place not later than six months from the commencement of production. The period of exemption was confined for a specified period of three to seven years. Insofar as the State of Punjab was concerned, sales tax at the rate of 12 per cent was provided on electronic goods sold within the state irrespective of their manufacture.

In pursuance of a notification issued under the sales 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 coming from outside the state[170]".

The Court held that the both under the notifications issued in Uttar Pradesh and in Punjab there was no discrimination against goods manufactured outside the state for the following reasons: "35....In case of Punjab, an overwhelmingly large number of local manufacturers of similar goods are subject to sales tax and, therefore, the general statement that the manufacturers within the State are favoured against the manufacturers outside the 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 following circumstances: Availability of a reduced rate of sales tax to new industrial units; Applicability of a reduced rate of sales tax to producers of certain specified goods, such as electronic goods; Limitation of the period during which the reduced rate of tax could operate; and Applicability of the general rate of sales tax to an overwhelmingly large number of local manufacturers, at par with imported goods. 202 While sustaining the grant of a reduced rate of sales tax, this 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. Hence, it was not necessary in those decisions to consider the problem in its present aspect. If, however, the said power is exercised in a colourable manner intentionally or purposely to create unfavourable bias by prescribing a general lower rate on locally manufactured goods either in the shape of general exemption to locally manufactured goods or in the shape of lower rate of tax, such an exercise of power can always be struck down by the courts. That is not the situation in the instant cases."

(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 purposes and does not require that every legislation of the State must obtain assent of the President. Constitution of India is an organic document........

Hence, the economic development of States to bring these into equality with all other States and thereby develop 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 State is as much vital as economic unity."

(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 objective underlying Article 304(a) of the Constitution. This was noticed in a subsequent decision in Shree Mahavir Oil Mills v. State of J & K[171]. In that case, under the J & K General Sales Tax Act, 1962, sales tax on edible oil was prescribed at 4 per cent.

However, in order to protect the local edible oil industry, the state government issued a notification directing that the goods manufactured by a dealer operating as a small-scale industrial unit in the state would be exempted from the payment 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 on goods imported from other States and Union Territories - that they are already empowered by other provisions in the Constitution - but to declare that that power shall not be so exercised as to discriminate against the imported goods vis--vis locally manufactured goods.

The clause, though worded in positive language has a negative aspect. It is, in truth, a provision prohibiting discrimination against the imported goods. In the matter of levy of tax - and this is important to bear in 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--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 trade, commerce and intercourse throughout the territory of India, guaranteed by Article 301. As we shall presently point out, this clause does not prevent in any manner the States from encouraging or promoting the local industries in such manner as they think fit so long as they do not use the weapon of taxation to discriminate against the imported goods vis--vis the locally manufactured goods. To repeat, the clause bars the States from creating tax barriers - or fiscal barriers, as they 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 on specific conditions" and was not extended to all the producers of those goods, it does not offend the freedom guaranteed by Article 301. Similarly, in the case of Punjab notification, it was held that since the exemption is for certain specified goods and also because "an overwhelmingly large number of local manufacturers of similar goods are subject to sales tax", it cannot be said that local manufacturers were favoured as against the outside manufacturers."

(Id. at p. 51)

Again, it was held that :

"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 Bench decision in A.T.B. Mehtab Majid and the decisions in Indian Cement, W.B. Hosiery Assn. and Weston Electroniks. The limited exception created in Video Electronics does not help the State herein for the reason that exemption concerned herein is neither confined to "new industries", nor is circumscribed by other conditions of the nature stipulated in the Uttar Pradesh notification.

It is not possible to go on extending the limited exception created in the said judgment, by stages, which would have 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 exemption granted in favour of small-scale industries in Jammu and Kashmir producing edible oil (there are no large-scale industries in that State producing edible oil) is not sustainable in law."

(Id. at p. 52)

205 The Court cautioned that a limited exception which had been carved out in Video Electronics should not be enlarged "lest it eat up the main provision." An unconditional exemption in the case of edible oil produced within the state from sales tax while subjecting similar goods produced in 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 Article 304(a) and reasonable classification 207 Does Article 304(a) prohibit a state from making a reasonable classification? Article 303 contains a prohibition on the legislature of a state granting a preference to one state over another and for making a discrimination. Article 304 operates, inter alia, as an exception to the norm contained in Article 303 as a result of its non-obstante provision. Under clause (a) of Article 304 a state may impose on goods which are imported from other states "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, in the exercise of its legislative power, so long as that tax is imposed also on similar goods manufactured or produced within.

The latter part of clause (a) which contains a mandate against discrimination must have some meaning. In drafting the provision, the founding fathers evidently did not confine it merely to a norm providing a parity of taxes between imported goods and similar goods produced or manufactured within. While stipulating that "any tax" to which similar goods produced or manufactured 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 was imposed to boost the electronics manufacturing industry and to stop existing industrial units shifting to neighbouring states, particularly having regard to "the prevailing peculiar circumstances of Punjab". Moreover, while states, such as Gujarat and Maharashtra were fully developed industrial states, Punjab at that stage was backward in terms of industrial growth.

These factors undoubtedly weighed with this Court in sustaining the notification.

208 A state does have a legitimate concern and 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 of incentives is carefully structured so as not to defeat the underlying spirit and object of Article 304(a). Moreover, when the grant of such an incentive is challenged, it is for the state to justify it with reference to circumstances which have a bearing on legitimate state interest.

J.3.1 Formal and substantive equality

209 Equality and non-discrimination are elements of the same universe. Equality has both a formal and substantive content. In a formal sense, equality perceives of governance 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 of opportunity. Hence, formal equality may not necessarily result in just ou[TComes. Treating all individuals alike may perpetuate deprivation and denial of economic opportunity to those for whom the social order has not provided equal access to education or to the resources necessary for economic advancement. Hence, substantive equality is premised on the foundation that in order to produce just ou[TComes and a real equality between individuals who are unequally situated, the legal regime must comprehend 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 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 available. Yet, other areas of the country have remained in a state of comparative under-development as a result of circumstances such as geographical isolation and the absence of developed means of communication. Many regions have suffered from the absence of education and unavailability of access to health and sanitation. Social deprivation and discrimination have been the defining characteristic of large swathes of the nation. In this background, substantive equality like its mirror image-non-discrimination-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 a state with those which are imported from other states is the first and formal requirement. But beyond this, Article 304(a) brings into focus substantive principles by embodying a norm of non-discrimination in its latter stipulation.

Non- discrimination in a substantive sense requires a level playing-field. Two states in the nation may not be comparable in terms of social development and economic advancement. One state may be industrialised with a growth of capital investment in urban infrastructure 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 tax treatment between goods produced and manufactured in a state and those which are imported from other states must be balanced with the need to produce a state of non-discrimination in a substantive as opposed to formal sense. Hence, the judgment of this Court in Shree Mahavir Oil Mills v. State of J & K[172] while construing the earlier decisions in Video Electronics, held that the limited exception carved out in the latter decision should not consume the rule.

Video Electronics 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 read to allow states to pursue policies of protectionism that destroy the essential freedom of trade and commerce.

J.4 Production and manufacture within the home state

212 Another aspect which needs close analysis is whether under Article 304(a), it is necessary that a state must actually produce or manufacture goods similar to goods imported from other states which are sought to be taxed. The crucial words are "any tax to which similar goods manufactured or produced in that state are subject". Article 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- Alcoholic liquors for human consumption; Opium, Indian hemp and other narcotic drugs and narcotics; But not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry."

213 The words "similar goods manufactured or produced" are common to both Article 304(a) and Entry 51. However, the notion of a countervailing duty under Entry 51 (as the judgment in Kalyani Stores explains) is intended to counterbalance the duty of excise levied on articles which are produced or manufactured in the state. The countervailing duty is imposed on articles which are produced 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 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 Article 304(a) which contains the words "so however as not to discriminate between goods so imported and goods so manufactured and produced" is not a surplusage. The object of the latter part is to ensure that there is no discrimination between goods which are produced or manufactured in the state and goods which are imported from other states. If a particular rate of duty is levied on goods which are produced or manufactured in a state, a higher rate of duty cannot be levied on goods imported from 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 state. To take an example, if motor vehicles are manufactured in six states, Article 304(a) does not restrict the power of the state legislatures of the other states to impose a tax (in the exercise of the legislative power) with respect to motor vehicles. Any other construction would lead to the unintended, if not absurd, consequence that a tax on goods which are imported from other states can be levied only by those states which actually manufacture similar goods within the state.

If a state does not manufacture or produce goods similar to the imported goods on which a tax is imposed, no question of 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 the Seventh Schedule of the Constitution provides for : "52. Taxes on the entry of goods into a local area for consumption, use or sale therein." Entry 89 of List I provides for terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights. K.1 Octrois and Terminal taxes

215 The legislative history surrounding the incorporation of Entry 52 is a significant guide to interpreting its provisions. Section 80A of the Government of India Act, 1915 defined the 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 goods into a local area for consumption, use or sale therein. Terminal taxes were placed in List I."

216 In the Government of India Act, 1935, Entry 49 used the expression "entry of goods into a local area for consumption, use or sale therein", instead and in place of "octroi" (as contained in the Devolution Rules under the Act of 1915). The Constitution incorporated Entry 52 in List II in language which corresponds to Entry 49 of List II under the Government of India Act, 1935 but with the difference that 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[173] 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 Britannica octroi is an indirect or consumption tax levied by a local political unit, normally the commune or municipal authority, on certain categories of goods on their entry into its area." (Id. at p. 252)

218 Octroi was a tax levied on the entry of goods into areas which were administered by local bodies. When the draftsmen of the Constitution incorporated Entry 52 in List II, it was with the knowledge that the expression 'local area' had been used in the Government of India Act, 1935. Moreover, it 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 local area.

219 The situation that fell for consideration before the Constitution Bench in Diamond Sugar Mills arose under Section 3 of the UP Sugar Cane Cess Act, 1956 under which the State Government was empowered to impose a cess not exceeding a stipulated amount on the entry of sugarcane into the premises of a factory for use, consumption or sale therein.

The legislative competence of the state legislature was questioned on the ground that the premises of a factory did not constitute a local area 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 Entry 52 should therefore be taken to mean "any part of the State in any place therein". So, the argument runs, a single factory being a part of the State in a place in the State is a "local area". In other words, "local area" means "any specified area inside the State".

The obvious fallacy of this argument is that it draws no distinction between the word "area" standing by itself and the phrase "local area". If the Entry had been "entry 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 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". The use of the words "local area" instead of the word "area" cannot but be due to the intention of the Constitution-makers to make sure that the power to make laws relating to levy on entry of goods would not extend to cases of entry of goods into any and every part of the state from outside that part but only to entry from outside into such portions of the state as satisfied the description of "local area".

(Id. at p. 250)

In holding that a factory could not be a local 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 rules, 1920-that is, the area administered by a local authority such as a municipality, a district Board, a local Board or a Union Board, a Panchayat or some body constituted under the law for the governance of the local affairs of any part of the State. Whether the entire area of the State, as an area administered by the State Government, was also intended to be included in the phrase "local area", we need not consider in the present case."

(Id. at p. 253)

220 These observations indicate that Entry 52 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 local area was, however, kept open in Diamond Sugar Mills.

221 In another judgment of a Constitution Bench in Bangalore Woollen Cotton and Silk Mills Co. Ltd. v. Corporation of the City of Bangalore[174] there was a challenge to the constitutional validity of the imposition of octroi duty on cotton and wool by the Bangalore Municipal Corporation Act, 1949 inter alia under the provisions of Article 301. The octroi duty was, in the submission of the state, saved by Article 305 which stipulated 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[175] the appellant had unsuccessfully moved the High Court for a writ seeking to prohibit the municipality from charging octroi on its products which were brought inside octroi limits for sale. The goods brought into octroi limits by the appellant comprise of four categories : Goods consumed by the appellant; Goods sold by the appellant itself or through dealers and consumed within octroi limits by others; Goods sold by the appellant itself or through dealers within octroi limits but consumed outside; and Goods sent by the appellant from its depot within octroi limits to points outside the municipality 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. Octrois were taxes on goods brought into the local area for consumption, use or sale. When the Constitution was adopted, the expression octroi was avoided and instead a description was used. Expounding the ambit of Entry 52, the Constitution Bench observed as follows:

"21. It is not the immediate person who brings the goods into a local area who must consume them himself, the act of consumption may be postponed or may be performed by someone else but so long as the goods have been brought into the local 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 not with a view to taking them out again but with a view to their retention either for use without using them up or for consumption in a manner which destroys, wastes or uses them up." (Id. at p. 230-231)

224 The Constitution Bench ruled that so long as goods are brought inside the area for sale within the area to an ultimate consumer, it makes no difference that the consumer does not consume them in the area but takes them out for consumption elsewhere : "22......The word "therein" 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 :

To be consumed by itself or sold directly by it to consumers; For sale to dealers who in their turn sold the goods to consumers within the municipal area irrespective of whether such consumers bought them for use inside or outside the area. However, the appellant was not liable to octroi in respect of goods which it brought into a local area for re-export.

225 For many years after the adoption of the Constitution, local bodies across the country continued to levy octroi, which was an important source of revenue. Octroi was levied under state 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 tasked with the collection of octroi duty. Over a period of time, accepting the clamour of the trade, octroi was gradually phased out and replaced by entry tax legislation in the states. Noteworthy, among the changes made, was that the tax would be leviable upon a dealer. Moreover, the tax would be collected not at the octroi or municipal limit but subsequently after the submission of returns. K.2 Entry taxes and Article 304(a)

226 For the purposes of this reference, it is necessary to clarify 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--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 entry of goods into a local area for consumption, use or sale therein. If the goods originate in any other state, the imported goods would upon entry into a local area be liable to entry tax since the charging event is the entry of the goods into the local area for consumption, use or sale. Issues of discrimination arise on whether similar goods produced or manufactured within the state are subject to entry tax.

228 Article 304 permits the state legislature to impose on goods imported from another 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 outside) the mandate of Article 304(a) would be met.

229 The issue is whether Article 304 (a) would be breached by imposing an entry tax only upon goods that are imported from other states. Plainly, if a tax is imposed on goods which are imported from other states without subjecting similar goods produced or manufactured within the state to the tax, there would be a violation of Article 304(a). This would constitute an unconstitutional discrimination between goods imported from other states which 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 exclusively within the state, is not subject to entry tax. Alternatively, the expression local area may be defined with reference to the entire state. If the legislation imposes a tax only upon the entry of goods originating outside the state into the state, while goods produced and manufactured within the state are not subject to the levy, this would constitute a hostile discrimination prohibited by Article 304 (a). K.3 Meaning of 'Local area'

230 The issue as to whether the entire area of a state can be 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[176]. 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 contractors or dealers of motor vehicles who had purchased them outside the state and had brought them within the state of Maharashtra as being a colorable exercise of legislative power under Entry 52 of List II as well as violating Article 301.

Taking note of the fact that the issue of what constitutes a local area had not been decided in Diamond Sugar Mills, the Bench of three Judges held as follows : "4....The expression 'local area' has been used in various Articles of the Constitution, namely, 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 e[TC. 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 taxable event according to the High Court, is not the entry of vehicle in any area of the State but in a local area.

The High Court explained it by giving an illustration that if a motor vehicle was brought from Jabalpur (Madhya Pradesh) for being used or sold at Amravati (in Nagpur District of Maharashtra), which was the border area, taxable event was not the entry in Nagpur District but entry in area of Amravati Municipal Corporation. The levy, therefore, is not, as urged by the learned Counsel for 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) requires the constitution in every state of Panchayats at the village, intermediate and district levels. Article 243H (a) empowers the legislature of a state by law to authorize a Panchayat to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits. Article 243Q provides for the constitution of a Nagar Panchayat, a Municipal Council and a Municipal Corporation. Article 243X empowers the legislature of a state by law to authorize 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 Municipalities, Panchayats or local board) constituted under the law for the governance of local affairs in any part of the state.

This statement of principle in the decision in Diamond Sugar Mills now stands fortified in view of the constitutional amendments brought by the insertion of Parts IX and IXA into the Constitution. A local area cannot be defined with reference to the entire state but will comprehend within the state, an area that is administered by a local body constituted under the law.

K.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 originating from outside the state, it would be impermissible, by a process of interpretation as suggested to excise the offending words. Such an excise would not fall within the permissible scope of reading down the statute. The effect of such a judicial exercise would be to impose a levy upon goods moving into a local area from within the state, though, this has not been done by the state legislature. Whether such a levy should be imposed is a matter for the state legislature to determine in its law 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 the state upon their entry within it, the court must strike down such a provision which violates Article 304(a). The provision cannot be re-written by judicial interpretation to mean that the tax will be levied both on goods originating outside the state and goods originating within the state and entering a local area. Re-writing a legislative provision is impermissible in the exercise of judicial review.

K.5 Equality of tax burdens

234 At first impression Article 304(a) presents a fairly simple application. If a tax at the rate of five per cent is imposed by a taxing state on goods imported 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 goods imported from other states. This furnishes the rationale for several decisions of this Court, which hold that Article 304(a) mandates the same rate of tax and once that requirement is fulfilled, the application of the provision is at an end.

235 The submission of the petitioners, however, which falls for close examination is that Article 304(a) requires that the very tax which is imposed by a taxing state on imported goods must be imposed on domestic goods. In the context of entry tax, the submission 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 application of Article 304(a). The example is simple in the sense that a discrimination is then effected in the imposition of the same tax by subjecting domestic and imported goods to differing treatment. The picture may, however, become more nuanced. Different states have adopted varying models while framing legislation in a manner which, according to them, fulfils the mandate of Article 304(a). Whether it in fact, does so is for the court to determine.

237 A state may have a single legislative enactment 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 of tax paid under the General Sales Tax Act.

Similarly, state enactments provide for the reduction of liability under entry tax legislation by the amount of tax which is paid under the sales tax law of that state. Contrariwise, such a reduction has not been made available to imported goods in certain state legislation. The state legislation may have excluded from entry tax those local goods which are liable to pay sales tax under the State Act. However, an importer of scheduled goods who incurs 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 state.

In some cases, manufacturers in a local area are required to pay the same entry tax on raw material imported from another local area or another state.

238 These examples furnish illustrations of different patterns and approaches adopted by state legislation. It is necessary to clarify that in this reference the nuances of each state law are not being considered since the cases would have to be placed for disposal before the appropriate Bench after the reference is answered. For the purposes 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 :

240 The first is that Article 304(a) refers to the imposition of any tax on goods. The provision is not either a source of legislative power nor does it prescribe fields of legislation. The expression "any tax on goods" is of a generic nature and covers all taxes which a state is competent to impose on any aspect of goods under Articles 245 and 246 read with List II of the Seventh Schedule. The expression 'any tax' would mean any exaction in the nature of an impost or levy which the state legislature 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 the state against imported goods by embarking upon protectionist policies. The discrimination which the constitutional provision is intended to rule out is discrimination which is protectionist in nature. A state cannot impose taxes in a manner that would make the goods of another state non-competitive so as to effectively bar the inflow of trade by utilizing fiscal exactions. Thirdly, the latter part of Article 304(a) is prefaced by the expression "so however".

In Words and Phrases[177] the expression however has been explained as indicating "an alternative intention, a contrast with a previous clause and a modification of it under circumstances"[178]. 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 contextual way". P Ramanatha Aiyar's Law Lexicon[179] states that the word 'however' in a deed or will indicates an alternative intention, a contrast with a previous clause and a modification of it under certain circumstances.

The latter part of Article 304(a) follows upon the first which enables the state to impose on goods which are imported from other states any tax to which the goods produced or manufactured within the state are subject. The latter part constitutes a positive 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 from other states and goods that are manufactured and produced within.

The use of the expression "so" in the latter part is an obvious reference to the imported goods and the goods manufactured or produced within, referred to in the first part. The expression 'between' postulates that imported goods and local goods must be allowed a level playing field in the taxing state. Imported goods from another state cannot be placed at a comparative disadvantage. The expression 'between' also signifies that goods 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 goods produced and manufactured within its territorial limits. Both must go hand in hand. Discrimination both in a positive manner against imported goods and a reverse discrimination against domestic goods are within the ambit of Article 304(a). The fifth important principle which requires emphasis is that our Constitution does not embody a requirement that the state legislature while enacting a legislation must legislate separately in respect of each subject of legislation contained in List II. 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. Laws imposing taxation except laws imposing duties of customs or of excise shall deal with one subject of taxation only; but laws imposing duties of customs shall deal with duties of customs only, and laws imposing duties of excise shall deal with duties of excise only."

242 The Indian Constitution does not impose such a restriction on the states. Considered from a different perspective, "rag-bag" legislation is constitutionally permissible under the Indian Constitution and it is open to a single enactment 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[180] All India Federation of Tax Practitioners v. Union of India[181] and State of A.P. v. NTPC[182]].

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 enacting a statute to legislate only upon one head of legislation falling within its competence. The legislature can distribute or allocate its regulatory or law making requirements (both fiscal and non-fiscal) in a manner which best sub-serves its needs and concerns. Once this be the position, its impact upon the interpretation of Article 304(a) is that it is open to the state legislature to have due regard to the equality of tax burdens, when it legislates to impose "any tax" so long as it does not 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, the legislature is entitled to devise a law in a suitable manner which while being consistent with the norm of non- discrimination also preserves a parity of tax burden between goods imported and domestic goods. This is the foundation of the theory of equivalence.

244 The burden of establishing that there is a discrimination against goods which are imported from other states lies on the person who sets up such a plea. In answering a plea of discrimination, it would be open to the state to establish 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 of List II ("taxes on the entry of goods into a local area for consumption, use or sale therein").

Both sets of taxes fall within the competence of the state legislature. Taxable events under entries both entries are distinct : in the case of one the sale of goods and in the case of the other, entry of goods into a local area for consumption, use or sale therein. Both deal with separate aspects of the taxation of goods; the taxable events being proximate though distinct. The expression "any 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 adjustment, exemption or set off based on the payment of sales tax may be intended to avoid double taxation and discrimination. Whether this object has been legitimately achieved by the enacting law is a matter to be determined on its interpretation and application. 245 It is trite law that every discrimination involves a differentiation but every differentiation does not implicate discrimination. (Digvijay Cement v. State of Rajasthan[183]).

The enquiry into whether a state has 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 : procedures and machinery including aspects such as licencing, recognition and compliance: Measure of the tax; and Exemptions or set offs; Beyond this enquiry, the court would need to analyse the reasons for the differentiation and then to determine as to whether there has been a discrimination violative of Article 304(a).

K.6 Entry tax and imported goods 246 Entry 83 of List I provides for "duties of customs including export duties". The submission of the petitioners is that there being no over- lapping of legislative entries, the field of Entry 52 of List II would begin where that of Entry 83 of List I ends. Hence, while considering whether entry tax can be imposed in relation to goods 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 a foreign country are brought into India. Section 2 (23) of the Customs Act, 1962 defines the expression import to mean "bringing into India from a place outside India".

The expression imported goods is defined to mean "any goods brought into India from a place outside India" but so as not to include goods which have been cleared for home consumption. Section 2 (26) defines the expression importer in relation to any goods at any time between their importation and the time when they are cleared for 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 of the officer that the goods entered for home consumption are not prohibited goods and the importer has paid the import duty assessed thereon together with the charges payable under the Act. Section 48 provides for the sale of goods by the person having custody if they are not cleared for home consumption or warehousing or transhipped within 30 days from the date of unloading. Chapter IX provides for warehousing. Section 57 provides for public warehouses where dutiable goods may be deposited. 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 goods with due permission to carry on any manufacturing process or operations in the warehouse, relating to the goods. Section 68 provides for the clearance of warehoused goods for home consumption subject to the presentation of a bill of entry, payment of import duty and all penalties and charges and upon the passing of an order of clearance for home consumption. Section 73 provides for the cancelation and the return of a warehousing bond.

249 The Constitution distributes subjects of legislation 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 nonetheless be necessary to earmark the ambit of Entry 83, List I and Entry 52 List II respectively. Both, according to the petitioners cover taxes on the movement of goods. According to the petitioners, Entry 52 should cover an entry into a local area after the importation of the goods is complete since the field of Entry 83 continues to subsist until the goods have been imported by filing of a Bill of entry for home consumption.

250 Entry 83 of List I and Entry 52 of List II have separate and 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 & Sons[184] it was held that if a tax payer who pays sales tax is also a manufacturer subject to excise duty "there may no doubt be overlapping in one sense, but there is no overlapping in law". The two taxes which he is called upon to pay - excise duty and sales tax were held to be "economically two separate and distinct imposts". There was, in the view of the Federal Court no reason to expand the meaning of the expression 'duties of excise' at the expense of the provincial power to levy taxes on the sale of goods. The judgment of the Federal Court was affirmed by the Privy Council in Governor General in Council v. Province of Madras[185].

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 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 manufacture itself."

252 Applying the same principle, this Court held in Ram Krishan Ram Nath Agarwal v. Secretary, Municipal Committee, Kamptee[186] that a Bidi manufacturer was liable to pay excise duty and octroi on two distinct taxing events : 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[187] 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, this Court held that : "6. It is difficult to see how the levy of duty upon consumption of electrical energy can be regarded as duty of excise falling within Entry 84 of List I.

Under that Entry, what is permitted to Parliament is levy of duty of excise on manufacture or production of goods (other than those excepted expressly by that entry). The taxable event with respect to a duty of excise is "manufacture" or "production". Here the taxable event is not production generation of electrical energy 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 Constitution is to the same effect..."

(Id. at p. 286-287)

253 In D G Gose v. State of Kerala[188] this Court held that a tax on buildings imposed under the Kerala Building Tax Act, 1961 was referable to Entry 49 of List II and was not a tax on the capital value of assets under Entry 86 of List I. In that context, it was held that : "7....So if a tax is levied on all that one owns, or his total assets, it would fall within the purview of Entry 86 of List I, and would be outside 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 of his total assets, but a tax under Entry 86 will not bear any direct or definable relation to his building. A tax on 'buildings' is therefore a direct tax on the assessee's buildings as such, and is not a personal tax without reference to any particular property."

(Id. at. p. 421)

254 This decision has been affirmed in Union of India v. H S Dhillon[189]. While reiterating this position in Lt. Col. Sawai Bhawani Singh v. State of Rajasthan[190] this Court held that : "7.....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[191] a tax was imposed on "circumstances and property" under the UP Kshettra Samitis & Zila Parishad Adhiniyam, 1961. This composite tax was questioned on the ground that this was essentially a tax on income under Entry 82 of List I and therefore outside the legislative competence of the state legislature. Rejecting this submission, this Court held that :

"17. The Full Bench decision under appeal in the instant case, R.R. Engineering Co. [R.R. Engineering Co. v. Zila Parishad, Bareilly, AIR 1970 All 316] has taken the same view of the nature of the tax on circumstances and property 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 tax on status or financial position combined with a tax on property. These decisions correctly describe the nature of the tax on circumstances and property. We affirm the view taken therein, especially that the aforesaid tax is not a tax on income."

(Id at p. 337)

The constitutional principle has been enunciated by a Constitution Bench in Godfrey Phillips India Ltd. v. State of U P[192] thus : "The logical corollary of holding that taxes are imposed only on taxable events is that even 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 powers of the Union and the states are mutually exclusive. (See in this context the decisions in Hoechst Pharmaceuticals v. State of Bihar[193] ; and State of West Bengal v. Kesoram Industries[194]). 257 A Bench of nine Judges of this Court in Re Sea Customs[195] distinguished the taxable event in the case of a duty of excise, which is the manufacture of goods, with a sales tax where the taxable event is the act of sale. Dealing with customs duties, the Bench of 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 imposition of an import duty, by and large, results in a condition which must be fulfilled before the goods can be brought inside the customs barriers, i.e. before they form part of the mass of goods within the country." (Id. at. p. 543) Entry of goods into a local area for consumption, use or sale therein attracts the charging provision of entry tax legislation.

The levy which is referable to Entry 52 of List II is attracted the moment the goods enter a local area for consumption, use or sale. The Customs 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 warehousing station in their factory units or in the local area where they are located. Hence, the contentions are stated to have been advanced without any basis in the pleadings or facts. Moreover, it has been submitted that the petitioners have not produced any evidence that the bill of entry is filed in the factory units or in a land customs station located in the same local area as the petitioner's units. 259 For the purposes of this reference, it is not appropriate for the court to conclusively 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, which is the entry of goods into a local area for consumption, use and sale therein. M Direct and inevitable effect test

260 Whether taxes per se constitute an impediment upon the freedom of trade, commerce and intercourse is an issue which has resulted in two contrary positions, neither of which has been subscribed to in this judgment. At one end of the spectrum is the theory that all taxes impede the freedom of trade, commerce and intercourse. If this theory were to be accepted, the entire 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 intercourse.

In fact, as discussed earlier, taxes provide the means by which revenues can be raised under a regime of law made by law making bodies at the federal and state level. Absent a taxing power, the states would be bereft of revenues needed for maintaining order and governance. Trade, commerce and intercourse cannot survive in the abstract and without conditions of stability and order created by the state. Moreover, the revenues which are made available to the state provide the basis for 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 limitation on taxing legislation save and except for discriminatory taxes of the kind that are prohibited by Article 304(a). The position that Article 304(a) constitutes the entire universe of taxation for the purpose of Part XIII has been rejected by this judgment on the ground that it suffers from fundamental fallacies and is contrary to the text of Part XIII. To recapitulate, the grounds for so holding are : Laws for the purposes of Part XIII must mean all laws and not to the exclusion of taxing legislation;

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; Article 304(a) deals with a specific area of taxation - taxation of goods.

The legislative powers of the state legislatures in List II of the Seventh Schedule enables them to tax persons, activities or things (Godfrey Phillips India Ltd. v. State of UP[196]). Article 304(a) covers only the last category namely a tax on goods. It does not cover taxes on persons (profession taxes or luxury tax) or taxes on activities (betting and gambling); Article 301 guarantees free trade, commerce and intercourse throughout the territory of India. Inter-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; Article 306 of the Constitution, as it stood prior to its repeal contemplated that restrictions could take the form of duties and imposts; and The expression 'restrictions' has been utilized in Part XIII of the Constitution, as the provisions of Articles 302, 303, 304 and 306 would indicate in a manner that would not exclude taxing legislation.

The consistent view of Constitution Benches of this Court has been that taxes may under certain circumstances amount to a restriction on the freedom of trade and commerce. The position has been lucidly summarized in the erudite judgment of Justice M N Venkatachaliah (as the learned Chief Justice then was) in Express Hotels Pvt. Ltd. v. State of Gujarat[197]. After reviewing the position of 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 developed in support of the above principle, there is neither any rationale of constitutional principle or law that should leave this Court to make a departure from the position and to hold that taxes can in no circumstances constitute a restriction on the freedom of trade and commerce. Moreover, it has been accepted even as a matter of judicial precedent that taxation serves not only the purpose of raising revenues but is also a powerful instrument of social control.

The states and the Union in 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 and commerce.

263 In determining as to when taxes can constitute a restriction on the freedom of trade and commerce, the direct and immediate effect test (as refined subsequently) provides a judicially manageable framework. The test of direct and immediate effect was enunciated in the judgments in Atiabari and Automobile Transport. The test is firmly entrenched as a part of our jurisprudence. In R C Cooper v. Union of India[198] a Bench of eleven Judges of this Court while adjudicating upon the validity of a law providing for bank nationalization overruled the judgment in A K Gopalan v. The State of Madras[199] 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 protection he can claim: it is the effect of the law and of the action upon the right which attracts the jurisdiction of the Court to grant relief. If this be the true view, and we think it is, in determining the impact of State action upon constitutional guarantees which are fundamental, it follows that the extent of protection against impairment of a fundamental right is determined not by the object of the Legislature nor by the form of the action, but by its direct operation upon the individual's rights."

(Id at p. 288)

In Bennett Coleman & Co. v. Union of India[200] 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 the real test."

(Id at p. 799)

264 In Maneka Gandhi v. Union of India[201] this Court refined this test to mean the "direct and inevitable effect" of the action impugned. The direct and inevitable effect is that which necessarily must be intended by the state legislature, or, in other words, what may be described as the doctrine of intended and real effect. This Court held that : "20. It may be recalled that the test formulated in R.C. Cooper case merely refers to "direct operation" or 'direct 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 unquantifiable discretion to decide whether in a given case a consequence or effect is direct or not. Some other concept-vehicle would be needed to quantify the extent of directness or indirectness in order to apply the test. And that is supplied by the criterion of "inevitable" consequence or effect adumbrated in the Express Newspapers case. This criterion helps to quantify the extent of directness necessary to constitute infringement of a fundamental right. Now, if the effect of State action on fundamental 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 burden must lie on the person who alleges that such is the effect of the tax to plead and establish to the satisfaction of the court that the consequence which is alleged does in fact exist. The direct and inevitable consequence for the purposes of Part XIII of the Constitution is not the same as an infringement of the fundamental right to carry on an occupation trade or business under Article 19(1)(g).

Under Article 19 (1)(g), it is the individual's right to carry on trade or business which is guaranteed 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 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 the flow of trade and commerce.

266 The mere fact that the activity which is taxed is related to the flow or movement of trade and commerce is not sufficient in itself to lead to the inference that a tax on that activity impedes or restricts it. Businessmen and traders must and do necessarily factor in the requirement of tax compliance as a part of an overall business plan. Hence, the mere fact that the tax is imposed with reference to an activity or thing which constitutes an aspect of trade or commerce 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 unless the tax is paid. If the tax is not paid there can be no entry of goods. This is the basis for urging that entry tax constitutes a direct impediment or restriction on the freedom of trade and commerce. This approach to the issue cannot be accepted. In the regulatory sphere, adherence to a regulatory statute may be made a condition precedent to engaging in a particular line of activity involving business, trade or commerce.

However, the requirement of compliance does not by itself render the statute an impediment of trade and commerce. Similarly, in the fiscal arena, the fact 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 establishes that the impact of the tax is to result in that consequence. The burden to establish this is on the person who seeks to do so as a ground for relief.

268 In a regulatory area as well as in a fiscal context, the legislature may prescribe the fulfilment of certain requirements subject to which a line of business, trade or commerce may be pursued. The fulfilment of those requirements may be set down as a condition precedent. A statutory regulator may for instance stipulate requirements of licencing 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 commerce is not a right to be free from regulation that ensures orderly conditions for the pursuit of the activity. Nor can a right be exercised in such a manner as would create chaos through unregulated actions of numerous participants. In other words, the fact that a requirement operates as a pre- condition is not sufficient in itself to hold that it impedes or restricts trade.

In order to constitute an impediment, the condition must be demonstrated to cause, as a direct and inevitable consequence 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 associated with an aspect of an activity or thing. The mere fact that this aspect is connected with the flow or movement of trade or commerce does not in itself lead to the conclusion that the tax constitutes an impediment or restriction. The impediment does not lie in the aspect of the activity or thing which is the subject of the tax but in its consequence. Every tax or movement on entry does not impede trade or commerce.

The volume of trade in a commodity is determined by numerous variables including 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 restriction, the threshold must be crossed by demonstrating that the immediate and necessary consequence is to restrict impede or obstruct trade as a whole. Unless the impact of the financial levy is demonstrated, in terms of its direct and inevitable consequence, to restrict trade or commerce the provisions of Article 304 (b) would not be attracted.

For, there has to a restriction in the first place before the issue of its reasonableness arises. Consequently, it is not possible to hold that 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 this judgment are, in summation, formulated below :

270 The freedom guaranteed by Article 301 enables goods, services, persons and capital to engage in trade, commerce and commercial intercourse throughout the territory of India. The expression 'throughout' extends the ambit of the freedom across and within state boundaries. Article 301 subserves the constitutional goal of integrating the nation into an economic entity comprising of a common market for goods and services.

271 The freedom guaranteed 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 source of the legislative power of Parliament and the state legislatures. Article 245 is subject to the provisions of the Constitution. Every constitutional authority is subject to its provisions. No arm of the Constitution is vested with absolute power. Every institution created by the constitution operates subject to the governing principles of the written constitution and is subject to the limitations which it prescribes. Constitutional limitations on legislative power originate in the necessity that 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 factor in the necessity of ensuring that the carefully crafted balance between the Union and the States is preserved.

275 Taxation is a sovereign power entrusted by the Constitution to the Union and the States. The Seventh Schedule distributes legislative power, including the power to tax, between Parliament and the state legislatures. The interpretation of Part XIII must ensure that the autonomy of the states in the fields assigned to them is not eroded.

276 While recognising sovereignty in the 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 of raising revenues.

277 The concept of compensatory taxes was judicially evolved in the decision in Automobile Transport to exclude certain regulatory measures and fiscal exactions from the operation of Part XIII. The concept has created doctrinal inconsistencies and uncertainty in the application of legal standards. The decision in Automobile Transport is to that extent overruled.

278 The proposition that taxes do not constitute a restriction on the freedom of trade and commerce (save 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 position that all taxes are restrictions and at the other end, is the position that no tax (except a discriminatory tax on goods) is a restriction. All taxes do not constitute restrictions. Some taxes may impede trade and commerce.

280 A tax may amount to a restriction where its direct and inevitable effect is to restrict the freedom of trade, commerce and intercourse. The burden to establish this is on the person who seeks to assail the validity of a particular tax on the ground that it amounts to 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 304(a) does not require that in order to impose a tax on goods imported from other states, similar goods must be actually produced or manufactured within the taxing state. The object of the provision is to prevent states from following protectionist policies by discriminating against goods produced or manufactured by other states. Article 304(a) does not import the concept of a countervailing duty.

283 Article 304(a) does not prevent a reasonable classification. The provision comprehends both formal 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 be struck between the concerns of both formal and substantive equality. The decisions in Video Electronics and Mahavir must be understood in that context.

284 The expression "any tax" in Article 304(a) does not mean a tax which is referable to only one subject of legislation falling under a taxing entry in List II of the Seventh Schedule. When a legislature legislates, the full range of its plenary powers is available to it. In India, the legislatures are not confined to imposing 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 within. The legislature may have regard to the tax burden under value added tax/sales tax law as well as entry tax, considered as a composite whole. Whether the scheme of exemptions and set offs has achieved an equalisation of tax burdens as between goods domestic to a state and those imported from other states is an issue to be considered in each case having due regard to the provisions of state legislation.

286 A "local area" for the purposes of Entry 52 of List II is not the entire state. Local area postulates an area within a state administered by a local body under relevant state legislation.

............................................... J [DR D Y CHANDRACHUD]

NEW DELHI

NOVEMBER 11, 2016.

Jindal Stainless & ANR. Vs. State of Haryana & Ors.

[Civil Appeal No.3453 of 2002]

Connected Matters

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 hearing. Now, it is our turn to respond.

2. In preparing my judgment I had advantage of going through thoughtful & well reasoned judgment of My Lord the Chief Justice. I deeply regret my inability to share the views of learned Chief Justice on Question No. 1 & 4 as framed by us, although I agree with the conclusion of His Lordship on Question No. 2 & 3. The views of Dr. Justice D. Y. Chandrachud in his scholarly judgment are fairly near my own except on few subjects on which I have expressed 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 Judgment in Atiabari Tea Co. Ltd, 1961 (1) SCR 809 and 7 Judges Bench Judgment in Automobile Transport case, 1963 (1) SCR 491, on interpretation of Part XIII of the Constitution of India. Part XIII of the Constitution was engrafted by framers of the Constitution to attain the goal of economic unity of the country. Large number of issues ranging from principles of constitutional interpretation, federalism, sovereignty of states, limitation on legislative powers of the States, freedom of trade, commerce 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 questions.

5. On the above subjects, learned eminent counsel appearing before us have thrown different shades of light to illuminate the topics, which we are sure, shall make our task easy to discharge our constitutional responsibility of interpreting the Constitution. The Constitution, not only, contains the goals and aspirations set by Constituent Assembly for our country, but it is also a guiding star for the future generations to attain the highest standards of social, political, economic and individual 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:-

A. LEGISLATIVE HISTORY AND DEBATES IN CONSTITUENT ASSEMBLY ON FREEDOM OF TRADE, COMMERCE AND INTERCOURSE.

B. NATURE OF FEDERALISM IN CONSTITUTION OF INDIA.

C. LIMITATIONS ON THE LEGISLATIVE POWER OF THE STATE UNDER THE CONSTITUTION.

D. WHETHER PART XIII OF THE CONSTITUTION INCLUDES "TAX LEGISLATION" AND WORD "RESTRICTION" USED THEREIN INCLUDES TAX LEGISLATION.

E. LEGISLATIVE HISTORY AND CONSTITUENT ASSEMBLY DEBATES RELATING TO ARTICLE 304(a) AND ARTICLE 304(b).

F. INTERPRETATION, SCOPE AND AMBIT OF ARTICLE 304(a) AND 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 DOWN IN 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 be noted. The challenges to various State Legislations were laid before different High Courts on various grounds including the ground that levy of Entry Tax violates the freedom of trade, commerce and intercourse as guaranteed by Article 301 of the Constitution of India and Legislations are not saved under Article 304.

7. One of the State Legislations, namely, Haryana Local Area Development Tax Act, 2000] came to be challenged before Punjab and Haryana High Court. The High Court by its judgment 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 on the entry of goods into the local area of the State of Haryana for consumption and use therein and matters incidental thereto and connected thereto. One of the grounds of challenge was that 2000] Act is violative of Article 301 and not saved under Article 304. The Pubjab and Haryana High Court repelled the challenge holding that Entry Tax being compensatory in nature is outside the purview of Article 301 as has been held by the Constitution Bench judgment in Atiabari Tea Co. Ltd. vs.The State 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 President's Sanction as required by Article 304(b). The majority rejected the argument raised on behalf of the State that Tax Laws are outside Part XIII. It was held that the Tax Laws can and do amount to restriction freedom from which is guaranteed to trade under Part XIII. It was held that a rational and workable test to be applied for finding out is; whether the impugned restrictions operate directly and immediately on trade or its movement.

9. The above decision of the Constitution Bench came 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 that regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contained in Article 301 and such measures need not comply with the requirement of the proviso to Article 304(b).

10. It was further held that a working test for deciding whether a tax is compensatory or not is to enquire whether the traders people are having the use of certain facilities for the better conduct of their business and paying not much 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 Judge Bench in the above case held that the concept of compensatory nature of tax has been widened and if there is substantial or even some link between the tax and the facilities extended to such dealers directly or indirectly the levy cannot be impugned as invalid.

The above Three Judge Bench judgment was followed by a Two Judge Bench in State of Bihar and others vs. Bihar Chamber of Commerce and others, (1996) 9 SCC 136, which was in the context of Bihar (Tax on Entry of Goods into Local Areas for 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 noted. The Two Judge Bench also referred to Aitabari Tea Co. Ltd. And Automobile Transport (Rajasthan) Ltd. and noted the working test for finding out a compensatory tax as laid down in Automobile Transport.

Two Judge Bench expressed its doubt regarding the correctness of tests laid down by Bhagatram Rajeevkumar and Bihar Chamber of Commerce to find out whether the tax is compensatory or not. Two Judge Bench expressed its doubt and observed that interpretation of Article 301 vis-a-vis compensatory tax 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 activities in various local areas of the State 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 Bhagat Ram(supra) and Bihar Chamber of Commerce(supra), we are of the view that the interpretation of Article 301 vis-a-vis compensatory tax should be authoritatively laid down with certitude by the Constitution Bench under 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 overruled judgments of Bhagatram Rajeevkumar and Bihar Chamber of Commerce and recorded their views in paragraph 52-53 to the following effect:

"52. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram's case followed by the judgment in the case of 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 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 constitutional validity of various local enactments which are the subject matters of pending appeals, special leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment."

15. After judgment of the Constitution Bench all the matters including the matters of Jindal were again listed before a Two Judge Bench. Two Judge Bench noticed that basic issues revolve around the concept of compensatory tax and the High Courts concerned had not examined the issues in 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 paragraphs 5 & 6: "5.Since relevant data do not appear to have been placed before the High Courts, we permit the parties to place them in the concerned Writ Petitions within two months. The concerned High Courts shall deal with the basic issue as to whether the impugned levy was compensatory in nature. The High Courts are requested to decide the aforesaid issue within five months from the date of receipt of our order. The judgment in the respective cases shall be placed on record by the concerned parties 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 the respective Acts as not compensatory. The judgments of the different High Courts consequent to directions in Jindal Stainless Ltd.(3) came to be challenged by different assessees and the State before this Court.

A batch of SLPs came for consideration before Two Judge Bench. Two Judge Bench observed that though some of the factors have been addressed to by the Constitution Bench in Jindal Stainless (2)(supra) whereas certain other constitutional issues are involved. Two Judge Bench opined that 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 general notion of Entry Tax. Therefore, considering the importance of the issues relating to Articles 301 and 304 and Part XIII of the Constitution, we consider it necessary to refer the matter to a larger Bench in terms of Article 145(3) of the Constitution.

9.The following questions are referred for the aforesaid purpose:

(1) Whether the State enactments relating to levy of Entry Tax have to be tested with reference to both Clauses (a) and (b) of Article 304 of the Constitution for determining 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 compensatory character of the Entry Tax.

(3) Whether Entry 52, List II, 7th Schedule of the Constitution like other taxing entries in the Schedule, merely provides a taxing field for exercising the power to levy and whether collection of Entry tax which ordinarily would be credited to the Consolidated Fund of the State being a revenue received by the Government of the State and would have to be appropriated in accordance with law and for the purposes and in the manner provided in the Constitution as per Article 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) 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 within which they are not sold, used or consumed?

(7) Whether interpretation of Articles 301 to 304 in the context of Tax on vehicles (commonly known as 'transport') cases in Atiabari's case (supra) and Automobile Transport's case (supra) apply to Entry Tax cases and if so, to what extent.

(8) Whether the non discriminatory 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 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 re- imbursement/recompense for the provider of the services/ facilities) to be provided in the concerned 'local area' and whether the entire State or a part thereof can be comprehended as local area for the purpose of Entry Tax?"

17. Consequent to the above Reference order dated 18th December, 2008] in 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 others, (2010]) 4 SCC 595, decided to make a Reference for constituting a suitable larger Bench for reconsideration of the judgments of this Court in Atiabari Tea Co. Ltd. and Automobile Tranposrt (Rajasthan) Ltd. The Constitution Bench in its order noted the following in paragraphs 1,2 and 3:

"1.On 18th December, 2008] when some of the cases in the present batch came for hearing before a Division Bench of this Court to which one of us, Kapadia, J., was a party, the Division Bench of this Court found 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 being - whether the State enactments relating to levy of entry tax have to be tested with reference to both Article 304(a) and Article 304(b) of the Constitution and whether Article 304(a) is conjunctive with or separate from Article 304(b)? Consequently, the matter stood referred to the Constitution Bench of this Court.

3.Accordingly, on 16th March, 2010] the entire batch of cases came for hearing before the Constitution Bench in which the lead matter is Jindal Stainless Ltd. and ANR. v. State of 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 5-Judge 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."

18. The Constitution Bench was of the view that on a number of aspects a larger Bench of this Court needs to revisit the interpretation of Part XIII of the Constitution including the various tests propounded in the judgments of the Constitution Bench of this Court in Atiabari Tea Co. and Automobile Transport(Rajasthan) Ltd. Some of these aspects which need consideration by a larger Bench of this Court were enumerated in Paragraphs 11, 12 and 13 & 14 which are relevant, are to the following 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 vis--vis the States' authority to levy taxes under Article 245 and Article 246 of the Constitution read with the appropriate legislative Entries in the Seventh Schedule, particularly 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-discrimination? 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 Article 304(b) includes tax laws? Is taxation justiciable?

Whether the "working test" laid down in Atiabari makes a tax law per se violative of Article 301? Inter-relationship 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. (supra) by a larger Bench of this Court.

13.In conclusion, we may also mention that though the judgments in Atiabari 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 non-discriminatory tax is a matter on which there is scope for difference of opinion. Article 304(a) prohibits only imposition of 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. 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." (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 judgments of this Court in Atiabari Tea Co. and Automobile Transport (Rajasthan) Ltd. (supra)." 19. In pursuance of Reference made by the Constitution Bench by its order dated 16th April, 2010] Hon'ble the Chief Justice has constituted this Nine Judges Bench to hear the matter.

20. Although in paragraphs 11 and 12, as extracted above, certain questions were noted by the Constitution Bench, when the hearing began in the present batch of cases this Bench with the assistance of learned counsel appearing for the parties have re-framed the questions to be considered. Four main issues which have been framed by this Bench are as follows:

1. Can the levy of a non-discriminatory 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?

4. Is the Entry Tax levied by the States in the present batch of cases violative of Article 301 of the Constitution and in particular have the impugned State enactments relating to Entry Tax to be tested with reference to both Articles 304(a) and 304(b) of the Constitution for determining their validity?

21. With regard to Question No.1 nine incidental questions have also been framed which are as follows:

1. Is levy of taxes an attribute of a sovereign State?

2. If the answer to Question No.1 is 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 List-II subject to Part-XIII 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 makes the power to make laws and levy taxes subservient to Article 301 have the effect of denuding the States of their sovereign power and affecting the federal structure envisaged by the Constitution?

5. Is levy of taxes presumed to be in public interest?

6. If answer to Question No.5 is in the affirmative, can levy of taxes be justified as reasonable restrictions imposed in public interest?

7. If levy of taxes under Article 304(b) were permissible only with the previous sanction of the President, 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 language employed in Article 301? 22. Learned counsel for the parties have made their respective submissions in reference to the above questions framed by this Bench.

PART II ATIABARI TEA CO. LTD.

23. The Constitution Bench of this Court, by majority opinion, delivered by P.B. Gajendragadkar J. had considered various aspects of Part XIII of the Constitution of India, especially Article 301. The challenge before this Court was to the provisions of Assam Taxation (on goods carried by Roads and Inland 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 given under Article 301 of Constitution of India. The Assam High Court repelled the challenge by dismissing the writ petition. Three appeals were filed on certificate granted by the High Court; two writ petitions were directly filed under Article 32, challenging the vires of the Assam Act, 1954. Both the appeals and the writ petitions were heard by the Constitution Bench.

The majority opinion was expressed by P.B. Gajendragadkar J.: B.P. Sinha, C.J. and J.C. Shah, J. delivered separate opinions. Before 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 types of goods carried by road or inland, waterways strictly within entry of the State List, the Assam Act, 1954 was not within the prohibition contained under Article 301 of the Constitution of India. One of the submissions pressed before the Constitution Bench was that taxing power having been conferred on the State by Article 245 to 248 read with relevant Entries in List II, Part XIII cannot be held to be attracted on the taxing statue.

25. P.B. Gajendragadkar J. rejected the arguments that the tax 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 impact on trade or its movement is direct and immediate or indirect and remote? Answering the said questions, it was observed as under:- ".......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.

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 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: Does the impugned restriction operate directly or immediately on trade or its movement?....."

27. After laying down the relevant proposition on interpretation of Part XIII and after applying the said propositions to the Assam Act, 1954, following was observed in the majority opinion:- ".......It purports to put a restraint in the form of taxation on the movement of trade, and if the movement of trade is regarded as an integral part of trade itself, the Act in substance puts a restriction 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 of trade, commerce and intercourse.

29. Sinha J. also held that if legislature imposes a tax, which is an impediment to the free flow of trade, commerce and intercourse, such law assumes character of trade barrier which is contrary to freedom granted under Article 301. Following was observed by Sinha J. "......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 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......"

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 guarantee of Article 301 trade, commerce and intercourse was declared free. Shah J. expressed his conclusion in following words:- ".......On a careful review of the various Articles, in my judgment, by Part XIII, restrictions have been imposed upon the legislative power granted by Articles 245, 246 and 248 and the lists in the seventh schedule to the Parliament and the State Legislatures and those restrictions include burdens of the nature of taxation. Therefore, the power to tax commercial intercourse 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 required under Article 304(b) proviso, the Act was declared void. The Automobile Transport (Rajasthan) Ltd.

32. The writ petitions were filed before the Rajasthan High Court challenging the demand of payment of tax due on their registered motor vehicles under the Rajasthan Motor Vehicles Taxation Act, 1951 (hereinafter referred to as 'the Act').

33. In the writ petitions, principal contention raised before the High Court was that the provision of the Act imposing tax on their motor vehicles was unconstitutional 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 taken to this Court and heard by a Constitution Bench of five Judges which felt that having regard to the importance of the Constitutional issues involved and the views expressed by this Court in case "Atiabari Tea Co. Ltd. Vs. The State of Assam and Others" reported in (1961) 1 SCR 809, the appeals should be heard by a larger Bench. The appeals were consequently placed for hearing before the Bench of seven Judges. Three opinions came to be delivered in the larger Bench. S.K. Das, J. delivered the judgment 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 earlier Constitution Bench Judgment in Atiabari Tea Co. Ltd (supra) with one clarification, in following words: "The interpretation which was accepted by the majority in the Atiabari Tea Co. case is correct, but subject to this clarification. Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Art.301 and such measures need not comply with the requirements of the provisoto Art.304(b) of the Constitution."

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 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. If the authorities concerned really wanted to hamper anybody's trade, they could easily raise the amount of tax or toll to an amount which would be prohibitive or deterrent or create other impediments which instead of facilitating trade and commerce would hamper them.

It is here that the contrast, between "freedom" (Article 301) and "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 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 is to hinder the movement part of trade. So long as a tax remains compensatory or regulatory it cannot operate as a hindrance....."

38. Das, J. did not accept the arguments that restrictions in Part XIII of the Constitution do not apply to taxation laws.

39. After laying down the relevant test for examining the validity of taxing statue, Das J. noted various provision 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 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 a tax by a meticulous test, and in the nature of things that cannot be done....."

40. Ultimately, Das, J. held that the Act does not violate the provision of Article 301 and the tax imposed under the Act are compensatory taxes which did not hinder the freedom of trade, commerce and intercourse assured by Article 301. Taxes imposed were 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 compensatory or regulatory tax cannot be treated as restriction.

42. Hidyatullah, J. also expressed a view that all taxes or taxing laws are not outside the reach of Part XIII. It was further held that tax is a restriction when it is placed upon a trade directly and immediately. But the tax being generally paid by tradesman in common with others, cannot be held to be infringing freedom of trade under Article 301. Following observations were made as under:- "......That a tax is a restriction when it is placed 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 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 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 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, commerce and intercourse should be rendered "unfree". Trade and commerce remain free even when general taxes are paid by tradesmen in common with non-tradesmen......"

43. Hidyatullah, J. held that taxes which are imposed by the Act by Schedules II, III and IV operates restriction on trade and commerce directly. Hence, the provisions have to be held offending Article 301 and resort to the procedure prescribed by Article 304(b) having not been taken, the Act is ultra vires to the Constitution of India.

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 Shri Harish Salve.

45. The arguments on behalf of different States have been led by Shri P.P. Rao and Shri Rakesh Dwivedi, Senior Advocates. Several other counsel have also made submissions, however, to avoid repetition, we have noted only those submissions which were not covered by Shri P.P. Rao and Shri Rakesh Dwivedi. Shri Mukul Rohatagi, learned Attorney General has also made his submissions.

46. Shri Harish Salve, learned senior counsel leading the arguments on behalf of the petitioner made 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 in the Chapter of Fundamental Rights which clearly indicates that framers of the Constitution intended to guarantee freedom of trade, commerce and intercourse as a fundamental right. He has taken us to the discussion in the Constituent Assembly. He submitted that provisions of Article 304 Sub-clause (b) was thread-ware discussed and the constituent assembly consciously decided not to make any change in the scheme as delineated by Article 304 Sub-clause (b) proviso. In our Constitution we avoided American 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 clearly intended that Part XIII shall also operate on tax legislation. He contended that had tax legislation was not included in Part XIII there was no occasion for specific mention of tax in Article 304(a) and Article 306 [as it was before the Constitution (7th Amendment) Act 1956] of the Constitution of India. He, however, contended that the freedom from the tax law or any other law was guaranteed under the Article 301 only to the extent when the tax legislation or any other law impeded trade, 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 subsequent 7 Judges Bench in Automobile Transport (supra). Shri Salve however submitted that various statutes regulating trade and commerce may not impede trade and commerce like laws pertaining to traffic rules. Taxes, regulatory in nature may not be hit by Article 301. However, it is contended that taxes which have effect directly and immediately on the trade, commerce and intercourse violates Article 301. He contended that Entry Tax under Entry 52 of List II of VIIth Schedule of the Constitution is one subject which directly impede Freedom of trade and commerce.

50. Answering Question No. 1, Shri Salve contends that in a set of circumstances non-discriminatory 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". It is contended that express constitutional limitation is clearly laid down in Article 245 (1), and the legislative powers have to be exercised by Parliament or State subject to the provisions of this Constitution. Article 246 is division of legislative powers between the Parliament and the State which shall always be subject to general limitation as contained in Article 245 Sub-article (1).

51. Answering to subsidiary Question No. 2, Shri Salve submits that Article 246 of the Constitution recognizes 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 Constitutional Scheme and the States are free to legislate as contemplated by Article 301 and the limitation contained in 304(b) is with larger object to achieve the economic unity of the country. There is no question of surrender of sovereign power by the State but legislative power can always be limited by the express provision of the Constitution. Referring to provision of Article 285 and 286 of the Constitution, Shri Salve contended that those are provisions of the Constitution which work as 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 are restrictions imposed in public interest is a question which has be decided by considering the individual legislation. Levy of taxes may or may not be reasonable restrictions.

55. Answering to incidental Question No. 7, Shri Salve contends that under Article 304(b) a State is empowered to legislate imposing reasonable restriction on the freedom of trade and commerce and intercourse in the public interest subject to obtaining previous sanction of the President. The State thus is free to legislate 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 the Constitution.

56. Answering to the subsidiary Question No. 9, Shri Salve contends that Compensatory Tax Theory is not consistent with the language implied in Article 301. He submits that Compensatory Tax Theory is a theory which has been judicially evolved in Automobile Transport case (supra). However, Compensatory Tax Theory is not consistent with the Scheme of Part XIII of the Constitution nor it can be said that if a tax is compensatory, it goes beyond the purview of Article 301.

57. Shri 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 immediate effect" has to be applied to find out as to whether a particular statute impedes the trade. Compensatory tax is mixing of two constitutional concepts namely tax and fee.

58. Coming to Question No.4, Shri Salve contends that Article 304(a) is not a source of power of the statute, rather it is one of the exceptions carved out to Article 301 where the State can legislate. He further submits that Article 304 sub-clause (a) only covers inter-State trade and does not cover intra-State trade. The provision of Article 304 sub-clause (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 purpose. Although Article 304(b) uses the words restrictions on the freedom of trade, commerce or intercourse, the said restrictions may also include restriction by way of taxing statute. He submits that movement of goods from one local area of a State to local area of another State does not fall under Article 304(a) but it falls under Article 304(b).

59. Justice Hidyatullah's views in Automobile Transport case be accepted that tax to be compensatory is not the way out from Article 301. He further submitted 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 pre-condition permitting Entry Tax under Article 304(a) is that similar goods of that very State have to be taxed first.

60. Shri Salve in support of his submissions has also placed reliance on various judgments of this Court as well as judgments of the Australian High Court, Privy Council and US Supreme Court which shall be referred to while considering the submissions in detail.

61. Shri A.K.Ganguly, learned senior counsel, submitted at very outset that reference to this larger bench to reconsider the decisions 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 undertaken only when earlier decision was clearly erroneous. The Constitution Bench in Jindal Stainless Ltd(supra) without any appropriate reason has made a reference for constituting a larger bench for reconsideration of the judgment of this Court in Atiabari Tea Co. and Automobile Transport, Rajasthan ltd.(supra).

63. He further submitted that reliance on observation of Mathew J in G.K.Krishnan Vs. State of Tamil Nadu 1975 (1) SCC 375 which was only an Obiter could not have been basis for making a reference 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 co-relation 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 sub-clauses of Article 304 are gateway to go out from the clu[TChes of Article 301. Article 304(b) is a federal check and has come due to the historical reasons. Sh. Ganguly has also referred to 'Sarkaria Commission's Report' which rejected the demand of certain State for omission of Article 304(b) from the Constitution. He further submitted that the procedure on referring to State bills to the President as contemplated by Article 304(b) ensures that the obligation of India that it owes international community are met.

66. Shri T.R. Andhyarujina, learned senior counsel submits that sub- clauses (a) and (b) of Article 304 are not disjunctive. Hence, 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 inter-State trade, whereas when goods move from one local area to other local area within a State, tax can be covered only under Article 304(b). He submits that the question whether a tax is a tariff barrier or not cannot be decided quantitatively but can be decided qualitatively.

69. Shri Bagaria submits that he appears for Steel Authority of India in some cases. He stated that Bhilai is maintained by Steel Authority of India and all expenditures for maintaining it and all civic amenities in township are being provided 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 1995-96 to 2008]-2009]. 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 P. Datar, learned senior counsel contends that the concept of compensatory tax as judicially evolved in Automobile Transport has to go. He submits that concept of compensatory tax is anomalous, tax being compulsory extraction and all taxes are to be utilized for public good. He suggests that proper test is whether there is 'Appreciable Adverse Effect' on trade and commerce, which can be determined by the manner in which trade and commerce was carried out before the impugned law and the manner in 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 non-discriminatory tax which does not violate Article 304(a) may still violate Article 304(b) if it has discriminatory procedural provisions.

71. The ultimate effect on trade and commerce has to be seen even if it is not direct and immediate. No State is an Island, law in one State has its effect on other States also. The State is not the final Judge of restriction which is contained in the statute framed by it. Hence, Presidential assent is required. There are various provisions in the Constitution like Article 31A, 200, 201, 213, 254, 361 and Sixth Schedule where Presidential 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 like-goods manufactured or produced in that state. The tax referred to in Article 304(a) should be read with general exceptions, set-off, credit e[TC available to goods as manufactured or produced in that state. Learned counsel has also referred to General Agreement of Tariff and Trade, 1947 (GATT, 1947) of which India is a founding member.

The whole purpose of GATT, 1947 was to encourage free trade among the GATT members by eliminating tariff and non-tariff barriers. Learned counsel further submitted that even if a tax levied by the state is non-discriminatory, it may impede right guaranteed under Article 301. Learned counsel supports his submission by giving an illustration. In a state laptops and I-pads 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 I-pad with an intent to discourage the import of I-pad.

The said state's above action may not be violating Article 304(a), however, procedure prescribed in Article304(b) has to be applied with. Another example where state, although, complies with Article 304(a) but violates Article 304(b) given by learned counsel is; the State of Maharashtra imposed Entry Tax exactly equal to the local taxes but puts conditions:

(i) All goods to Maharashtra should enter only through Balharshah;

(ii)Finished goods manufactured in Maharashtra should have at least 75 % local content. Learned counsel thus contends that while imposing tax by the state both the Articles 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 component of tax in the restrictions adverted in Part XIII. He submitted that the Preamble of the Constitution is to be relied and looked into while interpreting the constitutional question.

74. Shri Ravindra Srivastava, learned senior counsel, submitted that as a concept compensatory tax cannot be supported. Compensatory tax is a misnomer and it was unnecessary. He submitted that taxes which have direct and immediate effect are hit by Article 301. Relying on opinion of Justice Hidayatullah in Automobile 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) "Ability-to-Pay 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 conclusion whether the tax amounts to restriction and if so, whether it is saved under Article 304. Learned counsel for the petitioner referring to [SLP (C) NO. 23990 of 2009] Steel Authority of India Ltd. contends that the quantum of Entry Tax varies from 0.5% to 50% which clearly demonstrate that it is an impediment in the trade and hit by Article 301.

75. Shri N. Venkataraman, learned senior counsel, submits that Constitution of India is designed in such a way that State's power to legislate is 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 sub-clause (3)(a) and (3)(b) restricts the State's power of taxation. Similarly, Part XIII is restriction on the State legislative power. Articles 302 to 304 also contain various restrictions on the powers of Parliament and the States in making laws.

77. Referring to the Constitution (One Hundred and Twenty Second Amendment)Bill, 2014] he submits that Union and State have reached to a conversion where both are entitled to legislate. He has referred to Article 246A of the Bill. There is consensus between Union and the States to abolish all the taxes including Entry Tax and is now to be subsumed in two taxes that is services and goods. 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 Agrawal has also referred to the Constituent Assembly Debates.

79. Shri Gopal Jain, learned senior counsel appearing for the appellants in C.A.No.3453 of 2002] submits that the Constitutional Scheme is a well crafted architecture which must be read holistically. A Constitutional provision has to be interpreted from the reading of the whole of the Constitution to ensure that overall objectives are achieved.

80. Shri Dilip Tandon, learned counsel referring to judgment of this Court in Automobile Transport 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 provisions of the Haryana Local Area Development Tax Act, 2000] contends that manner of collecting Entry Tax violates Article 286. She submits that liability and pay-ability of Entry Tax is different which is nothing but a discrimination.

82. Shri Tushar Mehta, learned Additional Solicitor General appearing on behalf of the Indian Oil Corporation submits that judgment in Automobile Transport case has held the field since 1964 and need not be disturbed. He submits that Entry Tax would invariably impede inter-State 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 Indian Oil Corporation has its own refinery have levied the Entry Tax. Referring to Mathura refinery situated in the State of U.P., he contends that the State of U.P. does not produce any crude oil hence, Entry Tax cannot be demanded under Article 304(a). Demand of Entry Tax is clearly discriminatory. Learned ASG, however, fairly conceded that there is no pleading to the above effect taken before the High Court by the Indian Oil Corporation. He further submits that during the course of the submission 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 Part XIII of the Constitution is a discrimination and that too a deliberate discrimination. Article 304(a) and Article 304(b) are disjunctive. Article 304(a) applies to taxes whereas Article 304(b) applies to non-fiscal measures. Taxes are assumed to be in public interest and are reasonable. Under sub-clause(b) of Article 304, President cannot be made super adjudicator. India is a Federation and the sovereign power of the State cannot be subjected to an implied control.

85. Shri Rohatgi submitted that federal structure is a basic feature of our Constitution. Though India is described as a Quasi-Federal 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 38 and Article 39 of the Directive Principles of State Policy.

86. Referring to Article 245 and Article 246 learned Attorney General submitted that Article 245 is the source of legislative power, whereas, Article 246 provides for distribution of legislative functions between the Union and the states. He submitted that Article 245 begins with the express provision 'subjects to the provisions of this Constitution' which phrase has also to be read under Article 246. Learned Attorney General 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 between States. Freedom of trade, commerce and intercourse is not absolute as is evident from various provisions of Part XIII of the Constitution. Restrictions on the power of Parliament and the State Legislature as referred to in Article 303, is confined to the powers under the entries relating to trade and commerce only. The restrictions thus do not include tax. Entries relating to tax in List II that is Entries 46 to 63 were never contemplated under Article 303.

88. Part XIII deals with "Restrictions" 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 Tax learned Attorney General submits that since we are at the fag end of Entry Tax Regime, it shall be appropriate to stick with Compensatory Tax Theory.

89. Shri P.P.Rao, learned senior counsel, has made his submissions on behalf of States of Madhya Pradesh and Andhra Pradesh. Shri Rao submits that it is well settled that a Constitution must not be construed in any narrow and pedantic sense and the construction which is most beneficial to the widest possible amplitude of its power must be adopted. 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 vis-a-vis goods of other States and Union Territories which restrict the freedom of trade in Article 301 and all other taxes do not obstruct the said freedom. The federal character of the Constitution is a part of the basic structure. The power to levy Entry tax under Entry 52 of the State is not subject to any restriction.

91. The framers of the Constitution never intended that the exclusive power of State to levy tax on the entry of goods be subject to requirement of obtaining the previous sanction of the President mention in proviso 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 vis-a-vis goods imported from other States and Union Territories interfere with the freedom of trade, commerce and intercourse mentioned in Article 301. The whole scheme of Part XIII is that the discriminatory tax interferes with the trade, commerce and intercourse. A Non-discriminatory tax does not interfere with the freedom of trade, commerce and intercourse.

92. The framers of the Constitution intended minimum inroads in power of taxation in the State. Learned Counsel has referred to various passages from Atiabari and Automobile Transport case. Referring to observations made by Gajendragadkar J. that "how a tax can be levied on internal goods is, however, 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.

93. Shri Shyam Divan, learned senior counsel has appeared on behalf of the State of Haryana. Shri Divan submitted that the core constitutional value of Part XIII of the Constitution is creating an economic unity across India.

94. Article 302 - 305 are in the nature of exceptions to Article 301. Article 304 being an exception to Article 301 ought to be read, narrowly. He gives an example of protectionist barrier i. e. a State wants to protect the agriculture of its own State for which, a restriction is imposed that all agriculture-based industries shall take raw-materials 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 difference between differentiation and discrimination. Lastly, he contended that in terms of 2000] Act and 2008] Act, the entire tax collected by the State under the respective statute would be utilized for the development of trade, commerce and industry in the state.

96. Shri Rakesh Dwivedi, learned senior counsel has advanced his submissions on behalf of the States of Orissa, Bihar, Madhya Pradesh, Tamil Nadu and West Bengal. Shri Dwivedi submits that petitioners' arguments are that the judgments of 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 is nothing but States and Union Territories.

II. This Court completely ignored the concept of 'Federalism' which has now been accepted as basic feature of the Constitution after judgment of this Court in Kesavanand Bharati's case (supra). III. Each of their Lordships in aforesaid cases draw support from various Australian and US cases, whereas, there is no comparison of Part XIII with Australian and US Constitution. In US, States have no power to legislate except law and order, good governance 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 specifically regarding economic unity. V. All the judgments considered history from the point view of Section 297 of the Government of India Act, 1935 and they conclude that it was all about trade barriers. VI. In Part XIII "subject to the provision of this Part" was read as "subject to only the provisions of this Part". VII. This Court in both the above cases did not examine fully the nature of taxation.

(i) Tax is an incident of sovereignty.

(ii) Tax is necessary for carrying out the welfare activities 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) Article 289(2) - Even, a State doing business is not exempted from tax. Trade and business never were treated as exempted from tax.

97. Shri Dwivedi further submits that tax per se is not covered by Part XIII. Tax is not a trade barrier and unless it is discriminatory it shall not be treated as a barrier. The right of trade, commerce and intercourse cannot be exalted as a basic feature of the Constitution.

98. Shri Dwivedi submits that "Free" in Article 301 does not mean free from tax. State's power, 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.

The imposition of tax is always for public purpose and various inherent limitations in taxation operate as limitation in taking any discriminatory or any other unreasonable measures. Article 302 to 304 are not exceptions or provisos to Article 301. Coming to Article 304, it is submitted that both clauses (a) and (b) of Article 304 are disjunctive and freedom of trade, commerce and intercourse is subject to them. The word 'and' normally is conjunctive but it is often construed as disjunctive 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 inter-State 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 inter-State trade. He submits that inter-State does not come to an end after the entering into the State. It may have some effect and operation within the State also.

100. Shri Dwivedi further submits that the Presidential Sanction as contemplated in Article 304(b) proviso was due to the reason that Article 304 is related to inter-State trade and it falls in Entry 42 List I. He submits that justification for requirement of obtaining Presidential sanction in proviso to Article 304(b) is the restriction which may touch the inter-State trade, which is not within 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 that this Court held in large number of cases that in the context of Part III of the Constitution tax per se does not violate the fundamental rights. Tax simplicitor being out of reach of Article 301 only those taxes which substantially destroyimpede the Trade can fall foul to Article 301. He contends that framers of the Constitution were conscious that freedom of Trade and Commerce, and Intercourse does not include freedom from tax. The tax can become a barrier if imposed preferentially and discriminately. 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. Commonwealth (1936) 55 CLR (1), a 7Judges Bench of High Court of Australia in Cole Vs. Whitfield and Another reiterated in (1988)78 ALR (41) have rejected the 'direct immediate effect test' and has preferred to discriminatory test. The 7Judges Bench held that the various interpretations of Section 92 which have attracted any support over the years only the Fiscal Charges Theory and the Anti- Discrimination Interpretation have been favoured.

104. Coming to cases of U.S. Supreme Court, learned counsel 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, the goods coming from other states come to repose in a local area and the Entry Tax is not tax on border or a tax on movement of goods.

The legislative scheme of different states for which he appears indicates that no tax is collected at border and only a transit pass is given and the Entry Tax is to be paid based on self-assessment. Article 304(a) protects this type of Entry Tax.

106. Shri Dinesh Dwivedi, learned senior counsel has made his submissions on behalf of the State of U. P. Shri Dwivedi, answering the Question No. 1 submits that levy of Non-Discriminatory 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 into and no part has to be interpreted de horse the other provisions of the Constitution.

107. Shri V.Giri, learned senior counsel has appeared on behalf of the State of Kerala. He submits that 383 Appeals have been filed by the State of Kerala against the Judgment of Kerala High Court striking down the Kerala Tax On Entry Of Goods Into Local Areas Act, 1994. He submits that the High Court has struck down the Act on the ground that tax imposed is not Compensatory and it violates Article 301 of the 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 non-discriminatory 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, 1993, as enacted by State of Bihar was adopted by State of Jharkhand after reorganization of the State in the year 2000]. 110. He submits that although Patna High Court upheld the Act 1993 but Jharkhand High Court has struck down the enactment. One of the grounds taken by Jharkhand is that for amendments made by the State of Jharkhand in the 1993 Act, no Presidential Sanction was obtained. He submits that for carrying out the amendments, no Presidential sanction was required.

111. Shri Jugal Kishore 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 'State of Karnataka Vs. Hansa Corporation' 1980 (4) SCC 697.

113. He submits that in fact in three Civil Appeals being [CIVIL APPEAL No. 4476 of 2000] SLP(Civil) No. 16786-16788 of 2009] and SLP(Civil) No. 12789 of 2009] the questions referred to this larger Bench do not arise and he adopts the submissions made by Sh. P.P.Rao and Sh. Rakesh Dwiwedi.

114. Shri Saurabh Shyam Shamshery, learned Additional Advocate General has appeared for the State of Rajasthan. He submits that Rajasthan Tax on Entry Of 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 counsel appearing for different States and other parties, contends that submission that taxing power is some sort of sovereignty, is not a correct preposition.

116. The earlier view that tax is out of Part III has been reversed. When it is said that Part XIII includes tax no one is asking to emasculate State's sovereignty. What is prohibited by Part XIII is the impediment to trade and commerce, 'direct and immediate'. The sanction of President, as contemplated in Article 304(b) does not 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.C.R. 77, and few subsequent cases contends that taxing statute can very well be challenged on the ground of violating provisions of Part III of the Constitution. He submits that when taxing statute can be challenged under Part III, there is no inhibition from entertaining the challenge to a taxing statute for violation of Part XIII. 118. Shri Salve to point out difference between challenge under Article 19 and Article 301, gives an example. An oil company carrying out trade in entire country is 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 group of the legislations which consists of States of Tamil Nadu, Andhra Pradesh, Kerala is the legislation in which Entry Tax is imposed only on the goods which are imported from different State and no tax is imposed on locally produced/manufactured goods which is clearly discriminatory and violative of Article 304(a).

He submits that second category of legislation consists of cases where in the enactment facially Entry Tax is imposed on the goods i.e. goods coming from out of State and local goods, but legislation contains a devise by which there is set-offexemptions to the local goods which result in non-imposition 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 set-off of Entry Tax on raw-materials like State of Orissa and Madhya Pradesh. There is fourth category of legislation where Entry Tax is imposed by creating a special area like State of Chhattisgarh.

120. Shri Salve contends that the submission raised on behalf of the States that question of discrimination under Article 304(a) is to be decided based upon the totality of burden of taxes and not the impact of a particular tax, is contrary to the plain language of Article 304(a) and would defeat the underlying object of Part XIII of the Constitution. 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 non-discrimination, 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 passed on is a rebutable presumption and whether tax has been passed or not is a question of fact and has to be considered by assessing authorities. He has also referred to judgment of this Court reported in (2005]) 2 SCC 215 Godfrey Phillips India Ltd Vs. State of U.P. With regard to capital goods he contends that there cannot be passing on of any tax.

122. Shri A. K. Ganguly, learned senior counsel, making his submission in rejoinder contends that Constitutional history and Debates of the Constituent 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.

Entry 52 does not contemplate State as a unit. Incidence of levy is different from provisions relating to machinery to collect Entry Tax. Coming to Article 304(a), Shri Ganguly submits that provisions contemplate fulfillment of two conditions i.e. similar goods manufactured and produced in the State are subject to tax and further non-discriminatory taxes between the imported goods and the local goods. He further contends that other varieties of taxes not covered under 304(a) shall fall in 304(b).

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 laws per se are not outside the purview of Part XIII. He further contends that Article 304(b) includes taxation. He submits that Article 304(a) refers to goods alone whereas taxes can be levied on persons, activities and things also. Article 304(a) shall not cover other parts of the taxes which necessarily has to go under Article 304(b). Entry Tax only on the goods imported from outside States and not levying them on entry into local areas from within the State is not permissible. Such taxes are 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 non-fiscal. As on date 42 per cent of taxes of Union go to the State.

126. Coming to Video Electronics, learned counsel submits that if the object of a State is economic development, the State cannot levy different taxes with regard to imported goods and local goods, the State is free to give subsidies, and other assistance to any kind of industry but providing for discriminatory taxes in the name of economic development is in the teeth of Article 304(a). Any discrimination between local goods and imported goods is per se hostile. Coming 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 disturbed. Learned counsel has also referred to certain interim orders passed by this Court wherein it was specifically mentioned that State shall not be entitled to press unjust enrichment. He submits that any amount deposited under the Court's order is not an unjust enrichment.

127. Shri B. Laxmikumaran, learned senior counsel in his rejoinder reiterates that tax per se is covered under Article 301. Referring to Article 304(a),learned counsel submits that same tax is to be levied when the 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 his rejoinder contends that legislative powers of both the Union and the States are subject to the provisions of the Constitution including limits thereupon and enacted therein.

129. In the end, we have again heard Shri P. P. Rao and Shri Rakesh Dwivedi in reply to some additional submissions made in rejoinder.

PART IV A. LEGISLATIVE HISTORY AND DEBATES IN CONSTITUENT ASSEMBLY ON FREEDOM OF TRADE, COMMERCE AND INTRECOURSE

130. The discussion on the above subject needs to be focused on following three 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 non-official attempt of drafting the Constitution. The dominion status as achieved by Australia and passing of Australian Constitution Act 1900 was noticed by those associated with National Movement. Indian leaders including Members and Ex-Members of Central and Provincial Legislature had framed a Bill, namely, 'Commonwealth of India Bill, 1925' which was read in House of Commons in December, 1925, contained a clause on freedom of trade to the following effect:

"25. Trade, commerce and intercourse among the provinces shall be free, and there 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 Government shall--

(a) by virtue of the entry in the Provincial Legislative List relating 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 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 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 May 16, 1946 by British Prime Minister was to ensure that India attains freedom and decide as to what form of Government is to replace the existing regime. The Cabinet Mission Plan laid foundation for Constitution, functioning and procedure of Constituent Assembly.

134. The Constituent Assembly was well aware of the Constitution of Australia, USA and other Constitutions of world. On the freedom of trade the Constituent Assembly preferred the Australian model from Sections 92 and 99 of the Australian 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."

135. The Privy Council in James vs. Commonwealth of Australia, (1936) AC 578, had occasion to consider the freedom of trade as granted under Section 92 of the Constitution of the Australia. Following was stated by the Privy Council: "Thus reference may be made to the sections dealing in the midst of which s.92 is placed. It is well known that one of the objects which the federation sought to achieve was the abolition of restrictions on trade between the Colonies, and of the diversity in the different States of tariffs and border regulations; this was described as "the old inter- colonial 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 whatever that freedom of trade, commerce and intercourse means at least freedom from taxation. One of the main motives of the federal movement in Australia was the desire to do away with what had become known as "border barbarism"-the operation of customs barriers on the State borders. Section 92 of the Australian Constitution was one of the provisions drawn to achieve this purpose, to ensure the economic unity of Australia, to prevent the continuance of competing State fiscal systems."

137. The framers 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 Sub-Committee 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 internal duties or taxes of customs. At the same time, we realise that many Indian States depend upon such duties and taxes for a considerable part of their revenue and cannot do without it all at once. Similar difficulties have arisen in the framing of the constitutions of other countries and unless there is a scheme for a smooth transition to free trade in the Union friction will inevitably arise. Some agreement will therefore have to be made with those States in the light of their existing rights 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 sub-committee 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, commerce and intercourse between the citizens. In dealing with this clause we have taken into account the fact that several Indian States depend upon internal customs for a considerable part of their revenue and it may not be easy for them to abolish such duties immediately on the coming into force of the Constitution Act. We, therefore, consider that it would be reasonable for the Union to enter into agreements with such States, in the light of their existing rights, with a view to giving them time, 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 of the goods manufactured in the Unit itself. Otherwise, the goods produced in other Units will flood that particular Unit. With that view only has this proviso been added. Provinces, therefore, can impose certain duties and taxes on goods imported from other units with a view to bring up the value to the level of good manufactured in the Unit itself. But it was felt, Sir, that this was incomplete.

Such regulations and conditions may be made as to favour the goods produced in the Unit and therefore, the words 'and under regulations and conditions which are non- discriminatory' 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 Drafting Committee, freedom of trade, commerce and intercourse throughout the territory of India was incorporated as one of the fundamental rights in Clause 16 in following words:

"16. Subject to provisions of Article 244 of this Constitution and any law made by Parliament, trade, commerce and intercourse throughout the territory of India shall be free."

142. Another set of articles under heading 'inter-State trade and commerce' where articles 243, 244 and 245 which were to the following effect:

243 Prohibition of preference or discrimination 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 dealing with Fundamental Rights.

244 Restriction on trade, commerce and intercourse between States.

Notwithstanding anything contained in article 16 or in the last preceding article of this Constitution, it shall be lawful for any State--

245 Appointment of authority to carry out the provisions of articles 243 and 244.

(a) to impose on goods 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 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. 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 Constitution and confer on the authority so appointed such powers and such duties as it thanks necessary.

Draft Article 16 came for discussion before the Constituent Assembly on 03rd December 1948.

143. Shri C. Subramaniam raised the objection to the effect that powers given to the State Legislature have been in respect of interstate trade and commerce to impose certain taxes 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 that it was realized that there would be no use and purpose in forming an All India Union if trade and commerce throughout India was not free. Hence it was decided to put article in fundamental rights. Following was stated by Dr. Ambedkar: "But I shall explain to him why it was found necessary to include this matter in the fundamental rights. My friend, Mr. Subramaniam will remember that when the Constituent Assembly began, we began under certain limitations. One of the limitations was that the Indian States would join the Union 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. 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 All-India Union if trade and commerce throughout India was not free.

That was the general view. On the other hand, it was found that so far as the position of the States was concerned, to which I have already made a reference, they were not prepared to allow trade and commerce throughout India to be made subject to the legislative authority of the Union Parliament. 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. 1.

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 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, under some head. After exercising considerable amount of ingenuity, the only method we found of giving effect to 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."

145. One more important statement made by Dr. Ambedkar was to the following effect: "Yes, but reasonable restrictions do not mean that the restrictions can be such as to altogether destroy the freedom and equality of trade. It does not mean that 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 a motion stated that articles dealing with the freedom of trade and commerce were scattered in different parts of the Draft Constitution, as article 16 was under fundamental rights and article 243, 244 and 245 were in Part IX. Various amendments were proposed by Pandit Thakur Das Bhargava and other members. After a great discussion Part XA was passed to be included in the Constitution with certain minor amendments.

147. Subsequently, Dr. Ambedkar on 16th October 1949 moved a motion for insertion 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 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 the expiration of 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 expressed by Shri Raj Bahadur: "Shri Raj Bahadur (United State of Matsya): I have sought this opportunity, to take a few minutes of this House while this article is under consideration to give vent to the feeling of the common people in the States' Unions about these customs, duties and taxation. As a matter of fact, ever since political awakening dawned upon the people of the Indian States customs taxes have been a particular target of political opposition.

It was not without reason that the people 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 resorted to. Apart from that it was also supposed to be a part of the sovereign rights of the States. But so far as the interests of the people were concerned, they were not served by the imposition of these customs duties.

Constituent Assembly adopted Article 274DD."

149. The debates on draft article 264(A) (Now Article 286 in the Constitution) with regard to imposition of sales tax came for consideration on 16.10.1949 which are also relevant in the context of freedom of trade and commerce. Dr. B.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 levied by the various Provincial Governments either cut into goods which are the subject matter of imports or exports, or cut into what is called inter-State trade or commerce. It is agreed that this kind of chaos ought not to be allowed and that while the provinces may be free to levy the sales tax there ought to be some regulations whereby the sales tax levied by the provinces would be confined within the legitimate limits which are intended to be covered by the sales tax. It is, therefore, felt 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 sub-clause(1) of article 264A as proposed by me, sub-clause (b) is merely a reproduction of the article contained in the Constitution, the entry in the Legislative List that taxation of imports and exports shall be the exclusive province of the Central Government. Consequently so far as sub-clause (1) (b) is concerned there cannot be any dispute that this is in any sense an invasion of the right of provinces to levy as sales- tax. Similarly, sub-clause (2) is merely a reproduction of Part XA which we recently passed dealing with provisions regarding inter-State trade and commerce. Therefore so far as sub-clause(2) is concerned there is really nothing new in 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 and the removal of or prevention of local barriers to economic unity so that competing economic units within unions shall not threaten the stability of the nation as a whole. The Unity of India was seen to some extent on above realization.

151. From what we have noted above, it is clear that the Constitution framers gave great importance to the freedom of trade and commerce. In the beginning, when States had conceded to union, only foreign affairs, defence and communication, right of freedom of trade and commerce was placed in the Chapter of Fundamental Rights since it was thought that making of All India Union will be useless if trade and commerce is not free. Dr. Ambedkar on 08.09.1949, during the debates had stated that even though, there may be reasonable restriction on the right, however, the restriction can be such which altogether may not destroy the freedom and equality of trade.

152. The Constitution framers were conscious of the fact that goal set-up for freedom of trade and commerce is to eliminate internal custom duties and States were conceded to impose limited taxes with restrictions as envisaged in the proposed articles.

153. Article 274DD as adopted by the Constituent Assembly, which became Article 306 of the Constitution allowed the existing taxes and duties by the States on the import into or export of goods for a period not exceeding 10 years clearly indicates that taxes are restrictions on trade and commerce, hence period of 10 years was allowed to abolish the same and the State to ensure free flow of trade and commerce.

154. One more important fact is to be noticed from the Constituent Assembly Debates dated 8th September, 1949 in reference to Article 244 (now Article 304), which permitted the State to impose any tax on goods imported from other States. Dr. B.R. Ambedkar referred the above Article 244 as a provision giving limited power to impose certain restrictions on the entry of goods. Dr. Ambedkar in his statement in the proceeding instead of repeating the word 'tax' as specifically mentioned in Article 244 used the word 'restriction'. The above also indicates that the use of word 'restriction' included the tax also.

155. From the legislative history as noted above and the extent of freedom of trade and commerce as emerged from Constituent Assembly Debates, it is abundantly clear that the taxes were treated as restriction on freedom of trade and commerce and it was further comprehended that restriction on freedom of trade and commerce can be put by taxation also.

B. Nature of Federalism in Constitution of India

156. 'In the people of India', vests the legal sovereignty while the political sovereignty is distributed between Union and the States. We having adopted for ourselves a well thought, well deliberated written Constitution, it is pertinent to know the structure of our Constitution. Learned counsel for the parties during their respective submissions have referred to the federal structure of the Constitution and one of the submissions raised before us is that while interpreting the Constitution the federal structure of the Constitution has to be kept in mind, since, the framers of the Constitution must have never intended to dilute the federal structure of the Constitution.

157. The Constituent Assembly of India consisting of illustrious members drawn from all parts of the country deliberated all aspects of the new Constitution and took considerable pain and caution in drafting the Constitution which may fulfill the aspirations of independent India. Initially, it was perceived that the federal Government i.e. Union Government shall be responsible for Foreign Affairs, Defence and Communication. After declaration of Partition on 3rd June, 1947, there was considerable change in the views of the Constituent Assembly. Union Constitution Committee on 6th June, 1947 took a decision that Constitution would be federal with a strong Centre. Granville Austin in the Indian Constitution:Cornerstone of a Nation has described the shift in the following words: "Mountbatten announced Partition on 3 June 1947. Within four days the Assembly had embarked on a centralized federal union.

On 5 June the Union and Provincial Constitution Committees,having spent much of the first month of their lives marking time, met in joint session and concluded that in the light of the June Third Statement the Cabinet Mission Plan no longer applied to the Assembly. The following day the Union Constitution Committee met alone. Present were Nehru, the Chairman, Prasad,Azad,Pant,Jagjivan Ram, Ambedkar, Ayyar, Munishi, Shah, S.P. Mookerjee, V.T.Krishnamachari, Panikkar, N.G. Ayyangar,and P. Govinda Menon. These men took the following tentative decisions: That the Constitution would be federal with a strong centre; That there should be three 'exhaustive' legislative lists, and that residuary powers should vest in the Union Government; That the Princely States should be on a par with the provinces regarding the Federal List,subject to special matters; and That generally speaking the Executive authority of the Union should be co- extensive with its legislative authority."

158. The Drafting Committee which was charged with the duty of preparing a Constitution in accordance with the decision of the Constituent Assembly on the reports made by the various Committees prepared a Draft Constitution which was made public. The Draft Constitution was placed for discussion on 4th November, 1948. Dr. B.R. Ambedkar while placing the Draft Constitution/while moving the motion had deliberated over the nature of the Constitution. Dr. Ambedkar stated that the Draft Constitution is Federal Constitution in the following words: "Two principal forms of the Constitution are known to history-one is called Unitary and other Federal. The two essential characteristics of a Unitary Constitution are:

(1) the supremacy of the Central Polity,and

(2)the absence of subsidiary Sovereign politics.

Contrariwise,a Federal Constitution is marked:

(1) by the existence of a Central polity and subsidiary polities side by side, and (2)by each being sovereign in the field assigned to it. In other words, Federation means the establishment of a Dual Polity. The Draft Constitution is, Federal Constitution inasmuch as it establishes what may be called a Dual Polity. This Dual Polity under the proposed Constitution will consist of the Union at the Centre and the States at the periphery each endowed with sovereign powers to be exercised in the field assigned to them respectively by the Constitution."

159. Dr. Ambedkar also referred to the Constitution of USA and highlighted the difference between Indian Federation and American Federation. While speaking on the difference of Indian Federation to that of American Federation Dr. Ambedkar stated: "But there are some other special features of the proposed Indian Federation which mark it off not only from the American Federation but from all other Federations. All federal systems including the American are placed in a tight mould of federalism. No matter what the circumstances, it cannot change its form and shape. It can never be unitary. On the other hand the Draft Constitution can be both unitary as well as federal according to the requirements of time and circumstances. In normal times,it is framed to work as a federal system. But in times of was it is so designed as to make it work as though it was a unitary system."

160. Dr. Ambedkar further stated that a Federal Constitution cannot but be a written Constitution. The following was stated: "A Federal Constitution cannot but be a written Constitution and a written Constitution must necessarily be a rigid Constitution. A Federal Constitution means division of Sovereignty by no less a sanction than that of the law of the Constitution between the Federal Government and the States, with two necessary consequences (1)that any invasion by the Federal Government in the field assigned to the States and vice versa is a breach of the Constitution (2)such breach is a justiciable mater to be determined by the Judiciary only."

161. A.V. Dicey in his celebrated work "The Law of the Constitution" while dealing with the aim of Federation stated the following: "A federal state is a political contrivance intended to reconcile national unity and power with the maintenance of 'state rights'. The end aimed at fixes the essential character of federalism. For the method by which federalism attempts to reconcile the apparently inconsistent claims of national sovereignty and of state sovereignty consists of the formation of a constitution under which the ordinary powers of sovereignty are elaborately divided between the common or national government and the separate States.

The details of this division vary under every different federal constitution,but the general principle on which it should rest is obvious. Whatever concerns the nation is a whole should be placed under the control of the national government. All matters which are not primarily of common interest should remain in the hands of the several States." 162. A.V. Dicey further stated about three leading characteristics of federalism; "the supremacy of the constitution- the distribution among bodies with limited and co-ordinate authority of the different powers of government- the authority of the Courts to act as interpreters of the constitution."

163. Shri Alladi Krishnaswami Ayyar while referring to Part XA i.e. trade, commerce and intercourse (within the territory of India) referring to factors of federation in the context of trade, commerce and intercourse stated as follows: "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 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."

164. The nature of federalism as contained in the Constitution of India came for consideration before this Court in large number of cases. Several larger Benches of this Court dealt with the issue and had deliberated and explained the principles of federalism as incorporated in the Constitution. A Seven Judge Bench in the Special Reference No.1 of 1964: In the matter of: Under Article 143 of the Constitution of India, (1965) 1 SCR 413 referring to fundamental feature of a Federal Constitution laid down that supremacy of the Constitution is fundamental to the existence of the Federal Constitution, following was stated: "In dealing with this question, it is necessary to bear in mind one fundamental feature 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 is 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 (Dicey, The Law of the Constitution 10th ed. pp. xxxiv, xxxv). On the other hand, the essential characteristic of federalism is "the distribution of limited executive, legislative and judicial authority among bodies which are co-ordinate with an independent of each others."

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 States from destroying or impairing that delicate balance of power which satisfies the particular requirements of States which are desirous of union, 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."

165. In the landmark judgment of this Court in His Holiness Kesavanand Bharati Sripadagalvaru vs. State of Kerala and another,(1973) 4 SCC 225 a new dimension was given to the Constitutional principles. This Court by majority judgment declared that the basic feature of the Constitution could not be amended by a constitutional amendment. Chief Justice, Sikri while delivering the majority judgment had held that federal character of the Constitution is one of the basic structures of the Constitution.

166. Shelat and Grover, JJ. while delivering concurring opinion had also stated that our Constitution has all essential elements of federal structure. In paragraph 486 following was stated: "The Constitution has all the essential elements of a federal structure as was the case in the Government of India Act, 1935, the essence of federalism being the distribution of powers between the federation or the Union and the States or, the provinces.

All the legislatures have plenary powers but these are controlled by the basic concepts of the Constitution itself and they function within the limits laid down in it Per Gajendragadkar C.J. in Special Reference No. 1 of 1964, [1965] 1 S.C.R. 413. All the functionaries, be they legislators, members of the executive or the judiciary take oath of allegiance to the Constitution and derive their authority and jurisdiction from its provisions. The Constitution has entrusted to the judicature in this country the task of construing the provisions of the Constitution and of safeguarding the fundamental rights Ibid p. 446. It is a written and controlled Constitution."

167. Again a Seven Judge Bench in State of Rajasthan and others vs. Union of India and others, (1977) 3 SCC 592 had an occasion to consider the nature of Indian Constitution. M.H. Beg, CJ,while delivering majority decision in paragraph 57 following was stated:

"57. The two conditions Dicey postulated for the existence of federalism were: firstly, "a body of countries such as the Cantons of Switzerland, the Colonies of America, or the Provinces of Canada, so closely connected by locality, by history, by race, or the like, as be capable of bearing, in the eyes of their inhabitants an impress of common nationality"; and, secondly, absolutely essential to the founding of a federal system is the "existence of a very peculiar state of sentiment among the inhabitants of the countries". He pointed out that, without the desire to unite there could be no basis for federalism. But, if the desire to unite goes to the extent of forming an integrated whole in all substantial matters of Government, it produces a unitary rather than a federal constitution. Hence, he said, a federal State "Is a political contrivance intended to reconcile national unity with the maintenance of State rights."

The degree to which the State rights are separately preserved and safeguarded gives the extent to which expression is given to one of the two contradictory urges so that there is a union without a unity in matters of government. In a sense, therefore, the Indian union is federal. But, the extent of federalism in it is largely watered down by the needs of progress and development of a country which has to be nationally integrated, politically and economically coordinated, and socially, intellectually and spiritually up-lifted. In such a system, the States cannot stand in the way of legitimate and comprehensively planned development of the country in the manner directed by the Central Government......"

168. Further in paragraph 60 referring to Dr. Ambedkar following was stated:

"60. Although Dr. Ambedkar thought that our Constitution is federal "inasmuch as it establishes what may be called a Dual Polity," he also said, in the Constituent Assembly, that our Constitution makers had avoided the 'tight mould of federalism' in which the American Constitution was forged. Dr. Ambedkar, one of the principal architects of our Constitution, considered our Constitution to be both unitary as well as federal according to the requirements of time and circumstances'."

169. A Nine Judge Bench had occasion to elaborately consider the nature of Constitution of India in S.R. Bommai and others vs. Union of India and others, (1994) 3 SCC 1, Ahmadi, J. referring to federal character of the Constitution in paragraph 14 following was stated:

"14.In order to understand whether our Constitution is truly federal, it is essential to know the true concept of federalism. Dicey calls it a political contrivance for a body of States which desire Union but not unity. Federalism is, therefore, a concept which unites separate States into a Union without sacrificing their own fundamental political integrity. Separate States, therefore, desire to unite so that all the member-States may share in formulation of the basic policies applicable to all and participate in the execution of decisions made in pursuance of such basic policies. Thus the essence of a federation is the existence of the Union and the States and the distribution of powers between them. Federalism, therefore, essentially implies demarcation of powers in a federal compact."

170. Ahmadi, J. further stated that the Constitution of India is differently described, more appropriately as 'quasi-federal' because it is a mixture of the federal and unitary elements, leaning more towards the latter.

171. B.P. Jeevan Reddy, J., held that the founding fathers wished to establish a strong a Center. In the light of the past history of this sub- continent, this was probably a natural and necessary decision. In paragraphs 275 and 276 following was stated: "275. A review of the provisions of the Constitution shows unmistakably that while creating a federation, the Founding Fathers wished to establish a strong Centre. In the light of the past history of this sub-continent, this was probably a natural and necessary decision. In a land as varied as India is, a strong Centre is perhaps a necessity.

This bias towards Centre is reflected in the distribution of legislative heads between the Centre and States. All the more important heads of legislation are placed in List I. Even among the legislative heads mentioned in List II, several of them, e.g., Entries 2, 13, 17, 23, 24, 26, 27, 32, 33, 50, 57 and 63 are either limited by or made subject to certain entries in List I to some or the other extent. Even in the Concurrent List (List III), the parliamentary enactment is given the primacy, irrespective of the fact whether such enactment is earlier or later in point of time to a State enactment on the same subject-matter. Residuary powers are with the Centre. By the 42nd Amendment, quite a few of the entries in List II were omitted and/or transferred to other lists. Above all, Article 3 empowers Parliament to form new States out of existing States either by merger or division as also to increase, diminish or alter the boundaries of the States.....

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, the courts should not adopt an approach, an interpretation, which has the effect of or tends to have the effect of whittling down the powers reserved to the States. It is a matter of common knowledge that over the last several decades, the trend the world over is towards strengthening of Central Governments be it the result of advances in technological/scientific fields or otherwise, and that even in USA the Centre has become far more powerful notwithstanding the obvious bias in that Constitution 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 ou[TCome 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" (Eastern Law House, Calcutta, 1974). The nature of the Indian federation with reference to its historical background, the distribution of legislative powers, financial and administrative relations, powers of taxation, provisions relating to trade, commerce and industry, have all been dealt with analytically.

It is not possible nor is it necessary for the present purposes to refer to them. It is enough to note that our Constitution has certainly a bias towards Centre vis-a-vis the States Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, (1963) 1 SCR 491, 540: AIR 1962 SC 1406. It is equally necessary to emphasise that courts should be careful not to upset the delicately-crafted constitutional scheme by a process of interpretation."

172. A Constitution Bench in Kuldip Nayar vs.Union of India, (2006) 7 SCC 1, held that India is not a federal State in the traditional sense of the term and it is not a true federation formed by agreement between various States and it has been described as quasi-federation and similar other concepts. Dr. Justice Durga Das Basu in his Treatise "Comparative Federalism" by tracing the history of framing of our Constitution stated following in Chapter IV "Indian Federation in particular"-

"The strong centralising tendency of the Indian federation which has attracted the notice of foreign observers, can be properly appreciated only if its genesis is understood. Federation, under our Constitution, is the resultant of conflicting forces. The political tradition of the country was unitary, but it was not possible to adopt a unitary Constitution, since it was necessary to fit in the Indian States (about 600 in number) which had practically become independent since the lapse of paramoun[TCy, as a result of the Indian Independence Act, 1947.

On the other hand, it was not possible to make the Union the 'exceptional' government as in the United States, because all the units of the federation were not equally developed,and central control was necessary to secure uniform development of the country as well as of the backward classes of the population. Above all, a strong Central Government had been necessitated by the situation created by the partition of the country. It may be recalled that the Objectives Resolution adopted by the Constituent Assembly at the outset envisaged that the units of the Union of India should be 'autonomous' and vested with residuary power. But the framers of the Draft Constitution had to depart from the federal concept embodied in the Objectives Resolution owing to a change in the political situation which had taken place in the meantime.

The object of the framers of our Constitution,thus,was to build a strong central authority which might resist external aggression and also to check internal disruptive forces that might tend to undermine the nascent State. This object has been sought to be attained,not only by endowing larger enumerated powers upon the Union than elsewhere and by giving it the residue [Art.248] (as in Canada), but also by enabling the Centre itself to assume control of the units whenever there is any threat of disruption either from outside or from within."

173. The law declared by this Court as noted above clearly indicate that the Indian Constitution is basically federal in form and is marked traditional characteristics of a federal system, namely, supremacy of the Constitution, division of power between the Union and States and existence of an independent judiciary. Federalism is one of the basic features of Indian Constitution. However, the history of Constitution including the Debates in the Constituent Assembly indicate that the distribution of powers was given shape with creating a strong Centre with the object of unity and integrity of India. The States are sovereign in the allotted fields.

The Indian Constitution cannot be put in traditional mould of federalism. The traditional concept of federalism has been adopted with necessary modification in the framework of the Constitution to suit the country's necessity and requirement. The sum total of above discussion is that federalism in the Constitution is limited and controlled by the Constitution and the exercise of powers of both the States and the Centre are controlled by express provisions of the Constitution.

174. The submission that while interpreting Part XIII of the Constitution federal nature of the Constitution has not to be tinkered with shall be adverted hereinafter while dealing with interpretation of different Articles of Part XIII of the Constitution specially Article 304.

C. LIMITATION ON THE LEGISLATIVE POWER OF THE STATE UNDER THE CONSTITUTION

175. Thomas M. Cooley in "A Treatise on the Constitutional Limitations" defines a Constitution in the following words: "A constitution is sometimes defined as the fundamental law of a state, containing the principles upon which the government is founded, regulating the division of the sovereign powers, and directing to what persons each of these powers is to be confided, and the manner in which it is to be exercised. Perhaps an equally complete definition would be,that body of rules and maxims in accordance with which the powers of sovereignty are habitually exercised."

176. The Indian Constitution has adopted federal structure as noted above. Three characteristics of federal system are :

(1) supremacy of the Constitution;

(2) division of powers between the Union and State Governments; and

(3) existence of an independent judiciary.

The Constitution operates as a fundamental law. Organs of the States, i.e., executive Legislature and judiciary derive their authority and discharge their responsibilities within the framework of the Constitution. Neither the Union Parliament nor State Legislature are sovereign.

The legislative power given to Parliament and State Legislature is provided for and dealt in the Constitution. The State is sovereign to legislate on any subject in conformity with the Constitutional limitations. What are the limitations envisaged by the Constitution in exercise of the legislative power of the State, is one of the issues for consideration before us. Learned counsel appearing for the States contend that the power to legislate as on the subjects as enumerated in List II is a sovereign power which also includes power of State to impose taxes in which no limitation can be read from Part XIII of the Constitution. It is contended that it is only by a specific prohibition or limitation in the Constitution which has to be read as limiting the sovereign power of the State.

On the other side, the petitioners contend that State Legislature while exercising its power of taxation exercise the same legislative power as it does while enacting any other law which it is competent to enact and there is no qualitative distinction between the exercise of legislative power enacting a law levying tax or enacting a non-fiscal law. In making of any law, all limitations envisaged by the Constitution shall apply. Learned counsel appearing for the States have submitted that limitations on taxing power of the State Legislature are all contained only in Part XII of the Constitution and no other limitation in exercise of State legislative power can be read.

177. Article 13 sub-clause (2) in Part III of the Constitution provides express prohibition in making of law by the State. Article 13 sub-clause (2) is as follows: "13(2). The State shall not make any law which takes away or abridges the rights conferred by this Part and any law made in contravention of this clause shall, to the extent of the contravention, be void."

178. Part XI of the Constitution deals with "Relations between the Union and the States". Chapter I of which contains heading "Legislative Relations". Chapter I contains Article 245 to Article 255. Article 245 begins with the words : 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 or any part of the State. Article 246 deals with the subject-matter of the laws made by Parliament and by the Legislatures of States. Articles 245 and 246 are as follows:

"245. Extent of laws made by Parliament and by the Legislatures of States.-

(1) 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.

(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 in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the "Concurrent List").

(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred 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."

179. During submissions before us, one of the issues raised is as to whether Article 245 is source of legislative power or it is Article 246. Some of the counsel appearing on behalf of the States contend that the word "subject to the provisions of this Constitution" is there only in Article 245 which does not govern, Article 246 under which Legislature of any State has exclusive power to make law. Articles 245 and 246 both cover the same subject i.e. law making by the Parliament and the Legislature. Article 245 deals with the extent of laws whereas Article 246 deals with the subject- matter of laws. Both the Articles together define and demarcate the legislative powers to be exercised by the Parliament and the States. The issue is no longer res integra.

The Constitution Bench of this Court in Maharaj Umeg Singh and others vs. The State of Bombay and others,(1955) 2 SCR 164, had occasion to consider the extent and limitations on the legislative powers as provided under Articles 245 and 246. Following was laid by this Court in the above case: "The fetter or limitation upon the legislative power of the State Legislature which had plenary powers of legislation 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 this power was by virtue of article 245(1)subject to the provisions of the Constitution. The Constitution itself laid down the fetters or limitations on this power, e.g., in article 303 or article 286(2)." It is relevant to note that Constitution Bench has noticed Article 303 as one of the Articles by which limitations were put on the legislative powers of the State.

180. The above view has been reiterated in a large number of judgments of this Court. It will be sufficient to refer only one more Constitution Bench judgment of this Court in State of Kerala and others vs. Mar Appraem KuriCompany Limited and another, (2012]) 7 SCC 106. This Court again had occasion to consider Articles 245 and 246. The Constitution Bench held in the said case that while the legislative power is derived from Article 245, entries in the Seventh Schedule of the Constitution only demarcate the legislative fields of the respective legislatures and do not confer legislative power as such. Following observations were made in paragraph 35: "35.....While the legislative power is derived from Article 245,the entries in the Seventh Schedule of the Constitution only demarcate the legislative 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."

181. In paragraph 37 it was laid down that the expression "subject to other provisions of the Constitution" has also to be read in Article 246, following was laid down in paragraph 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".

182. Thus, it is well settled that legislative power of the State is subject to the provisions of the Constitution. The words 'subject to the provisions of this Constitution' had to give its full meaning and content. Thus, limitation of the legislative powers wherever found in the Constitution has to be given effect to. There can be no doubt that Part XII of the Constitution deals with "Finance, Property, Contracts and Suits" and there are various express limitations provided in Part XII, namely, Articles 276, 286 and certain other Articles but can Part XII be treated as the only limitations on the legislative powers of the States, the answer has to be in negative.

We have already extracted Article 13 sub-clause (2) and there are more than one Constitution Bench judgments which held that taxing legislation has also to conform Article 13 sub-clause(2). In Kunnathat Thathunni Moopil Nair vs. The State of Kerala and another, (1961) 3 SCR 77, Constitutional validity of Travancore-Cochin Land Tax Act, 1955 was challenged. Following contention was raised by the petitioners: "On the legal aspect of the controversy raised on behalf of the petitioners, it was argued that the Act has its justification in Art.265 of the Constitution, which was not subject to the provisions of Part III of the Constitution and that, therefore, Arts. 14, 19, 31 could not be pressed in aid of the petitioners. It was also contended that even if the Act is, in effect,confiscatory, it cannot be questioned, being a taxing statute."

183. Repelling the contention the Constitution Bench held that tax legislation is also subject to Article 13. Following was held: "It has to be done by authority of law, which must mean valid law. In order that the law may be valid, the tax proposed to be levied must be within the legislative competence of the Legislature imposing a tax and authorizing the collection thereof and, secondly, the tax must be subject to the conditions laid down in Art.13 of the Constitution. One of such conditions envisaged by Art.13(2) is that the Legislature shall not make any law which takes away or abridges the equality clause in Art.14 which enjoins the State not to deny to any person equality before the law or the equal protection of the laws of the country."

184. Another Constitution Bench judgment in Hari Krishna Bhargav vs. Union of India and another, 1966 AIR SC 619, held that exercise of taxing power is also to be tested in the light of the fundamental freedoms guaranteed under Chapter III of the Constitution. Following was observed in paragraph 7: "7....Exercise of the taxing power to the State has undoubtedly to be tested in the light of the fundamental freedoms 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 Mohinder Garh, 1951 SCR 127: (AIR 1951 SC 97): Laxmanappa Hanumantappa v. Union of India,1955-1 SCR 769: (AIR 1955 SC 3): and the view expressed by Venkataramma Ayyar, J., in Anantha Krishnan v. State of Madras, ILR (1952) Mad 933: (AIR 1952 Mad 395). But it is now settled by decisions of the Court (e.g.), Kunnathat Thathunni Moopil Nair v.State of Kerala, 1961-3 SCR 77: (AIR 1961 SC 552), that a taxing statute is subject to the "conditions laid down in Art.13 of the Constitution". A taxing statute may accordingly be open to challenge on the ground that it is expropriatary, or that the statute prescribes no procedure or machinery for assessing tax, but it is not open to challenge merely on the ground that the tax is harsh or excessive."

185. All legislative powers is subject to limitations in the Constitution, be it fiscal statutes or non-fiscal statutes.

186. Now, we come to the question as to whether Part XIII also contains limitations on the legislative power of the State. Part XIII of the Constitution has been included in the Constitution after great deliberation and debates in the Constituent Assembly as noted above. Part XIII contains one of the most important right and principle on which country was to march to attain economic freedom. Justice Gajendragadkar, J. has beautifully explained the nature and contents of right guaranteed under Part XIII in following words: - "The provision contained in Article 301 guaranteeing the freedom of trade, commerce and intercourse is not a declaration of a mere platitude, or the expression of a pious hope of a declaratory character; it is not also a mere statement of a directive principle of State policy; it embodies and enshrines a principle of paramount important that the economic unity of the country will provide the main sustaining force for the stability and progress of the political and cultural unity of the country."

187. Justice Gajendragadkar speaking for majority in the above case has also held that Article 301 is a Constitutional limitation on the legislative power of the Parliament and the States in following words:- "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 by regarded as imposing a constitutional limitation on the legislative power of Parliament and the Legislatures of the States."

188. While discussing the "limitation on the legislative power of the State under the Constitution" we have already concluded that Article 245 which is a source of all legislative power puts a general limitation on all legislative power which has been expressly made 'subject to the provisions of this Constitution'. When all legislative powers are subject to the provision of Constitution, Part XIII being also a part of the Constitution, all legislative power has also to be subject to Part XIII.

189. A textual interpretation of Part XIII also lead to the same conclusion. Article 303 is an express provision which provides for 'restriction on the legislative power of the Union and the States with regard to trade and commerce'. Article 304 is another provision which although empowers the legislature of the State to put restriction on trade, commerce and intercourse among the States by law, but law to be made by the State is hedged by various restrictions as contained in Article 304(a) and 304(b). Thus Article 304 is also a limitation on legislative power of the State.

190. This Court in State of Karnataka and Another Vs. Hansa Corporation, (1980) 4 SCC 697, has held in Para 30: "Article 304(a) imposes a restriction on the power of the legislature of a State to levy tax.......".

191. Article 301 contains a general limitation on all legislative power. A Constitutional Bench of this Court in State of Tamil Nadu and Others Vs. Sitolaxmi Mills and Others (1974) 4 SCC 408 in para 7 as Stated: "....In other words Article 301 imposes a general limitation on all legislative power in order to secure that trade, commerce and intercourse in the territory of India shall be free".

192. Justice K. Mathew in G. K. Krishnan and Others Vs. State of Tamil Nadu and Others (1975) 1 SCC 375 had again reiterated that Article 304 imposes a general limitation on all legislative power, he states that 'Article 301 imposes a general limitation on all legislative power in order to secure that trade, commerce and intercourse throughout the territory of India shall be free'. In view of the aforesaid discussion, we conclude that Part XIII of the Constitution contains limitation on the legislative power of the State and all legislative power of the State whether fiscal or non-fiscal has to conform Part XII of the Constitution. D. Whether Part XIII of the Constitution covers "tax legislation" and word "restriction" used therein includes tax legislation.

193. The above subject is being considered in two parts. Firstly, whether Part XIII of the Constitution covers tax legislation and secondly, whether word restriction used in Part XIII includes tax legislation. Whether Part XIII covers tax legislation

194. Learned counsel for both the parties have to make different submissions on the above subject. Learned counsel for the petitioners on the one hand contends that all tax legislation which restrict freedom of trade, commerce and intercourse are covered by Part XIII whereas learned counsel appearing for the States contend that Part XIII only covers non- discriminatory taxes as referred to under Article 304(a) and no other tax legislation is covered under Part XIII.

195. Gajendragadkar J., speaking for majority in Atiabari Tea Co. Ltd. has rejected the argument that tax laws are outside Part XIII. Even Sinha C.J., having expressed the following opinion at Page 828: "...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'...." In the same Paragraph further observed: "... 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 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..."

196. Shah J., in Atiabari Tea Company has held that all taxations which imposed restriction are hit by Article 301. The Automobile Transport (supra) where correctness of Atiabari Tea Co. was questioned reiterated that taxation is included in Part XIII. Following was observed by Das J. " ...in view of the provisions of Article 245, we find it difficult to accept the argument that the restrictions in Part XIII of the Constitution do not apply to taxation laws..."

197. Both K. Subba Rao, J. and M. Hidayatullah, J. in their separate opinions have held that restriction by law of taxation is also hit by Article 301.

198. Learned Counsel for the States in support of their submission further contends that both the words i.e. 'tax' and 'restriction' have been used in Article 304(a) and Article 304(b) separately. Both the words are not interchangeable nor the scheme of Article 304 indicates that the word 'restriction' includes taxation. Learned counsel further submits that reading taxation into word 'restriction' as used in Part XIII is accepting an interpretation which fetters the plenary powers of legislation granted to the States under the Constitution.

199. All subsequent judgments of this Court have also proceeded on the premise that a tax legislation which impedes the freedom of trade, commerce and intercourse and is not saved by Article 302 to 304 is invalid. Apart from the reason which found favour in Atiabari Tea Company and Automobile Transport the following reasons reinforces our view that Part XIII covers all tax legislations which impede the freedom of trade, commerce and intercourse:

(a) The express use of word tax in Article 304(a) and 306 (as it existed before its repeal by Constitution's 7th Amendment Act, 1956) indicates that taxes were expressly included in Part XIII. Had the taxes, apart from as mentioned in 304(a) were not to be covered under Part XIII, Article 306 ought not to have been engrafted which permitted continuance of tax or duty on the import and export of the goods, in Part B States for a period not exceeding ten years from the commencement of the constitution. The framers of the Constitution were conscious that unless an overriding effect is given to taxes which are continuing in the State the same shall fall foul to Article 301.

(b) Article 302 uses the phrase, "Parliament may by law". Whereas Article 303 uses the phrase "neither Parliament nor the legislature of the State shall have power to make any law....." Article 304 uses the phrase the legislature of a State "may by law". All laws framed by Parliament or State in exercise of legislative entries under VIIth Schedule are law. Article 302 - 304 contain exception according to which, freedom of trade, commerce and intercourse as guaranteed under Article 301 can be overridden. The word law is wide enough to include both fiscal and non-fiscal legislations.

(c) Article 303 imposes restriction on the legislative power of the Union as well as of the State with regard to trade and commerce. Article 303(1) provides that a State shall have no powers 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 discrimination between one State or another, by virtue of any entry relating to trade and commerce in any Lists of the VIIth Schedule.

The legislative power of the State, which is restricted under 303(1) cannot be held to be confined only to law as referred to in 304(a) rather it can extend to a legislation by virtue of any entry relating to the trade and commerce in List II. From this, it is clear that tax legislation which are covered under Part XIII are not confined to only Article 304(a).

(d) In the event, the submission is accepted that all taxes are outside Part XIII except non-discriminatory taxes as permitted under Article 304(a), the same will lead to giving right to the Parliament and State Legislature to pass facially non-discriminatory laws but creating restrictions on trade and commerce by other means by providing arbitrary procedure and various other kind of restraints.

The taxation which can impede the trade, commerce and intercourse thus cannot be confined only to non-discriminatory taxation. Even, non-discriminatory taxes which create restraint on trade have to be held to fall foul to Article 301. In the event of accepting the above submission, the restraint in trade by other means of taxation shall be out of reach of Part XIII, which is never the intention of the framers of the Constitution.

(e) Article 304(a) covers imposition of taxes on goods imported from other States. Article 304(a) does not apply to imposition of taxes on intra-State trade. Can it be presumed that intra-State taxation, if it contains restraint on trade between one local area to another local area or is discriminatory, the same is outside the reach of Article 301?

The answer is obviously no. Trade and commerce throughout the territory of India is to be free. Thus reach of Article 301 is not confined to taxation as contemplated by 304(a) rather Part XIII embraces in itself all kind of tax legislation, which contains restraint on trade, commerce and intercourse.

(f) Article 304(a) only covers taxes on goods imported from other State and Union Territories. List II of VIIth Schedule contains various other entries which empower the State to levy taxes. Entry 49 to Entry 62 enumerate various fields of taxing legislation. In the event, the submission is accepted that it is only taxes referred to under Article 304(a), are covered by Part XIII, all taxing legislations as enumerated in List II shall go out of reach of Part XIII. Whether Constitution framers contemplated that restriction in freedom of trade, commerce and intercourse can be imposed by the State by taxing legislation other than those referred to in 304(a), answer has to be negative.

Other taxing legislation apart from those, mentioned in Article 304(a) are not immuned from restriction contained in Part XIII. For example, Entry 49 provides 'taxes on lands and buildings'. A State Legislation is passed imposing taxes on buildings where trade and commerce is carried, the effect of which is to impede the trade and commerce, can it be said that such tax legislation cannot be questioned as violating Article 301. The answer is that such legislation has also to comply with Article 301. Thus, Article 304(a) is not the only taxation which is covered by Part XIII. But it is only species of taxation which has been expressly indicated for carving out gateway for the State Legislature to impose tax which may not impede Article 301.

(g) Lastly, there are no provision in Part XIII which negate the applicability of Part XIII on taxes which operates as restriction to trade, commerce and intercourse. Something which is not expressly excluded in Part XIII cannot be excluded by way of interpretation. Whether restriction used under Part XIII includes tax legislation 200. While discussing the subject 'Legislative History and Debates in Constituent Assembly' on freedom of trade, commerce and intercourse, we have already found that taxes were treated as restrictions on freedom of trade and commerce and it was further comprehended that restrictions on freedom of trade and commerce can be put by taxation also. Apart from above, there are following reasons which support our conclusion that word 'restriction' used in Part XIII includes tax legislation:

(i) The textual interpretation of Part XIII itself indicates that taxes were contemplated to be included in word 'restriction'.

The heading of Article 304 reads 'restrictions on trade, commerce and intercourse among States'. Although the heading refers to 'restrictions' but Article 304(a) uses the word 'any tax'.

(ii) The same conclusion is drawn from the Article 306 as it was enacted. Article 306 also contained a heading 'power of certain States in Part B of the Ist Schedule to impose restriction on 'trade and commerce'.' Article 306 contained a non obstante clause empowering Part B, States to continue to levy and collect such tax, subject to an agreement with the Government of India which was being levied at the time of commencement of the Constitution.

The heading only referred to restrictions on trade and commerce whereas section referred to imposition of taxes. Thus textual interpretation of Article 304 and 306 clearly indicates that word 'restriction' was used as inclusive of taxes. iii. The word 'restriction' has been used in Part III, in Article 19(2) to Article 19(6). The word 'restriction' has also been used in Part XIII. The word 'restriction' appearing in Part III and Part XIII have the same meaning and should be construed as such. It is well known principle of statutory interpretation of Constitution that when the same words or phrases are used in different parts of the Constitution, the same meaning should be ascribed to such word unless the context demands otherwise.

It is sufficient to refer to judgment of this Court in Kesavananda Bharati Vs. State of Kerala, (1973) 4 SCC 225. Justice "Hegde and Mukherjea" in Para 640 had reiterated the above principle as: "...it is one of the accepted rules of construction that the courts should presume that ordinarily the Legislature uses the same words in a statute to convey the same meaning. If different words are used in the same statute, it is reasonable to assume that, unless the context otherwise indicates, the Legislature intended to convey different meanings of those words. This rule of interpretation is applicable in construing a Constitution as well..."

(iv) This Court had occasion to consider the word 'restriction' as used in Part III in context of taxing legislation, namely, Travancore-Cochin Land Tax Act, 1955 in K.T. Moopil Nair Vs. State of Kerala and ANR., 1961 (3) SCR 77. When word 'restriction' as used in Part III has been held to include restriction by tax legislation also, we see no reasons for not reading tax legislation in word 'restriction' in Part XIII also. The word restriction has to be given same meaning as contained in Part XIII.

(v) Article 302 contains a heading 'power of Parliament to impose restrictions on trade, commerce and intercourse'. Article further provides that the Parliament by laws impose such restrictions on the freedom of trade, commerce and intercourse. Under Article 302 tax laws enacted by the Parliament, namely, Central Sales Tax Act, 1956 has been saved by this Court in State of Madras Vs. N. K. Nataraja Mudaliar 1968 (3) SCR 829. Bachawat, J., agreeing with the majority opinion stated as following: "I may add that even assuming that the Central Sales Tax Act, 1956 is within the mischief of Art. 301, it is certainly a law made by Parliament in the public interest and is saved by Art. 302. find nothing in the Act which offends Art. 303(1)."

(vi) The word 'restriction' used in Article 304(b) has also to be interpreted in the same manner. As noted above, Article 304(a) covers limited field to taxes on goods imported from other States. Article 304(a) does not cover intra-State taxation. An Intra-State Tax Legislation, impeding the freedom of trade, commerce and intercourse between one local area to another local area, has also to fall foul to Article 301.

There may be valid reasons for State legislature to impose restriction with regard to intra-State taxation and there may be reasons for fixing different rate of taxes with regard to different local areas, which may be a restriction on the trade, commerce and intercourse. Article 304(b) is a window by which a State can impose reasonable restriction in public interest. In the event, it is held that Article 304(b) does not cover taxes, the State will have no mechanism to impose restriction on intra-State trade and with regard to imposition of taxes other than goods imported from other States, which can not be the intention of framers of the Constitution. From the foregoing discussion, we arrive at following conclusions:

i. Part XIII of the Constitution covers tax legislation which restrict freedom of trade, commerce and intercourse.

ii. The word 'restriction' used in Part XIII includes tax legislations also.

E. LEGISLATIVE HISTORY AND CONSTITUENT ASSEMBLY DEBATES RELATING TO ARTICLE 304(a)AND 304(b)

201. By Section 297 of Government of India Act, 1935, the certain restrictions on the Provincial Legislature and the Government were imposed to ensure freedom of trade, as has already been noted above. When the Constituent Assembly proceeded to finalise the provisions of the Constitution on freedom of trade and commerce, the Legislative Scheme as such under Section 297 was already enforced.

By Section 297(1)(a) the State Legislature and Government were prohibited from restricting the entry into, or export from, the Province of goods of any class or description; and further by Section 297(1)(b) imposition of any tax, cess, toll, or due which was discriminatory in nature was prohibited. As noted above the Sub- Committee on the fundamental rights in its report dated 3rd April, 1947 has proposed the following clause with regard to trade, commerce and intercourse:

"13.Subject to regulation by thelaw 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. "

202. Shri Alladi Krishnaswami Ayyar put a note on the above Clause 13 which was to the following effect: "Clause 13. Though I have been in some measure responsible for the inclusion of this clause I feel it must be made 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 themselves are subject."

203. While submitting the report of the Sub-Committee dated 16th April, 1947, Chairman of Fundamental Rights Sub-Committee stated that although every citizen is entitled to free trade, commerce and intercourse within the territories of the Union unburdened by any internal duties or taxes of customs but many Indian States depend upon such duties and taxes for a considerable part of their revenue and cannot do without it all at once. It was stated that some agreement had to be made with those States in the light of their existing rights with a view to their ultimate elimination within a period to be prescribed by the Constitution.

204. Thus, with regard to the taxes the above view was reiterated by Shri Vallabhbhai Patel in the report of Advisory Committee submitted on 23rd April, 1947. Shri C. Rajagopalachari in Advisory Committee proceeding had stated : "I think we should add to 14(1) that this shall not be a bar to the imposition of taxes for genuine purposes of revenue." Before the Constituent Assembly the Advisory Committee had recommended Clause 10 regarding trade, commerce and intercourse to the following effect:

"10. 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 in or in an 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 revenue by a Unit to one Unit over another."

205. The above Clause 10 came for discussion before the Constitution Assembly on Ist May, 1947. Shri K.M. Munshi before the Constituent Assembly placed amendment for adding the words 'and under regulations and conditions which are non-discriminatory'. The Constituent Assembly approved Clause 10 by accepting amendment proposed by Shri K.M. Munshi. Third proviso thus was approved as follows:

"Provided that nothing in this section shall prevent any Unit from imposing on goods imported from either Units the same duties and taxes to which the goods produced in the Unit are subject and under regulations and conditions which are non-discriminatory." 206. The above proviso was included in the Draft Constitution published in October, 1947 and thereafter draft as finalised by Drafting Committee provided for restriction on trade, commerce and intercourse by Article 244 which was of the following effect:

"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 goods 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 law 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."

207. Article 244 which was subsequently approved as Article 274D in Part XA and was adopted as Article 304 of the Constitution. The above indicates that initially the provisions empowered the State "to impose on goods imported from other States any tax to which similar goods manufactured or produced in that State are subject", and by an amendment another restriction i.e. "so, however, as not to discriminate between goods so imported and goods so manufactured or produced" was added. Article 304(a) contains both the above restrictions on the legislative power of the State.

The proceedings of the Constituent Assembly, thus, clearly indicate that both the above conditions have been added in the provision as separate conditions and the second condition was added by way of amendment in addition to the first condition which already existed. Now coming to Article 304(b) which was similar to draft Article 244(b), Constituent Assembly debated the above Article threadbare.

208. Dr. Ambedkar had moved motion for inclusion of a separate Part XA wherein Article 244 was deleted and substituted by a draft Article 274D which was to the similar effect. In the Constituent Assembly Debates dated 3rd December,1948 the draft Article 16 which was included in the fundamental rights came for consideration.

In the context of the above discussion objections were raised to Article 244 by Shri C. Subramanian. Shri C. Subramanian raised objection that a State Legislature has been given power to impose certain taxes and impose certain restrictions which clearly means that no fundamental right is reserved for free trade and commerce. The objection of Shri C. Subramanian was taken in the following words: "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 certain restrictions.

Having this in mind, if we come to Article 16, we find the words "subject to the provisions of article 244 of this Constitution", that is, even in respect of inter-state trade and commerce, the State Legislature has been given certain powers and that is not touched by this article. Therefore leaving that, the article would read "subject to the provisions of any law made by Parliament, trade and commerce and intercourse through the territory of India shall be free". I really fail 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."

209. Dr. Ambedkar replying to the above objection with regard to Article 244 stated as follows: "With regard to the other argument, that since trade and commerce have been made subject to article 244, we have practically destroyed the fundamental right, I think I may fairly say that my friend Mr. Subramaniam has either not read article 244, or has misread that article. Article 244 has a very limited scope. All that it does is to give powers to the provincial legislatures in dealing with inter-state commerce and trade, to impose certain restrictions 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."

210. As stated above Article 244 was akin to Article 274D which was sought to be added in new Chapter and came for discussion on 8th September, 1949 before the Constituent Assembly. Dr. B.R. Ambedkar by moving a motion in support of Chapter XA giving a complete picture of the Articles now put at one place stated as follows: "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 from the fundamental provision that trade and commerce shall be free throughout India.

The freedom of trade and commerce has been made subject to certain limitations which may be imposed by Parliament or which may be imposed by the Legislatures of various States, subject to the fact that the limitation contained in the 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 would not be in a position to undertake such legislation."

211. Pandit Thakur Das Bhargava raised various amendments. Pandit Bhargava moving his amendments stated: "Now, in regard to these amendments my submission is that the way in which I look at the subject is different from the way in which Dr. Ambedkar look at it. According to me, these rights of trade and commerce and intercourse should be absolute and only circumscribed by provisions relating to emergencies while in his view, the power of the Central Government as well as of the provincial Governments should be there, and these rights should be qualified We have already passed article 16 which runs thus: "Subject to the provisions of article 244 of this Constitution and of any law made by Parliament, trade, commerce and intercourse throughout the territory of India shall be free."

This article yet stands as it is. There has so far been no amendment that it stands abrogated. The existence of this article in the Chapter on Guaranteed Rights assures us that this is a fundamental right. The nature of this fundamental right has been, I know, curtailed to a great extent by the use of the words "and of any law made by Parliament". Subject to this, this fundamental right has been guaranteed to the citizens of India by the Constitution we have already passed.

212. With regard to Article 274D, Pandit Thakur Das Bhargava raised serious objections to sub-cluase (b), following was stated by Pandit Bhargava" "Similarly Sir, in regard to article 274D, I have no objection to clause (a); but so far as (b) is concerned, this is the clause to which I object most seriously. I think this is unnecessary because when the powers are given to the Parliament as originally they were given to the Parliament, I have no objection. The Parliament shall have to consider it from the general standpoint, from the standpoint of the whole of India, whereas a State is bound to consider it from a parochial point of view, from the point of view of the State and therefore, this mutual jealousy is bound to arise if we allow these powers to the State.

Therefore, the policy of the Government should be that so far as the State is concerned, they should not be allowed to exercise that power unless it be through Parliament. If a State is empowered to use its powers under clause (a) I have no quarrel as it will be a salutary power; but if you allow clause (b) to remain as it is, I do not understand what it may lead to."

213. Prof.Shibban Lal Saksena also supported the amendments moved by Pandit Bhargava.

214. Shri T.T. Krishnamachari replying the objections of Pandit Bhargava stated following with regard to Article 274D: "So far as 274D is concerned, my honourable Friend Pandit Thakur Das Bhargava will either wholly amend it in such a way as to completely change its shape or completely eliminate it. I feel that it arises-I have no doubt-from a particular bitter experience of his in which a Provincial Government has not executed its duty towards its people in the proper way. But hard cases do not always mean bad law. There is not reason for us to completely shut out discretion or the States in so far as the Central Government will have enough power not merely to have a uniform fiscal policy but also as far as possible to have a uniform economic policy. And that is provided by the fact that the President's previous sanction is necessary in regard to any legislation undertaking by the State under clause (b) of 274D.

Pandit Thakur Das Bhargava: Is it not exactly the reason why the Provinces and the State Legislatures should not be given the power? Shri T. T. Krishnamachari: That is exactly the reason why they should be given the power. The State should be given a certain amount of right in this matter and the only reason why the Centre should interfere is to see that the economic and fiscal policy of the Centre is not unduly interfered with, and to the extent that it cannot be interfered with the State must be given a reasonable amount of power to order its own affairs."

215. Shri Alladi Krishnaswami Ayyar replying the objections of Pandit Bhargava with regard to Article 274D stated as follows: "Then I am surprised at exception being taken to the terms of article 274D. It does not give any unfettered power to the States.The proviso clearly lays down- "No Bill or amendment for the purposes of clause (b) of this article shall be introduced or moved in the legislature of the 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".

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 freedom of trade, commerce or intercourse with or within that State as may be required in the public interest therefore the President who has to grant sanction will have the opportunity to see that the legislation is in the public interest and that the restriction imposed is reasonable. It is not possible to devise a water- tight formula for the purpose of defining these restrictions."

216. Replying the Debate, Dr. B.R. Ambedkar stated that he cannot usefully add anything to what Shri T.T. Krishnamachari and Shri Alladi Krishnaswami Ayyar had said. Article 274D was added to the Constitution by negating the amendments. From the above, it is clear that objections with regard to Article 274D sub-clause (b) which is now Article 304(b) were raised before the Constituent Assembly but the objections were overruled by retaining Article 274D sub-clause (b) which is now Article 304(b), thus, inclusion of Article 304(b) in the Constitution was consequent to well deliberated Constitutional Scheme and was accepted as restriction on the power of State to have uniform fiscal policy and uniform an economic policy.

F. INTERPRETATION, SCOPE AND AMBIT OF ARTICLE

304(a) AND ARTICLE 304(b)

217. Article 304 of the Constitution reads as follows:

"304. 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 restrictions on the freedom of trade, 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 of a State without the previous sanction of the President. "

218. 'Article begins with a non obstante clause i.e. 'notwithstanding anything in Article 301 or 303'. Article 301 declares that trade, commerce and intercourse throughout the territory of India shall be free. Article 304 has overriding effect over Article 301, Article 304 provides for 'restrictions on trade, commerce and intercourse' amongst States, as is clear by its heading, which otherwise would not have been permissible under 301. Article 304 also overrides restrictions on the legislative power of the State as provided for in Article 303.

219. Article 304 empowers legislature of a State by law to impose on goods imported from other States or Union Territories any tax. A plain reading of Article 304(a) indicates that it contains certain conditions for imposition of taxes on goods imported from other States. Article 304(a) can be divided in following parts:-

i . Impose on goods imported from other States or Union Territories;

ii. Any tax to which similar goods manufactured or produced in that State are subject;

iii. So, however, as not to discriminate between goods so imported and so manufactured or produced;

220. We have already noted, while noticing the proceeding before the Constituent Assembly that in the initial draft corresponding to 304(a) the condition iii, i.e., "as not to discriminate between goods so imported and goods so manufactured or produced" was not there which was added by an amendment brought by Shri K. M. Munshi. Thus (ii) and (iii) Part of Article 304, as noted above contains two separate and independent conditions for invoking 304(a).

Learned counsel for the States have submitted that the main content of Article 304(a) is imposition of non- discriminatory taxes. It is contended that in event, there are no similar goods manufactured or produced in the State to the goods which are imported there is no question of discrimination and State is free to tax imported goods, which are not produced or manufactured in the State. On first blush, the submission appears to be attractive but on a deeper scrutiny it merits rejection.

Article 304 is, in nature of enabling provisions to the State, to impose taxes on goods imported from other States. Framers of the Constitution had stated that the goods coming from other parts of the India in the units concerned cannot escape duties and taxes to which the goods produced in the units are subject. There is specific purpose and object in enabling the State to impose tax on goods imported from other States only when similar goods manufactured or produced in that State are subject. The object is that trade and commerce throughout the territory of India has to be free, as required by Article 301 and limited power to State was given to tax the outside goods when local goods are subject to taxes.

In event, locally manufactured or produced goods are not subject to any tax, State has no jurisdiction to impose tax on similar goods coming from other States. Tax on the locally manufactured or produced goods is condition precedent for imposing tax on similar goods coming from other States. Idea is that when State does not tax its locally manufactured or produced goods, similar goods coming from out of the State be permitted a free flow which is a part of freedom guaranteed under Article 301.

221. The last condition that 'so, however, as not to discriminate between goods so imported and goods so manufactured or produced..." is another limb of restriction which prohibits the State from discriminating in imposing taxes on imported goods as compared to goods manufactured or produced locally.

The question of discrimination shall arise only when first condition that is locally manufactured or produced goods are taxed by a State. In event, a particular good is not produced or manufactured in a State, State cannot be allowed to impose tax on goods coming from other States. First condition that is, taxing of the local goods being not fulfilled, the question of discrimination, does not arise. We are thus of the considered opinion that power under Article 304(a) for imposing taxes on the imported goods can be exercised by a State only when similar goods manufactured or produced locally are subject to tax.

When the similar goods are not subject to tax or similar goods are not available in the State, the State is obliged to permit free flow of goods from other States which is cardinal principle enshrined in Article 301 and the relaxation to the States has been given only on a condition that State imposes taxes both on local goods and outside goods. Article 304(a) came for consideration before this Court in several cases including the Constitution Bench of this Court in State of Madhya Pradesh Vs. Bhailal Bhai and Others 1964 6 SCR 261, in the above case the State has filed an appeal against judgment of the High Court of M.P. by which judgment High Court had allowed the writ petition filed by the assessee permitting the refund of the tax assessed and collected from them holding assessment and collection as violative of Article 301 and not being saved by 304(a).

The writ petitioners were carrying business of sale of tobacco in accordance with the notifications issued by the State Government, in the notification in question the tax was imposed only on imported tobacco and not on home grown tobacco which was noticed by the High Court in the judgment in following words: "The High Court was of opinion on a consideration of the notification under which the tax was assessed that it imposed a tax only on imported tobacco and not on home grown tobacco and so it did not come within the special provisions of Art. 304(a) of the Constitution and consequently the infringement of Art. 301 of the Constitution which resulted from the imposition of a tax on import of goods made the provisions void in law. The prayer for refund was allowed in the applications out of which C.A. Nos. 362-377, C.A. Nos. 861-867 of 1962 and [C.A. NO. 25 of 1963 have arisen. The prayer was rejected in the remaining applications.

In the present appeals the State of Madhya Pradesh challenges the correctness of the High Court's decision that the taxing provision was unconstitutional and void and also the orders for refund made in some of the petitions mentioned above. "

222. This Court came to conclusion that similar goods manufactured or produced in the State of the Madhya Bharat have not been subject to the tax which tobacco imported from other States have to pay hence tax was not saved under 304(a), affirming the judgment of the High Court this Court held as follows: "There can, therefore, be no escape from the conclusion that similar goods manufactured or produced in the Sate of Madhya Bharat have not been subjected to the tax which tobacco leaves, manufactured tobacco and tobacco used for Bidi manufacturing, imported from other States have to pay on sale by the importer. This tax is, therefore, not within the saving provisions of Art. 304(a). As already pointed out it contravenes the provisions of Art. 301 of the Constitution. The tax has therefore been rightly held by the High Court to be invalid. It is clear that the assessment of tax under these notifications was thus invalid in law."

223. In another Constitution Bench judgment, Kalyani Stores Vs. State of Orissa and Others 1966 1 SCR 865 Article 304(a) again came for consideration. In the above case, the petitioners have challenged the notification dated 31 March 1961 issued under Bihar & Orissa Excise Act, 1915 by which duty was enhanced from Rs. 40 to 70 per LP Gallon.

224. The petitioners were asked to pay duty at the rate of Rs. 30, in respect of stocks of liquor found in the shop after April 1, 1961. The petitioners challenged the legality of the levy by filing a writ petition, the following contention was raised before this Court: "The appellants contended, inter alia that the State could levy under s.27 of the Bihar and Orissa Act duty on excisable articles produced or manufactured in the State and a countervailing duty on excisable articles imported into the State, imposed with a view to equalize the burden on the imported articles with the burden on manufactured articles in the State, but no countervailing duty on liquor imported could be levied if there was in the year of licence no liquor, similar to the imported liquor, manufactured within the State, and as there was no distillery in the State manufacturing "foreign liquor" the levy of countervailing duty was without authority of law. "

225. The writ petition was dismissed by the High Court justifying the levy of duties of excise as countervailing duties under Entry 51 List II in VIIth Schedule. The judgment came to be challenged before this Court. This Court negativated the view of the High Court, justifying the levy as countervailing duty in following words: "The fact that countervailing duties may be imposed at the same or lower rates suggests that they are meant to counterbalance the duties of excise imposed on goods manufactured in the State. They may be imposed at the same 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 imported into the State are produced or manufactured, the right to impose counterbalancing duties of excise levied on the goods manufactured in the State will not arise. It may, therefore, be accepted that countervailing duties can only be levied if similar goods are actually produced or manufactured in the State on which excise duties are being levied. "

226. This Court held that exercise of power under Article 304(a) can only be effective if the tax duty is imposed on goods imported from other States and the tax or duty imposed on similar goods manufactured or produced in that State are such. This Court held as no foreign liquor is manufactured or produced in the State of Orissa, power to legislate given under Article 304(a) is not valid and following was laid down: "Exercise of the power under Art. 304(a) can only be effective if the tax or duty is imposed on goods imported from other Sates and the tax or duty imposed on similar goods manufactured or produced in that State are such that there is no discrimination against imported goods.

As no foreign liquor is produced or manufactured in the State of Orissa the power to legislate given by 'Art. 304 is not available and the restriction which is declared on the freedom of trade, commerce or intercourse by Art. 301 of the Constitution remains unfettered." 227. In the above two Constitution Bench judgments, this Court have clearly struck down levy of taxes on import of goods, when there was no taxes levied by State on the goods locally manufactured or produced or those goods were not locally available.

228. The question of discrimination between tax imposed on the imported goods and that of locally manufactured or produced goods is another factor, on which the levy can fall foul. In Firm A.T.B. Mehtabmajid and Company Vs. State of Madras and Anothers 1963 SCR Supl.(2) 435 a question of discriminatory levy under Article 304(a) was considered.

229. In a writ petition under Article 32 of the Constitution filed in this Court, rule 16 of Madras General Sales Tax (Turnover and Assessment Rules, 1939) was under challenge. Petitioner was a dealer in hides and skins who used to sell the hides and skins taken from outside the State of Madras as well as those taken from inside the State. Case of the petitioner was to the following effect:

"It is contended for the petitioner that the effect of this rule is that tanned hides or skins imported from outside the State and sold within the State are subject to a higher rate of tax than the tax imposed on hides or skins tanned and sold within the State, in as much as sales tax on the imported hides or skins tanned outside the State is on their sale price while the tax on hides or skins tanned within the State, though ostensibly on their sale price, is, in view of the proviso to cl. (ii) of sub-r. (2) of r. 16. really on the sale price of these hides or skins when they are purchased in the raw condition and which is substantially less than the sale price of tanned hides or skins.

Further, for similar reasons, hides or skins imported from outside the State after purchase in their raw condition and then tanned inside the State are also subject to higher taxation than hides or skins purchased in the raw condition in the State and tanned within the State, as the tax on the former is on the sale price of the tanned hides or skins and on the latter is on the sale price of the raw hides or skins. Such a discriminatory taxation is said to offend the provisions of the Art. 304(a) of the Constitution. Similar are the contentions for the intervenes in the case."

230. This Court held that taxing laws can be restrictions on the trade, commerce and intercourse and the tax which is affecting and discriminating goods of one State and goods of another may affect the free flow of trade and offend Article 301 and will be followed only if it comes within the term of Article 304(a). This Court held as follows: "It is therefore now well settled that taxing laws can be restrictions on trade, commerce, and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offend against Art. 301 and will be valid only if it comes within the terms of Art. 304(a).

Article 304(a) enables the Legislature of a State to make laws affecting trade, commerce and intercourse. It enables the imposition of taxes on goods from other States if similar goods in the State are subjected to similar taxes, so as not to discriminate between the goods manufactured or produced in that State and the goods which are imported from other States. This means that if the effect of the sales-tax on tanned hides or skins imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to sub-rule of r. 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down."

231. This Court allowed the petition by recording the following conclusion: "We are therefore of opinion that the provisions of r. 16(2) discriminate against the imported hides or skins which had been purchased or tanned outside the State and that therefore they contravene the provisions of Art. 304(a) of the Constitution.

232. The law laid down by the above Constitution Bench judgment of this Court reaffirms our view that for enabling a State to make a law under Article 304(a), following two preconditions, which are independent of each other have to be satisfied: a. Imposes on goods imported from other States or the Union Territories any tax to which similar goods manufactured or produced in that State are subject. b. So, however, as not to discriminate between goods so imported and goods so manufactured and produced;

233. During the course of his submission Shri Salve has referred to enactments of State of Tamil Nadu, States of Kerala, State of Assam and State of Andhra Pradesh. Referring to Tamil Nadu Entry Tax on Entry of Goods into Local Areas Tax Act, 2001] Shri Salve has contended that under Section 3 sub-section 2, tax is payable by an importer. Entry of goods into local area was defined as entry of scheduled goods into a local area from any place outside the State for consumption, use or sale therein. His contention was that enactment clearly imposes Entry Tax only on goods imported and there was no Entry Tax on the local goods which clearly violates Article 304(a) of the Constitution of India.

234. We find force in the submission of Shri Salve, which is supported by the Constitution Bench judgments in State of Madras Vs. Bhailal Bahi and Kalyani Stores Vs. State of Orissa and Others. Imposition of tax only on imported goods when no such tax is levied on local goods violates Article 304(a). The Division Bench of the Madras High court in I[TC Ltd. Vs. State of Tamil Nadu and Others [2007]] 7 VST 367 Madras has struck down the enactment. To the same effect, submissions have been made by Shri Salve with regard to Entry Tax enactments of State of Kerala, State of Andhra Pradesh and State of Assam.

235. Articles 304(a) and 304(b) are joined with conjunction 'and'. Learned counsel for the petitioners who have challenged the various enactments of various States contend that clauses (a) and (b) of Article 304 have to be read conjunctively as they are not mutually exclusive. It is contended that tax Legislation by State has to comply both clauses (a) and (b) whereas learned counsel for the States contends that word 'and' has to be read disjunctively. Legislation which is in accordance with Article 304(a) need not be in compliance of Article 304(b). Learned counsel for the States has further contended that in fact Article 304(b) does not include tax legislation, hence, it is another reason to contend that tax legislation complying Article 304(a) need not to comply Article 304(b).

236. We need to first advert to true meaning and purpose of word 'and' which joins both clauses (a) and

(b) of Article 304. According to the principles of statutory interpretation the word 'and' is normally used conjunctively and word 'or' is normally used disjunctively but at times they are used as vice versa to give effect to the manifest intention of the Legislation as disclosed in the context of the Legislation. This Court in large number of cases have read word 'and' as 'or'. In 1969(1) SCR 219, this Court had occasion to consider the word 'and' as used in Section 3(b) of the Drugs Act, 1940. Section 3(b)(1) which defines the Drug provided as: "The definition of "drug" contained in S.3(b) is in the following terms :-

(i) all medicines for internal or external use of human beings or animals and all substances intended to be used for or (in the diagnosis, treatment), mitigation or prevention of disease in human beings or animals other than medicines and substances exclusively used or prepared for use in accordance with Ayurvedic or Unani systems of medicine..............."

237. The issue before this Court as to whether word 'and' used in the Section 3(b)(1) between words "medicines and substances" be read as 'or', this Court laid down the following: "Now if the, expression "substances" is to be taken to mean something other than "medicine" as has been held in our previous decision it becomes difficult to understand how the word "and" as used in the definition of drug in s. 3 (b) (i) between "medicines" and "substances" could have been intended to have been used conjunctively. It would be much more appropriate in the context to read it disjunctively.

In Stroud's Judicial Dictionary, 3rd Ed. it is stated at page 135 that "and" has Generally a cumulative, sense, requiring, the fulfillment 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 contents, read as "or". Similarly in Maxwell on Interpretation of Statutes, 11th Ed., it has been accepted that "to carry out the intention of the legislature it is occasionally found necessary to read the conjunctions 'or' and 'and' one for the other".

238. We may revert to the Constitutional Scheme to find out the true purpose and object of the provision. Article 304 is an exemption granted to the State when State can impose taxes and impose restrictions on the freedom of trade and commerce which freedom is guaranteed under Article 301 of the Constitution of India. Article 304 begins with the words "Notwithstanding anything in Article 301 or Article 303, the Legislature of a State may by law-".

Two sub-clauses (a) and (b) are enabling powers given to the State by which taxes can be imposed on imported goods and restrictions can be imposed on the freedom of trade, commerce or intercourse. In the event, we tend to read conjunction 'and' as 'or' it may mean that the State may exercise only one of the enabling powers as given in the clauses (a) and (b). It is not the intention of Article 304 to empower the State to only exercise either of the powers, the clear intendment of the State is that the State may by law impose on goods imported from other States any tax- clause (a);and impose reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State - clause (b). The use of word 'may' in the beginning of Article 304 indicates that the power is enabling and States are entitled to exercise either or both the powers as may be required in the facts of the case.

239. Further, there is no compulsion on the State to exercise powers given in clauses (a) and (b) both. The State may choose to exercise only power given in clause (a) or power given in clause (b). We, thus, are not persuaded to accept the contention that whenever State makes a law under clause (a) it has necessarily to comply clause (b) also. Shri Arvind P. Datar, learned senior counsel, has submitted that use of word 'and' between clauses (a) and (b) of Article 304 is joint and several and has to be read as and/or. In support of his submission he has placed reliance on the Statutory Interpretation, Second Edition by RUTH SULLIVAN. Learned Author has expressed following views on 'And' or 'Or': "2) "And" and "Or" 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 joint "and", every listed possibility must be included: both (a) and (b); all of (a), (b), and (c). In the case of a joint and several "and", all the possibilities may be, but need not be, included: (a) or (b) or both; (a) or (b) or (c), or any of two, or all three. In other words, the joint and several "and" is equivalent to "and/or". Which meaning is appropriate depends on the context. When "and" is used before the final item in a list of powers, for example, it is joint and several:

To carry out the purposes of this Act, the Governor in Council may make regulations respecting the conditions on which licences may be issued; the information and fees that firearm vendors may be required to furnish; and 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 obliged to make regulations respecting

(a) conditions

(b) information and

(c) fees, the joint and several "and" becomes joint."

240. We find force in the submission and we are of the view that word 'and' between clauses (a) and (b) has to be read as joint and several, both meaning can be assigned as per requirement of a State Legislature. One of the submissions raised by the learned counsel of the petitioners as noted above is that whenever State Legislature imposes a tax by law under clause (a), it has necessarily to go through the procedure provided under clause 304(b), since both the clauses are conjunctive and require compliance.

We are not inclined to accept the extreme submission that in each and every case whenever law is framed under clause (a) procedure under clause (b) has to be complied with. The proviso to clause (b) 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, is confined to clause (b) which indicates that Constitutional Scheme does not provide that it is necessary to comply for framing law under clause (a) the requirement of clause (b) also.

We, however, hasten to add that there may be cases where a law which may conform the requirement under sub-clause (a) but still contains restrictions on the freedom of trade, commerce and intercourse, in that event, compliance of clause (b) may also be necessary, but a law framed in accordance with clause (a) imposing a tax which does not contain any restriction on the freedom of trade, commerce and intercourse as envisaged in clause (b) need not go through the procedure as contemplated by clause (b).

We thus come to the conclusion that with regard to law made by State Legislature exercising the power under clause (a) of Article 304 which does not impose any restriction on the freedom of trade, commerce and intercourse need not comply with Article 304(b). However, a law even though may comply with Article 304(a) but contains restrictions on the freedom of trade, commerce and intercourse has to obtain sanction of the President as contemplated by proviso to clause (b).

The requirement of obtaining previous sanction of the President has to be decided in accordance with the nature and content of the State Legislation.

241. One of the submissions which has been emphatically pressed by Shri P.P. Rao and Shri Rakesh Dwivedi, learned senior counsel appearing for the States is that requirement of obtaining previous sanction of the President by the State Legislature erodes the sovereignty of the State Legislature of making law in the field allocated to them included in the VIIth Schedule read with Article 246.

It is contended that a State's taxing power is a sovereign power granted to the State and insisting for previous sanction of the President for framing a taxing legislation by the State erodes their sovereignty and is also against the federal structure of the Constitution. We in the foregoing paragraphs have elaborately considered the nature of federal structure of the Constitution of India, which is not a federal Constitution, as it is traditionally understood.

This Court termed the Constitution of India as quasi-federal, mixture of federal and unitary elements, leaning more towards the latter, as noted above. The division of powers between Union and the State Legislatures is clearly defined and demarcated in the Constitutional Scheme.

The Constitutional Scheme delineates the scheme of check and balances between the Union and States. Apart from Article 304(b) following are the other Constitutional provisions where Presidential sanction has been contemplated: (1) 31-A. Saving of laws providing for acquisition of estates, e[TC.-

(1) Notwithstanding anything contained in Article 13, no law providing for- xxxxxxxxxxxxxxxxxxxx

Provided that where such law is a law made by the Legislature of a State, the provisions of this article shall not apply thereto unless such law, having been reserved for the consideration of the President, has received his assent.

(2) 31-C. Saving of laws giving effect to certain directive principles.- xxxxxxxxxxxxxxxxxxx Provided that where such law is made by the Legislature of a State, the provisions of this Article shall not apply thereto unless such law, having been reserved for the consideration of the President, has received his assent.

(3) 213. Power of Governor to promulgate Ordinances during recess of Legislature.- xxxxxxxxxxxxxxxxxxx

Provided that the Governor shall not, without instructions from the President, promulgate any such Ordinance if -

(a) a Bill containing the same provisions would under this Constitution have required the previous sanction of the President for the introduction thereof into the Legislature; or

(b) he would have deemed it necessary to reserve a Bill containing the same provisions for the consideration of the President; or

(c) an Act of the Legislature of the State containing the same provisions would under this Constitution have been invalid unless, having been reserved for the consideration of the President, it had received the assent of the President; or

xxxxxxxxxxxxxxxxxx

(4) 254. Inconsistency between laws made by Parliament and laws made by the Legislature of States.- xxxxxxxxxxxxxxxxxxx

(2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent List contains any provision repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then the law so made by the Legislature of such State shall, if it has been reserved for the consideration of the President and has received his assent, prevail in that State:

xxxxxxxxxxxxxxxxxxx

(5) 274. Prior recommendation of President required to Bills affecting taxation in which States are interested.- (1) No Bill or amendment which imposes or varies any tax or duty in which States are interested, or which varies the meaning of the expression "agricultural income" as defined for the purposes of the enactments relating to Indian income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter moneys are or may distributable to States, or which imposes any such surcharge for the purposes of the Union as is mentioned in the foregoing provisions of this Chapter, shall be introduced or moved in either House of Parliament except on the recommendation of the President. (6)288.

Exemption from taxation by States in respect of water or electricity in certain cases.- xxxxxxxxxxxxxxxxxxx

(3) The Legislature of a State may by law impose, or authorize the imposition of, any such tax as is mentioned in clause (1), but no such law shall have any effect unless it has, after having been reserved for the consideration of the President, received his assent; and if any such law provides for the fixation of the rates and other incidents of law by any authority, the law shall provide for the previous consent of the President being obtained to the making of any such rule or order.

242. The above provisions are part of our Constitutional Scheme and could not be wished away by saying that such provisions impinge upon the sovereign power of the State. Power of a State Legislature to the above extent is expressly limited by Constitutional Scheme. Article 304(b) proviso is one of such Constitutional Schemes where the State power is restricted and limited to the above extent.

The Constituent Assembly Debates, as noticed above, clearly bring about the rationale of introduction of the requirement of Presidential assent in respect of certain laws by which State Legislature put restriction on the freedom of trade, commerce and intercourse. We have noted above that in the Constituent Assembly there was serious objection raised against clause (b) of Article 304 and amendment was moved for deletion of clause (b) from the Constitution. The above amendment after great discussion was negatived by approving the limited restraint put on the State Legislature as engrafted in Article 304(b) proviso.

243. A Constitution Bench of this Court in Kaiser-I-Hind Pvt. Ltd. and another vs. National Textile Corpn. (Maharashtra North) Ltd. and others, (2002]) 8 SCC 182, has held that the power exercised by the President under Article 304(b) is in consonance with the federal structure of the Constitution. Doraiswamy Raju, J. agreeing with majority judgment stated following in paragraph 77: "....The powers actually exercised by the President, at any rate under Articles 31-A, 31-C, 254(2) and 304(b) are a special constituent power vested with the Head of the Union, as the protector and defender of the Constitution and safety valve to safeguard the fundamental rights of citizens and federal structure of the country's polity as adopted in the Constitution....."

244. The Sarkaria Commission was constituted to have re-look over the Centre-State relations under the Constitution of India. Sarkaria Commission dealt with "Legislative Relations" in Chapter II. The objections of State Governments were noted in para 2.40.01 to the following effect: "2.40.01 Some State Governments and a political party have asked for omission of Article 304, and, in the alternative, for deletion of the Proviso to Article 304(b). The arguments advanced are:

"Whether the restrictions imposed by an Act of a State Legislature on the freedom of trade and commerce are reasonable and whether they are in the public interest for purposes of Article 304(b) are questions to be decided ultimately by the High Court or Supreme Court. If the High Court finds that the restrictions are unreasonable or opposed to the public interest, previous sanction of the President or his subsequent assent cannot cure the infirmity. If the legislation is otherwise valid and the restrictions are reasonable and in the public interest, his previous sanction will be a superfluity. In any case the requirement relating to the previous sanction of the President directly encroaches on the field assigned to the State Legislature...".

245. The objects of Article 304(b) and its contents were noted in para 2.40.06 to the following effect: "2.40.06 The broad object of the provisions of Articles 301 and 304 is to ensure that the commercial unity of India is not broken up by physical and fiscal barriers erected by the State Legislatures through parochial or discriminatory exercise of their powers. The proviso to Article 304(b) enables the President to ensure, at the initial stage, that the State Legislation does not, by imposing unreasonable restrictions on trade, commerce or intercourse, endanger the commercial unity of the nation. It is true that clause (b) is not confined to inter-State trading activities, it extends to trade within the State, also.

But intra-State trading activities often have a close and substantial relation to inter- State trade and commerce. State laws, though purporting to regulate trade within a State, may have inter-State implications. They may impose discriminatory taxes or unreasonable restrictions which impede the freedom of inter-State trade and commerce. That is why, both inter-State and intra- State trade have been made the subject of limitations on State legislative power under Article 304(b)."

246. The Sarkaria Commission in para 2.40.07 has also recorded : "However, no instance of a Bill reserved under the Proviso to clause (b) of Article 304, which might have been vetoed by the President, has been cited." In para 2.40.08 it was concluded: "2.40.08. For these reasons, we cannot support the demand for amendment of Article 304, or omission of the Proviso to its clause (b)."

247. The Sarkaria Commission after hearing the States' point of view had specifically adverted to on Constitutional provisions contained in Part XIII of the Constitution. After elaborate consideration on the subject in Part XIII "trade, commerce and intercourse within the Territory of India" in paragraph 18.3.14 and 18.3.15 following was stated: "18.3.14. We have observed in the Chapter on "Legislative Relations" that intra-State trading activities often have a close and substantial relation to inter-State trade and commerce. State laws though purporting to regulate intra-State trade, may have implications for inter-State trade and commerce. These may impose discriminatory taxes or unreasonable restrictions, impeding the freedom of intra-State trade and commerce.

If clause (b) of Article 304 is deleted, the commercial and economic unity of the country may be broken up by State laws setting up barriers to free flow of trade an inter-course through parochial or discriminatory use of their powers. The suggestion of the State Government is not workable even from a functional standpoint. 18.3.15. From a broad conceptual angle, the suggestion for excluding intra- State trade and commerce from the purview of Article 302 and for deletion of the Proviso to Article 304(b) does not stand close scrutiny. It is not in consonance with the prevailing concept of federalism. It presumably draws, inspiration from the antiquated and obsolete theory of federalism, according to which two levels of government were supposed to function in water-tight compartments in isolation from each other. Such a "dual" federalism is nowhere a functional reality in the modern world.

Even in the so-called classical federation of the United States of America federalism is now a dynamic process of government, a system of shared responsibilities and cooperative action between the three tiers of government.

The Constitution-framers were conscious of this reality. Indeed, the very scheme of Articles 301 to 304 which imposes limitations on the legislative powers of the Union and of the States, both with respect of inter-State and intra-State commerce and intercourse, is expected to be worked in cooperation by the Union and the States. The mere fact that Article 303(2) gives an exclusive power to Parliament to m ake a discriminatory law for dealing with a situation of scarcity of goods, or that the Proviso to Article 304(b) gives a supervisory power to the President (i.e. Union Council of Ministers) over a State legislation seeking to impose restrictions on inter-State or intra-State trade, is not a good enough argument to hold that these are anti-federal features making unjustifiable encroachment on the autonomy of the States.

No doubt, these features give due weightage to the Union. But the scheme of the Articles in Part XIII considered as a whole, is well-balanced. It reconciles the imperative of economic unity of the Nation with interests of State autonomy by carving out in clauses (a) and (b) of Article 304, two exceptions in favour of State legislature to the freedom guaranteed under Article 301."

248. Now one more limb of submissions with regard to Article 304(b) needs to be considered. The submission on behalf of the States is that Article 304 sub-clause (b) does not contemplate taxing legislation. It is contended that Article 304(a) has specifically used word 'tax' and absence of word 'tax' in Article 304(b) clearly indicates that the Constitution framers have intended to cover restrictions other than tax. Learned counsel for the petitioners have refuted the submission and their contention is that word 'restrictions' used in Article 304(b) is vide enough to include tax legislation. Gajendragadkar, J. speaking for majority in Atiabari Tea Co.Ltd. (supra) has expressly held at page 856 "how tax can be levied on internal goods, is, however, provided by Article 304(b)".

Shri P.P. Rao, learned senior counsel appearing for the States, in the context of the above observation submits that the above observations made in majority judgment are only obiter, neither the issue was before the Court nor it can be said that after due consideration the law was laid down. In G.K. Krishnan & ors. Vs. State of Tamil Nadu (supra) a doubt was expressed by Justice Mathew that as to whether Article 304(b) would include levy by a non-discriminatory tax was a matter on which there was scope for difference of opinion. Justice Mathew did not express his opinion that tax legislation is not included in Article 304(b).

249. Article 304(a) as noted above is only with regard to the imposition of tax on goods imported from other States. Article 304(a) does not refer to taxes imposed on the local goods. In the event, the State Legislature imposes restrictions on the freedom of trade and commerce by taxing legislation covering local goods, whether the validity of it cannot be tested on anvil of Article 301. Further, State in public interest requires imposition of reasonable restriction by imposing tax on the local goods, what procedure it has to follow so as to not impede Article 301.

There cannot be any dispute that power to legislate including tax legislation is the power allocated to State Legislature under the Constitutional Scheme under Article 245 and 246. Article 304 is not a source of power of legislation by State rather as the heading of the section indicates that it is a "Restriction on trade, commerce and intercourse among States."

As we have noted above, Article 304(a) only deals with goods imported from other States hence for imposing reasonable restrictions in the public interest on trade, commerce and intercourse with regard to local goods, only way out for a State to save its legislation is to go through the route as provided under Article 304(b). We cannot imagine that merely because State Legislature has competence to frame tax law with regard to local goods, it can impose taxes which amount to impeding the freedom of trade and commerce, whereas the Constitution does not provide any exemption to State Legislature in that regard.

250. There are few more reasons due to which we are of the opinion that word 'restriction' uses in Article 304(b) also includes taxation law.

251. A State Legislature in exercise of its legislative power referable to any of the Entries of List II can frame law both fiscal or non-fiscal. When Article 304 uses words "by law" and the law is a wider term which embraces both fiscal and non-fiscal legislation with regard to clause (b), it cannot be limited as only non-fiscal law. If we have to hold that Article 304(b) does not refer to tax law, we have to give different meaning to words "by law" used in the beginning of Article 304 which governs both clauses (a) and (b). The mere fact that clause (a) uses the words 'any tax' and clause (b) does not use the word 'tax' is not of much significance since the word restrictions used in clause (b) is wide enough to cover any kind of restriction by fiscal law. Neither Article 302 nor Article 303 uses the word 'tax'. Both Articles are dealing with freedom of trade and commerce, non-use of word 'tax' in Article 304(b) is also inconsequential.

We thus are of the opinion that the word 'restrictions' under Article 304(b) is vide enough to include restrictions placed both by fiscal or non- fiscal law. 252. At this stage, we will like to clarify one aspect of the matter, the submission has been advanced by learned counsel for the State that in the event, it is accepted that word 'restriction' in Article 304(b) includes taxation, it will be a serious restraint on the legislative power of the State, which is plenary and sovereign power. It is to be clarified that Article 304(b) does not cover each and every legislative exercise of a State.

The legislation which contains restriction on freedom of trade, commerce and intercourse only need to be routed through Article 304(b). In the event, a State legislation does not contain any restriction to freedom of trade, commerce and intercourse, there is no necessity of routing through Article 304(b) in which, case Article 304(b) is not at all required to be resorted to. The State legislation, when it impedes the freedom of trade, commerce and intercourse and imposes reasonable restrictions by fiscal or non-fiscal legislation it needs to go through the routes of Article 304(b) to insulate it from the wrath of Article 301.

253. Article 304(b) thus operates in a very limited field, as explained above and plenary legislative power of the State, in no manner, is restricted by Article 304(b). We are thus of the view that apprehension of the learned counsel for the State that Article 304(b) operates serious restraint on the legislative power is misplaced. We thus conclude that word 'restriction' as used in Part XIII as well as in Article 304(b) at the Constitution includes tax legislation also.

254. With reference to Article 304(a), one of the aspects on which learned counsel for the parties have taken different stand is as to whether exemptions granted in tax by a State Legislature to the local goods does or does not violate Article 304(a). Shri Salve while elaborating his challenge to Entry Tax legislation of different States has referred to the second group of enactments in which an entry tax is imposed on the goods coming from outside and local goods but legislation contains device by which there is set off/ exemptions to the local goods which result in non-imposition of Entry Tax to the local goods leading to discrimination violating Article 304(a).

On the other hand, counsel appearing for the States submit that a State is not, in any manner, precluded from granting exemption to specified class of goods to give a helping hand for development of a particular industry specially in a State which is not so developed and State patronage for development is necessary. It is contended that all States are not equal in its economic and industrial development and backward State needs a special treatment by way of exemption in tax in deserving cases for coming up at level playing field with other States. It is contended that State's protection by way of exemption/set off in such cases cannot be termed as discrimination. It is contended that discrimination is one when it is a hostile discrimination.

255. Learned counsel for the parties have placed reliance on various pronouncements of this Court in support of their respective submissions which we shall notice hereinafter.

256. A Constitution Bench of this Court in Firm A.T.B. Mehtab Majid and Co. vs. State of Madras and another, (1963) Suppl. (2) SCR 435, had occasion to consider Article 301 and Article 304 in the context of Madras General Sales Tax Act, 1939 and Madras General Sales Tax Rules, 1939. The writ petition was filed under Article 32 by a dealer who was dealing in hides and skins tanned outside the State of Madras, as well as those tanned inside the State.

The dealer was assessed to sales tax for the year 1955- 56 representing the sales of tanned hides and skins which were obtained from the outside of the State of Madras. Rule 16 was challenged by the petitioner raising following contention:

"6. It is contended for the petitioner that the effect of this Rule is that tanned hides or skins imported from outside the State and sold within the State are subject to a higher rate of tax than the tax imposed on hides or skins tanned and sold within the state, inasmuch as sales tax on the imported hides or skins tanned outside the State is on their sale price while the tax on hides or skins tanned within the State, though ostensibly on their sale price, is, in view of the proviso to clause (ii) of sub-rule (2) of Rule l6, really on the sale price of these hides or skins when they are purchased in the raw condition and which is substantially less than the sale price of tanned hides or skins,

Further, for similar reasons, hides or skins imported from outside the State after purchase in their raw condition and then tanned inside the State are also subject to higher taxation than hides or skins purchased in the raw condition in the State and tanned within the State, as the tax on the former is on the sale price of the tanned hides or skins and on the latter is on the sale price of the raw hides or skins. Such a discriminatory taxation is said to offend the provisions of Article 304(a) of the Constitution. Similar are the contentions for the interveners in the case."

257. This Court after considering the respective submissions held that tax on hides and skins imported from outside being higher, it is discriminatory and unconstitutional. Following was held: "10. It is therefore now well settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offend against Article 301 and will be valid only if it comes within the terms of Article 304(a).

11. Article 304(a) enables the legislature of a State to make laws affecting trade, commerce and intercourse. It enables the imposition of taxes on goods from other States if similar goods in the State are subjected to similar taxes, so as not to discriminate between the goods manufactured or produced in that State and the goods which are imported from other States. This means that if the effect of the sales tax on tanned hides or skins imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to sub-rule of Rule 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down."

258. Petitioners rely on Weston Electronics and another vs. State of Gujarat and others, (1988) 2 SCC 568. Under Section 49 sub-Section (2) of Gujarat Sales Act, 1969 the State was empowered to exempt, in the public interest, any specified class of sales from sales tax. In 1981, while the rate for electronic goods entering the Gujarat State for sale therein was maintained at 15%, the rate in respect of locally manufactured goods was reduced to 6% by notification. By further notification in the year 1986, the rate of tax on imported television was reduced from 15% to 10% whereas rate of tax on manufactured television within the State was reduced from 6% to 1%.The petitioners, manufacturers of electronic goods including televisions whose factories are located at Delhi, and goods are sold in all over India including Gujarat, challenged the exemption granted to the goods manufactured in the State of Gujarat as violative of Article 301 and 304.

259. The State submitted before this Court that the rate of tax was reduced in the case of goods manufactured locally in order to provide an incentive for encouraging local manufacturing units. This Court referring to earlier judgments of this Court held that discrimination by applying different rates of tax is not sustainable, following was stated:

"6. In answer to the writ petition, the respondents point out that the rate of tax was reduced in the case of goods manufactured locally in order to provide an incentive for encouraging local manufacturing units. Reference is made to clauses (b) and (c) of Article 39 of the Constitution. We do not think that any support can be derived from the two clauses of Article 39. Clause (a) of Article 304 is clear in meaning. An exception to the mandate declared in Article 301 and the prohibition contained in clause (1) of Article 303 can be sustained on the basis of clause (a) of Article 304 only if the conditions contained in the latter provision are satisfied.

7. In the result, the discrimination effected by applying different rates of tax between goods imported into the State of Gujarat and goods manufactured within that State must be struck down." 260. Another two Judge Bench judgment in Indian Cement and others vs. State of Andhra Pradesh and others, (1988) 1 SCC 743, had a occasion to consider notification issued under Section 9(1) of Andhra Pradesh General Sales Tax Act, 1957 whereby rate of tax in respect of sales made by indigenous cement manufacturers to manufacturers of cement products in the State of Andhra Pradesh was reduced. Notification under Section 8(5) of Central Sales Tax Act, 1956 was also issued reducing rate of tax on the sale of cement made in the course of inter-State trade or commerce. Two Judge Bench of this Court referring to Atiabari Tea Co. Ltd. and Automobile Transport Ltd. Stated following in paragraph 12:

"12. There can be no dispute that taxation is a deterrent against free flow. As a result of favourable or unfavourable treatment by way of taxation, the course of flow of trade gets regulated either adversely or favourably. If the scheme which Part XIII guarantees has to be preserved in national interest, it is necessary that the provisions in the article must be strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in Atiabari Tea Co. case [AIR 1961 SC 232 : (1961) 1 SCR 809] and the observations then made obviously apply to cases of the type which is now before us."

261. This Court held both the notifications issued by Andhra Pradesh Government unsustainable in law. Following was stated in paragrph 14: "14.....Variation of the rate of interstate sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution. The notification extends the benefit even to unregistered dealers and the observations of Hegde, J. on this aspect of the matter are relevant. Both the notifications of the Andhra Pradesh Government are, therefore, bad and are hit by the provisions of Part XIII of the Constitution. They cannot be sustained in law."

262. Now, we come to a three Judge Bench judgment on which much reliance has been placed by the counsel for the State, i.e. Video Electronics Pvt. Ltd. And another vs. State of Pubjab and another, (1990) 3 SCC 87. In the above case this Court had occasion to consider notifications issued by Uttar Pradesh Government under Section 4-A of Uttar Pradesh Sales Act, 1948. Constitutional validity of Section 4-A of the Act and Section 8(5) of Central Sales Tax, 1956 was also challenged. The petitioner carry on the business of selling cinematographic films and other equipments like projectors, sound films, photo films e[TC. manufactured outside the State of Uttar Pradesh. New units of manufacturer as defined in 1948 Act in the State of U.P. were exempted for different periods ranging from 3 to 7 years on conditions set out in the notification. Petitioner challenged the notification as violative of rights guaranteed under Part XIII as well as Article 14 and 19(1)(g) of the Constitution.

263. This Court held that the power to grant exemption is always inherent in all taxing statutes. The reasons for notification as submitted on behalf of the State i.e. economic encouragement and growth found favour and it was held that exemption do not violate Article 304. This Court laid down following in paragraph 26 at page 108: "26. .......... Economic unity of India is one of the constitutional aspirations of India and safeguarding the attainment and maintenance of that unity are objectives of the Indian Constitution.

It would be wrong, however, to assume that India as a whole is already an economic unit. Economic unity can only be achieved if all parts of whole of Union of India develop equally, economically. Indeed, in the affidavits of opposition various grounds have been indicated on behalf of the respondents suggesting the need for incentives and exemptions, and these were suggested to be absolutely necessary for economic viability and survival for these industries in these States. These were based on cogent and intelligible reasons of economic encouragement and growth. There was a rationale in these which is discernible.

The power to grant exemption is always inherent in all taxing statutes. If the suggestions/submissions as advanced by the petitioners are accepted, it was averred, and in our opinion rightly, that it will destroy completely or make nugatory the plenary powers of the States. If the exemption is based on natural and business factors and does not involve any intentional bias, the impugned notifications to grant exemption of limited period on certain specific conditions cannot be held to be bad. Judged by that yardstick, the present notifications cannot be held to be violative of the constitutional provisions.

An examination of Article 304(a) would reveal that what is being prohibited by this article which is really an exception to Article 301 will not apply if Article 301 does not apply."

264. This Court further held that grant of exemption to specified class for limited period, such granting of exemption cannot be held to be contrary to the concept of economic unit. Following was stated: "28. Concept of economic barrier must be adopted in a dynamic sense with changing conditions. What constitutes an economic barrier at one point of time often ceases to be so at another point of time. It will be wrong to denude the people of the State of the right to grant exemptions which flow from the plenary powers of legislative heads in List II of the Seventh Schedule of the Constitution. In a federal polity, all the States having 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 (sic concept) 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 economic disintegration of the country as such does not arise. It is not open to any party to say that this should be done and this should not be done by either one way or the other.

It cannot be disputed that it is open to the States to realise tax and thereafter remit the same or pay back to the local manufacturers in the shape of subsidies and that would neither discriminate nor be hit by Article 304(a) of the Constitution. In this 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."

265. This Court also referred to Article 38 and 39. Earlier two judgments in Indian Cement Ltd. (supra) and Weston Electronics (supra) were noticed by this Court and it was held that these cases were not at all concerned to a special class, had a specific condition of maintaining the general rate of tax, hence they were not applicable. This Court further held that if the power of exemption is in exercise of colourable manner to create unfavourable bias by prescribing general lower rate on locally manufactured goods either in the shape of general exemption to locally manufactured goods or in the shape of lower rate of tax, such an exercise of power can always be struck down by the Courts. 266. The Court also considered the notification issued by the Punjab Government whereby two different rates of tax were provided differentiating between the manufacturers of electronic goods outside the State and within the State. In paragraph 36 following was stated:

"36. It has to be reiterated that sales tax laws in all the States provide for exemption. It is well settled that the different entries in Lists I, II and III of the Seventh Schedule deal with the fields of legislation, and these should be construed widely, liberally and harmoniously. And these entries have been construed to include ancillary or incidental power. Power to grant exemption is inherent in all taxing legislations. 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 harmonised with economic unity as well as economic development of developed and under developed areas. In that light on Article 14 of the Constitution, it is necessary that the prohibitions in Article 301 and the scope of Article 304(a) and (b) should be understood and construed. Constitution is a living organism and the latent meaning of the expressions used can be given effect to only if a particular situation arises.

It is not that with changing times the meaning changes but changing times illustrate and illuminate the meaning of the expressions used. The connotation of the expressions used takes its shape and colour 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 (sic or) units of a State so that it may come out of its limping or infancy to compete as equals with others, that, in our opinion, does not and cannot contravene the spirit and the letter of Part XIII of the Constitution.

However, this is permissible only if there is a valid reason, that is to say, if there are justifiable and rational reasons for differentiation. If there is none, it will amount to hostile discrimination. Judged in this light, despite the submissions of Mr Sanjay Parikh and Mr Vaidyanathan, we are unable to accept the contentions that the petitioners sought to urge in this application The three Judge Bench, thus, upheld the exemption in both the notifications as noted above.

267. In the judgment of Video Electronics the opinion was expressed by Sabyasachi Mukherji, CJ. Soon after the judgment of Video Electronics (supra) a three Judge Bench of this Court also consisting of Sabyasachi Mukherji, CJ in Andhra Steel Corporation vs. Commissioner of Commercial Taxes in Karnataka, 1990 (Suppl.) SCC 617, had occasion to consider exemption granted under Karnataka Sales Tax Act. In the above case the assessee purchases iron scrap from inside and outside the State of Karnataka for the purpose of manufacturing iron ingots, iron steel rounds and tor-steel. The main point urged before this Court challenging the exemption as violative Article 304(a) was noted in paragraph 4 to the following effect:

"4. The main point was urged in this appeal was that Section 5(4) of the Act insofar as it pertains to Item 2 in Schedule IV read with the Explanation II is violative of Article 304(a) of the Constitution as under that provision the sale of finished goods manufactured out of imported raw material is taxed but the sale of finished goods manufactured out of locally purchased raw material is not taxed and that amounts to hostile discrimination in the rate of tax or quantum of tax." This Court took the view that the case in hand was fully covered by the decision of A.T.B. Mehtab Majid (supra). Following was stated in paragraph 22 and 23:

"22. ............The tax was levied under the State Act in respect of steel semis. The State Act exempted steel semis which have been manufactured out of iron scrap which have suffered tax but not the other categories where the scrap had not suffered tax at that stage. This is directly covered by the decision in A.T.B. Mehtab case [1963 Supp 2 SCR 435 : AIR 1963 SC 928 : (1963) 14 S[TC 355] and that decision has not been dissented in Nataraja Mudaliar case[(1968) 3 SCR 829 : AIR 1969 SC 147 : (1968) 22 S[TC 376] or Rattan Lal & Co. case [(1969) 2 SCR 544 : AIR 1970 SC 1742 : (1970) 25 S[TC 136] . The decision in A.T.B. Mehtab case [1963 Supp 2 SCR 435 : AIR 1963 SC 928 : (1963) 14 S[TC 355] is by a Constitution Bench and had not been dissented so far in any case. The ratio of the judgment being fully applicable, the judgment of the High Court under appeal is not acceptable.

23. We accordingly hold that the provision which is impugned in this case is ultra vires and accordingly set aside the judgment of the High Court and allow the writ petition filed by the assessee in the High Court. There will be no order as to costs. 268. Now we come to two Judge Bench judgment of this Court in Shree Mahavir Oil Mills and another vs.State of J & K and others, (1996) 11 SCC 39. In the above case notification under Section 5 of the J & K General Sales Tax Act, 1962 dated 7.3.1991 was issued exempting small scale industrial units in the State for a period of five years. The rate of sales tax was 4% which was raised to 8%. The manufacturers brining edible oil from outside the State found tax discriminatory in so far as exemption was granted to all small scale industrial units in the State. The writ petitions and letters patent appeals filed before the High Court were dismissed and the matter was carried to this Court.

269. After noticing the scheme under Part XIII and specifically Article 304, this Court while interpreting Article 304(a) stated following: "8......The wording of this clause is of crucial significance. The first half of the clause would make it appear at the first blush that it merely states the obvious: one may indeed say that the power to levy tax on goods imported from other States or Union Territories flows from Article 246 read with Lists II and III in the Seventh Schedule and not from this clause.

That is of course so, but then there is a meaning and a very significant principle underlying the clause, if one reads it in its entirety. The idea was not really to empower the State Legislatures to levy tax on goods imported from other States and Union Territories - that they are already empowered by other provisions in the Constitution - but to declare that that power shall not be so exercised as to discriminate against the imported goods vis--vis locally manufactured goods.

The clause, though worded in positive language has a negative aspect. It is, in truth, a provision prohibiting discrimination against the imported goods. In the matter of levy of tax - and this is important to bear in 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--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 trade, commerce and intercourse throughout the territory of India, guaranteed by Article 301.

As we shall presently point out, this clause does not prevent in any manner the States from encouraging or promoting the local industries in such manner as they think fit so long as they do not use the weapon of taxation to discriminate against the imported goods vis--vis the locally manufactured goods. To repeat, the clause bars the States from creating tax barriers - or fiscal barriers, as they can be called - around themselves and/or insulate themselves from the remaining territories of India by erecting such "tariff walls". Part XIII is premised upon the assumption that so long as a State taxes its residents and the residents of other States uniformly, there is no infringement of the freedom guaranteed by Article 301; no State would tax its people at a higher level merely with a view to tax the people of other States at that level. And it is this clause which has a crucial bearing on this case....."

270. Two Judge Bench noticed earlier cases as well as three Judge Bench judgment in Video Electronics (supra). In paragraph 23 this Court came to the conclusion that the total exemption granted in favour of small-scale industries in Jammu & Kashmir producing edible oil is not sustainable in law. The Court held that States are free to encourage and promote the establishment and growth of industries within their States by all such means as they think proper but they cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation, i.e., a higher rate of sales tax vis-a-vis similar goods manufactured/produced within that State. This Court noticed that although a limited exception has no doubt been carved out in Video Electronics but that exception cannot be enlarged lest it eat up the main provision.

The Court while declaring the exemption as violative of Article 304(a) directed in paragraph 27 as follows:

"27. We declare that the exemption granted by Notification No.SRO 93 of 1991 to local manufacturers/producers of edible oil is violative of the provisions contained in Articles 301 and 304(a). At the same time, we direct that: (a) the appellants shall not be entitled to claim any amounts by way of refund or otherwise by virtue of or, as a consequence of, the declaration contained herein and (b) that the declaration of invalidity of the impugned notification shall take effect on and from 1-4-1997]. Till that date,i.e.,up to and inclusive of 31.3.1997] the impugned notification shall continue to be effective and operative. Appeal allowed in the above terms."

271. The State exercises legislative power under Article 246 read with List II which is plenary in nature, when it has power to levy tax it is also entitled to grant of exemption/remission of tax. There cannot be any dispute to the power of a State Legislature in providing for exemption/remission in tax to a specified class based on an intelligible differentia. A Constitution Bench in State of Madhaya Pradesh vs. Abdeali, AIR 1963 SC 1237 need also to be noted.

272. In the above case, in exercise of power under Section 4(3) of Madhya Bharat Sales Tax Act, 1950 exemption was granted from payment of Sales Tax in the following manner:

"2. ........... In exercise of the powers conferred by Section 4, sub-section (3) of the Madhya Bharat Sales Tax Act, Samvat 2007] the Rajpramukh in supersession of the Notification 59(c)(t) P.R. 412-54, dated 27-5-1955 of this department has exempted from the payment of sales tax, in case of sale by the manufacturer or any member of his family, the sale of all such shoes, chappals, country shoes and footwears which are hand-made and which are not manufactured on power machine and whose sale price does not exceed Rs 12-8-0."

273. The respondent was carrying on business of importing and selling different style of footwear in the State of Madhaya Pradesh. The respondent contended before the Sales Tax Officer that he was not liable to pay any sales tax on sale of hand-made shoes, chappals and other types of footwear whose sale price did not exceed Rs 12-8-0 per pair. The claim of the respondent was rejected that the respondent does not fulfill the conditions of the notification. In the writ petition filed by the respondent in the High Court one of the contentions was raised to the following effect:

"3.....................The respondent further averred that if the exemption were held to be in favour of sales by a manufacturer or a member of his family and not on sales by an importer, then the notification would be discriminatory in nature and would contravene the provisions of Article 304(a) of the Constitution. On these grounds the respondent prayed that the assessment order dated March 25, 1958 be quashed and the Sales Tax Officer be directed to exempt from tax such sales by the respondent as were covered by the exemption granted by the notification dated January 28, 1956. In their reply to the writ petition the appellants pointed out that the notification dated January 28, 1956 did not in any way discriminate between footwear manufactured or produced in the State of Madhya Pradesh and footwear imported from outside, because the conditions laid down in the notification were equally applicable to both types of goods and one of these conditions was that the sale which was to be exempted from tax must be by the manufacturer or a member of his family." 274. The High Court allowed the writ petition.

The State carried the matter to this Court. This Court noted that notification dated January 28, 1956 makes no discrimination between footwear manufactured or produced in the State of Madhya Pradesh and footwear imported from other States and the exemption granted by the notification depends on the fulfillment of three conditions mentioned therein. Following was held by this Court in paragraph 8: "8. We now proceed to consider these alternative submissions of learned counsel for the appellants.

We do not think that the notification dated January 28, 1956 makes any such discrimination between footwear manufactured or produced in the State of Madhya Pradesh and footwear imported from other States as is prohibited by Article 304(a) of the Constitution. We have already pointed out that the exemption granted by the notification in question depends on the fulfillment of three conditions and all the three conditions are equally applicable to footwear manufactured or produced in the State and footwear imported from other States.

It is obvious that the exemption is for the protection and benefit of small manufacturers who make hand-made shoes of small value and who may be unable to compete with large-scale manufacturers of footwear made on machines. Such a classification in the interests of small manufacturers has often been made and upheld by this Court. (See Orient Weaving Mills (P) Ltd. v. Union of India [Petition No. 110 of 1961 decided on February 28, 1962.]; and British India Corporation Ltd. v. Collector of Central Excise, Allahabad [ Petition No. 94 of 1955 decided on August 20, 1962.]." 275. In the above case submission of the assessee was that in the event benefit of exemption is not granted to the assessee the exemption notification may itself be invalid creating a discrimination between similar manufacturer of outside the State traveling in the State and selling hand-made shoes wherein small manufacturer has not to travel in order to get the benefit of the exemption. The Court rejected the above argument stating that it is really an argument of inconvenience.

In any view of the matter, this Court in the above case held that assessee did not fulfill the condition of the notification, i.e., sale was exempted only when it is by a manufacturer or a family member of his family. Hence, there was no error in assessing him to the tax. The issue whether it was permissible to grant exemption to local goods and not to grant such exemption to the goods coming from outside was not the issue in the above case. In the above case, this Court has noticed that there was no discrimination with regard to the exemption in regard to the goods manufactured outside the State or within the State. The above case, thus, does not decide the issue which has cropped up before us.

276. The power of exemption flows from legislation enacted by the State Legislature, wherever exemptions are granted, normally, statutes so provide with legislative policy. What is exemption, has been succinctly explained by this Court in Union of India and others vs. Wood Papers Ltd. And another, 1990(4) SCC 256 following was stated in paragraph 4: "4.....Literally exemption is freedom from liability, tax or duty. Fiscally it may assume varying shapes, specially, in a growing economy.

For instance tax holiday to new units, concessional rate of tax to goods or persons for limited period or with the specific objective e[TC. That is why its construction, unlike charging provision, has to be tested on different touchstone. In fact an exemption provision is like an exception and on normal principle of construction or interpretation of statutes it is construed strictly either because of legislative intention or on economic justification of inequitable burden or progressive approach of fiscal provisions intended to augment State revenue."

277. Reverting to provision of 304(a), for a legislation to be within four corners of 304(a), two conditions are necessary to be fulfilled (1) State can impose on goods imported from other States any tax to which similar goods manufactured or produced are subject, (2) so however, as not to discriminate between goods so imported and goods so manufactured or produced. The first condition is that goods manufactured or produced in the State are subject to tax, when exemption is granted in payment of tax to a specified category on fulfillment of certain condition, it pre-supposes that goods are subject to tax. The exemption granted on a specified class of goods, subject to condition, does not militate against the tax to which the goods are subject.

Thus in cases of grant of exemption to a specified category on conditions mentioned therein, first condition as noted above is not breached. Now coming to the second condition i.e. so, however, as not to discriminate goods exported and goods locally manufactured or produced. Goods exempted fall in a different category then the bulk of goods produced and manufactured in the State. Exemptions under different statutes have been upheld due to legislative policy as delineated in a particular statute. In the Video Electronics, three Judge Bench upheld the exemption noticing the fact that the exemption granted was to a special class for 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 that category.

Video Electronics, however, further states that if tax is imposed in a colourable manner intentionally or purposely to create unfavourable bias by prescribing a general lower rate on locally manufactured goods either in the shape either of general exemption to locally manufactured goods or in the shape of lower rate of tax, such an exercise of power can always be struck down by the Courts. Following was observed in paragraph 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 import- ed goods as we have read these cases. Hence, it was not necessary in those decisions to consider the problem in its present aspect.

If, however, the said power is exercised in a colourable manner intentionally or purposely to create unfavorable bias by prescribing a general lower rate on locally manufactured goods either in the shape of general exemption to locally manufactured goods or in the shape of lower rate of tax, such an exercise of power can always be struck down by the courts. That is not the situation in the instant cases. The aforesaid decisions, therefore, are not authorities for the general proposition that while, maintaining the general rate at par, special rates for certain industries for a limited period could not be prescribed by the States."

278. Two Judge Bench in Shree Mahavir Oil Mills had noticed earlier cases including Video Electronics. It was observed that exception carved out in Video Electronics cannot be widened or expanded to cover cases of a different kind, following observation was made in Shree Mahavir Oil Mills in paragraph 23: "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 exemption granted in favour of small scale industries in Jammu & Kashmir producing edible oil [there are no large scale industries in that State producing edible oil] is not sustainable in law."

279. The exception carved out in Video Electronics upheld exemption notification where it is limited to specified type with short period. The general exemption and exemption in wider term has never been approved. The ratio of Video Electronics has to be read as justifying only exemption limited to a specified category for a short period. Exemption in general terms of unlimited in nature cannot be approved. The exemption cannot be used as measure of discrimination between goods imported from other States and goods manufactured or produced in the State.

The exemption has to be a limited exemption to the tax which is imposed on the similar goods. In the event exemption is total and general in nature, the said exemption is clearly violative of Article 304(a). Similarly, set off of a particular tax which is general and not limited to specified category has also to be disapproved. In view of above, the ratio of three Judge Bench judgment in Video Electronics have to be read to the above extent and with the limitation as noticed above. 280. We, thus, come to the conclusion that State Legislature in exercise of its taxing power can grant exemption/set off to local goods, only to a limited extent based on intelligible differentia which is not in the nature of general/unspecified exemption. The exemption/set off which tend to become general exemption violates Article 304(a).

G. ENTRY 52 OF LIST II OF VIITH SCHEDULE OF THE CONSTITUTION

281. Legislative field under State List, Entry 52 is 'taxes on the entry of goods into a local area for consumption, use or sale therein'. The Entry 52 itself demonstrate that there are inherent limitations as regard the nature and character of the levy. In order to have a levy of tax to come within the purview of Entry 52, such levy has to satisfy three conditions:

(i) The levy under the State Entry must be 'on the entry of goods' which constitutes the taxable events.

(ii) The levy in question must be in respect of 'into a local area'. The local area has been defined as ' an area administered by local body like a municipality, a district board, a local board, a union board, a panchayat or the like'.

(iii) The goods must enter into the local area for the purpose of 'consumption, use or sale therein'.

282. The expression Entry Tax has to be understood in its plain meaning and also in the backdrop of historical imposition of taxes of this kind. The tax commonly known as octroi was in force in 1901 and it was subsequently included in VIIth Schedule of List II of Government of India Act, 1935. The Constitution of India does not use the word octroi. List I Entry 89 provides for 'terminal tax on goods and passengers carried by railways, sea or air; taxes on railway fares and flights'.

283. Taxes levied under Entry 52 is commonly known as entry tax. While noticing the Constituent Assembly debates, we have seen that freedom of trade and commerce was envisaged as freedom from border taxes, custom barriers e[TC., which was prevalent in Indian States. Section 297 of 1935 Act had contained a prohibition for imposing taxes on entry of goods from other States. The Constitution framers decided that States have to be conceded some taxing powers for revenue purposes and for purpose of carrying out various development projects. Article 301 provides freedom of trade, commerce and intercourse throughout the territory of India, simultaneously, exception to such freedom have been engrafted in Article 302 - 306.

284. Article 304(a), although permits the State to levy tax but it is hedged with two important conditions, which we have already noticed above. Article 304(a) thus expressly permits the State to impose any tax which includes entry tax also subject to conditions mentioned therein.

285. The Entry Tax is related to movement of goods. Movement of goods have been treated to be an integral part of trade and commerce. In Atiabari, referring to the content of freedom provided by Article 301, it was held that it certainly includes movement of trade following was observed by Gajendragadkar, J., at Page 859: "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 s. 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 part. If the transport or the movement of goods is taxed solely on the basis that goods are thus carried or transported that, in our opinion, directly affects the freedom of trade as contemplated by Article 301."

286. This Court, while construing the Karnataka tax on entry of goods into local area for consumption, use or sale therein Act, 1979 in State of Karnataka Vs. Hansa Corporation 1980 4 SCC 697 has held that the tax on the entry of goods falls within the inhibition of Article 301. Following was observed: "To the extent the impugned tax is levied on the entry of goods in a local 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."

287. A law, made under the subject matter of Entry 52 List II, would thus clearly be a tax on the movement of goods and thus would fall within the purview of the inhibition of Article 301 and the said law can only be saved if it complies with the Article 304. Learned counsel for the States have contended that Entry Tax does not prohibit the entry of goods and tax is collected, only subsequently and normally, on the basis of returns filed by the persons taking the goods into a local area. Hence, there is no restriction on the borders of a State or border of a local area. It is contended that on the entry of goods merely a transit slip is given hence there is no barrier to the flow of goods. It is well settled that there is a clear distinction between incidence of a levy and the machinery provisions contained in law to give effect to such levy. The incidence of levy is on entry of goods hence incidence of tax is complete as the goods enters into the local area, whether the tax is collected immediately or subsequently has no relevance with the incidence of taxation.

288. The trade and commerce being contemplated to be free throughout the territory of India, any restriction on movement of goods per se has to be treated as violating Article 301 unless the tax is saved by exceptions provided in Part XIII. However, there may be a tax which though complies Article 304(a) but still contains the restriction to trade and commerce which is an area where much difficulty has been felt. We have already concluded that all taxes which comply with Article 304(a) need not to be routed through Article 304(b) and it is only those taxes which contain restrictions on trade, commerce and intercourse which need to be routed through 304(b). This can be demonstrated by taking a simple example.

An Entry tax legislation is passed complying Article 304(a) levying Entry Tax on goods imported from outside the State as well as local goods at the rate of one percent of value of goods. Normally, such levy cannot be treated as any restriction on the trade and commerce and shall pass muster of Article 304(a) and need no compliance of Article 304(b). But in a case where, Entry Tax is levied to the extent of hundred per cent of the value of goods both on imported goods and locally produced or manufactured goods, the said levy is clear restriction on trade and commerce and has to be routed through Article 304(b). For taking out such levy, from the effect of Article 301 both 304(a) and 304(b) needs to be complied with.

289. We thus conclude that Entry Tax legislation which is a tax on movement of goods, trade and commerce is inhibited by Article 301 and such State legislation can be saved under Article 304. Whether a particular Entry Tax Legislation is valid and does not contravene Part XIII of the Constitution, can be decided only after looking into the nature, content and extent of legislation and its impact on trade, commerce and intercourse.

H. MEANING OF "RESTRICTION" AS USED IN PART XIII

290. Freedom of trade, commerce and intercourse throughout the territory of India is guaranteed under Article 301. The framers of the Constitution were conscious that the freedom cannot be absolute and it may be necessary in several circumstances to restrict the freedom in public interest. Article 302 - 306 enumerates exceptions to the freedom as guaranteed under Article 301. What is the meaning and contents of word 'restriction' as used in Part XIII? The word 'restriction' has also been used under Article 19 (2) to 19 (6) while empowering the State to impose reasonable restrictions on the fundamental rights guaranteed under Article 19(1) (a) to 19 (1) (g). The word 'restriction' is defined in New Webster Dictionary in the following manner: "The act of restricting, or state of being restricted; that which restricts; a restraint; limitation."

291. The Black's Law Dictionary also defines 'restriction' in following manner: "restriction.1.Confinement within bounds or limits; a limitation or qualification. 2.A limitation (esp. in a deed) placed on the use or enjoyment of property."

292. The restriction thus is an act to limit, confine and restrain. The 'restriction', in Part XIII has been used in the context of restriction to freedom of trade, commerce and intercourse. The law, which restrict or limit such right are called restrictions.

293. In the present case, since we are concerned with the taxing legislation, our discussions shall confine to find out the nature of restriction which can be put on the freedom of trade and commerce by tax legislation.

The Constitution Bench of this Court in Firm A.T.B. Mehtab and Majid and Company V. State of Madras and Others 1963 2 SCR 435 at P. 442 has stated 'it is, therefore, now well settled that taxing laws can be restrictions if they hamper the flow of trade and if there are not what can be termed to be compensatory tax or regulatory measures...........". In Indian Cement and Others V. State of Andhra Pradesh 1988 1 SCC 743 this Court has held that as a result of favourable or unfavourable treatment by way of taxation the course of flow of trade gets restricted:- either adversely or favourably.

Following observations were made in para 12, 14:- "12.

There can be no dispute that taxation is a deterrent against free flow. As a result of favourable or unfavourable treatment by way of taxation, the course of flow of trade gets regulated either adversely or favourably. If the scheme which Part XIII guarantees has to be preserved in national interest, it is necessary that the provisions in the article must be strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in Atiabari Tea Co. case and the observations then made obviously apply to cases of the type which is now before us."

"14. Variation of the rate of interstate sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution. The notification extends the benefit even to unregistered dealers and the observations of Hegde, J. on this aspect of the matter are relevant. Both the notifications of the Andhra Pradesh Government are, therefore, bad and are hit by the provisions of Part XIII of the Constitution. They cannot be sustained in law."

294. Now, we proceed to examine Part XIII of the Constitution in so far as it expressly refer to various acts, actions which are treated to be restrictions in freedom of trade and commerce. Article 302 - 306 contain provisions, by which restriction can be put on the freedom of trade and commerce. Some restrictions have been expressly mentioned in said articles. Article 303 provides for 'restrictions on the legislative powers of the Union and of the States with regard to the trade and commerce'. As per Article 303, sub-article Clause 1 following are treated to be restrictions:-

(i) Any law giving or authorising the giving of any preference to one State over another,

(ii) Any law making or authorising the making of, any discrimination between one State and another.

295. Thus preferences and discrimination both are treated as restriction in the context of freedom of trade and commerce. Coming to Article 304(a) any law framed by legislature is restriction on freedom of trade and commerce which:-

a). Imposes on goods imported from other State, any tax when no such tax is imposed on similar goods manufactured or produced in that State,

b). Imposes on goods imported from other States any tax which discriminates between goods so imported and goods so manufactured or produced.

296. Again in Article 304 sub-clause(b) State is empowered to impose reasonable restrictions in the public interest. Article 306, as it was initially enacted, contained heading 'power of certain States in Part B of the Schedule to impose restriction on trade and commerce'.

Article 306 permitted any tax on duty on import of goods into the State from other States or on the export of goods from the State to another States which was being imposed by a State specified in Part B to continue by an agreement between Government of India and Government of States for a period, not exceeding ten years. The article contemplates continuance of tax or duty which was treated to be restriction and was allowed to continue only with an agreement for a maximum period of ten years.

297. We have already noticed a series of judgments of this Court holding that imposition of discriminatory taxes violates Article 304(a). Such discriminatory tax imposed by State have been struck down as being violative of Article 304(a) reference is made to the judgment of this Court in State of Madhya Pradesh V. Bhailal Bhai and Others 1964 (6) SCR 261, Shree Mahavir Oil Mills and Another Vs. State of Jammu & Kashmir and Others 1996 11 SCC 39. 298. The restriction which can be imposed, as contemplated by above provisions of law, have to be such limitation on the right of freedom of trade and commerce which should not be arbitrary or of excessive nature beyond what is required in the context of the power.

The Constitution Bench, speaking through Patanjali Sastri, CJ., in State of Madras Vs. V. G. Row 1952 SCR 607 while considering the concept of reasonable restriction under Article 19 has stated:- "It is important in this context to bear in mind that the test of reasonableness, wherever prescribed, should be applied to each individual statue impugned, and no abstract standard, or general pattern of reasonableness can be laid down as applicable to all cases. The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict. "

299. Although the word 'restriction' may also in certain circumstances includes prohibitions but restriction is not to be understood with complete prohibition or stoppage of business, effect of tax when it hinders the trade & commerce, it becomes restriction and prohibited under Article 301. This Court in Laxmi Khandsari E[TC. Vs. State of U.P. 1981 (3) SCR 92. While considering the concept of reasonable restriction has held that reasonable restriction would depend on the nature and circumstances of the case following was laid down in page 105: "As to what are reasonable restrictions would naturally depend on the nature and circumstances of the case, the character of the statute, the object which it seeks to serve, the existing circumstances, the extent of the evil sought to be remedied as also the nature of restraint or restriction placed on the rights of the citizen. It is difficult to lay down any hard or fast rule of universal application but this Court has consistently held that in imposing such restrictions the State must adopt an objective standard amounting to a social control by restricting the rights of the citizens where the necessities of the situation demand."

300. Further, it was held in Laxmi Khandsari E[TC. E[TC. Vs. State of U.P. 1981 (3) SCR 107 that incurring of the loss in trade is not a ground to trade restrictions as un-reasonable. Following was laid down: "Finally, in determining the reasonableness of restrictions imposed by law in the field of industry, trade or commerce, the mere fact that some of the persons engaged in a particular trade may incur loss due to the imposition of restrictions will not render them unreasonable because it is manifest that trade and industry pass through periods of prosperity and adversity on account of economic, social or political factors. In a free economy controls have been introduced to ensure availability of consumer goods like food-stuffs, cloth or the like at a fair price and the fixation of such a price cannot be said to be an unreasonable restriction in the circumstances."

301. This Court, in G. K. Krishnan and Others Vs. State of Tamil Nadu and Others, (1975) 1 SCC 375 has held that the regulation like rules of traffic facilitate the freedom of trade whereas restriction impede that freedom, it was held that a discriminatory tax against outside goods is not a tax simpliciter but is a barrier to trade and commerce. Following was laid down in para 15 and 27:

"15. Regulations like rules of traffic facilitate freedom of trade and commerce whereas restrictions impede that freedom. The collection of toll or tax for the use of roads, bridges, or aerodromes, e[TC., do not operate as barriers or hindrance to trade. For a tax to become a prohibited tax, it has to be a direct ax, the effect of which is to hinder the movement part of the trade. If the tax is compensatory or regulatory, it cannot operate as a restriction on the freedom of trade or commerce. "

"27. A discriminatory tax against outside goods is not a tax simpliciter but is a barrier to trade and commerce."

302. A Constitution Bench in Federation of Hotel and Restaurant Association of India, E[TC. Vs. Union of India and Others (1989) 3 SCC 634 was considering the validity of a taxing law in the context of Article 14 of the Constitution. The Constitution Bench held that legislature enjoys a wide latitude in the matter of selection of persons, subject matter, events e[TC. for taxation.

Further, it was held that some excessiveness of taxation or its imposition tends towards diminution of earnings or profits, does not violate rights under Article 19 (1) (g): "46. It is now well settled that though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy legislature enjoys a wide latitude in the matter of selection of persons, subject matter, events e[TC., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. "

Further in para 52 following was stated: "62. Then again, the mere excessiveness of a tax or even the circumstance 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)."

303. It is, however, relevant to note that the issue as to whether the restriction contained in any taxing statute impede the freedom of trade and commerce is a question which will vary from case to case. The nature of restriction and the magnitude of the restriction are all relevant factors to determine whether trade is impeded or not.

It is well settled that provisions in a statute which is regulatory in nature which facilitates the trade have not been treated as restriction impeding the freedom of trade and commerce. Traffic regulations, registration of motor vehicles for plying in the State, collection of toll have not been treated to be restriction in freedom of trade and commerce.

304. The above discussion makes it clear that what has been expressly prohibited in Article 302 - 306 are all restrictions in the freedom of trade and commerce which shall obviously contravene Article 301, but there may be other instances when a law is treated to be restriction although not expressly enumerated in Part 302 to 306. We may clarify that Article 301 is not attracted in a legislation which does not contain any kind of restriction to the freedom of trade and commerce. The question of applicability of Part XIII arises only when the legislation contains restrictions which hamper, restrict, impede and adversely affect the freedom of trade and commerce directly & immediately.

I. WHETHER 'DIRECT AND IMMEDIATE EFFECT TEST' AS LAID DOWN IN ATIABARI AND APPROVED IN AUTOMOBILE TRANSPORT IS NO LONGER A CORRECT TEST

305. Gajendragadkar, J., speaking for majority in Atiabari Tea Company laid down that the restrictions, which directly and immediately impede the trade are hit by Article 301. Following was held at page 860: "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. 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 Article 301."

306. Das J.,in Automobile Transport also approved the direct and immediate effect test. Following was stated at page 523: "....For the tax to become a prohibited tax it has to be a direct tax the effect of which is to hinder the movement part of trade."

307. Subba Rao, J., concurring with the above view has also stated at page 550: "....If a law directly and immediately imposes a tax for general revenue purposes on the movement of trade, it would be violating the freedom. On the other hand, if the impact in indirect and remote, it would be unobjectionable."

308. Gajendragadkar, J., in Atiabari Tea Company had also referred to two Privy Council judgments, namely, James Vs. Commonwealth of Australia (1936) A.C. 578 and judgment of Lord Porter in, Commonwealth of Australia and Others Vs. Bank of New South Wales and Another (1950) A.C.

235. It is further relevant to note that Gajendragadkar, J., was conscious of the fact that political and historical background of the federal polity adopted by Australian Commonwealth and the setting of the Constitution of India, the distribution of powers and general scheme is entirely different. The caution noted by Gajendragadkar, J., was in following words: "Before we conclude we would like to refer to two decisions in which the scope and effect of the provisions of S. 92 of the Australian Constitution came to be considered. 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 distribution of powers and the general scheme of the Constitution are different, and so it would not be safe to seek for guidance or assistance from the Australian decisions when we are called upon to construe the provisions of our Constitution."

309. It is useful to refer to observations made by Lord Porter in Commonwealth of Australia & others(supra), which are in following words: "In this labyrinth there is no golden thread. But it seems that two general propositions may be accepted; (I.) 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 consequential impediment which may fairly be regarded as remote."

310. Shri Rakesh Dwivedi, learned Senior Advocate has contended that the Australian cases laying down 'direct and immediate effect test', which were relied by this Court in Atiabari, having been subsequently not followed by Australia High Court itself, the direct and immediate effect test should not be recognised for purposes of Article 301. Shri Dwivedi has referred to Cole Vs. Whitfield (1988) 78 ALR 42. He submits that 7-Judges Bench in Cole Vs. Whitfield has held that the operation test has failed to achieve unanimity. Shri Dwivedi submits that now the test which has been approved both by Australian High Court and U.S. Supreme Court is non-discriminatory test.

He submits that preventing preferences and discrimination is the main factor for achieving the goal of creating free trade as accepted in Cole Vs. Whitfield. He submits that in Cole Vs. Whitfield following observations were made by the Court: "In relation to both fiscal and non-fiscal measures, history and context alike favour the approach that the freedom guaranteed to interstate trade and commerce under s. 92 is freedom from discriminatory burdens in the protectionist sense already mentioned."

311. James Vs. Commonwealth of Australia (supra) was treated to have provided support for the development of the doctrine of criteria of operation. Cole Vs. Whitfield gave various reasons for disapproving the operation theory. Some of the reasons given are as follows: "First, in some respects the protection which it offers to interstate trade is too wide. Instead of placing interstate trade on an equal footing with intrastate trade, the doctrine keeps interstate trade on a privileged or preferred footing, immune from burdens to which other trade is subject."

..... ...... ...... ...... "The second major reason for rejecting the doctrine as an acceptable interpretation of s. 92 is that it fails to make any accommodation for the need for laws genuinely regulating intrastate and interstate trade. The history of the movement for abolition of colonial protection and for the achievement of intercolonial free trade does not indicate that it was intended to prohibit genuine non-protective regulation of intercolonial or interstate trade. The criterion of operation makes no concession to this aspect of the section's history. In the result there has been a continuing tension between the general application of the formula and the validity of laws which are purely regulatory in character. Judged by reference to the doctrine, the validity of a regulatory law hinged on whether it imposed a burden on an essential attribute or on a mere incident of trade or commerce."

312. As noted above, our Constitution framers were well aware of the provisions of the Australian Constitution and the difficulties which arose in the Australia and different views expressed on the interpretation of Section 92, the Constitution framers though took inspiration from Section 92 but they did not stop there, rather they expressly provided for qualification to the right and freedom guaranteed under Article 301 by Article 302 - 306.

Learned counsel for the State also in their submissions have contended that the Australian judgments pertaining to Constitution of Australia as well as the judgments of the U. S. Supreme Court are not directly applicable with regard to the interpretation of Part XIII. However, now it is contended by Shri Dwivedi that since the Australian High Court has now abandoned the operation test, this Court may also review the test as was laid down in Atiabari. 313. We have already noticed that in Atiabari in all the three opinions expressed by Sinha, C.J., and Gajendragadkar, J., and Shah, J., it was noted that in our Constitution, there is a departure from Australian Constitution and the Australian judgments are not relevant. Justice Gajendragadkar, has referred to two Privy Council judgments dealing with Australian Constitution to know how judicial minds have responded to the challenge presented by similar provisions.

In the above spirit, references of those two Privy Council judgments were made. Thus Gajendragadkar, J., did not base his judgment on the test, which was laid down in the Australian judgments but found justification for his conclusion from the aforesaid judgments. Further, the primary reason why the Australian High Court in Cole Vs. Whitfield rejected the 'trade and immediate effect test' is, that because the freedom guaranteed under Section 92 applies only "between the States" i.e. to the interstate trade, i.e., The doctrine accordingly ended up discriminating against intrastate trade as it provided some sort of immunity to interstate transactions which intrastate transaction did not enjoy.

We have already extracted the reasons given by Cole Vs. Whitfield, whereas in Part XIII of the Constitution, the Constitution framers had provided for non-discriminatory taxation between the intrastate and interstate trade with provision for dealing with all situation including a case whether restriction has to be imposed, on both interstate or intrastate trade that is Article 304(b). Although the Australian High Court rejected the idea of 'direct and immediate effect test' as being artificial, this Court has continued to adopt the said doctrine whenever legislation is decided on the touchstone of reasonable restriction and the doctrine has been applied consistently in the vast number of cases for decades which have stood the test of time.

314. Shri Dwivedi has also referred to American cases and contends that free trade immunity, which was propounded in Spector Motor Services, Inc. Vs. O'Connor 430 U.S. 289(1951) had been overruled in Complete Auto Transit Vs. Brady 430 U.S. 274(1977). Shri Dwivedi submits that in Complete Auto, it was held that 'it was not the purpose of the commerce class to relieve those engaged in interstate commerce from their just share of State tax burden even though it increases the cost of doing business'. Shri Dwivedi, further relies on State of Maryland Vs. State of Louisiana 451 U.S. 725 where it was observed, "one of the fundamental principles of commerce class jurisprudence is that no State, consistent with the commerce class, may or impose tax which discriminates against interstate commerce.......".

Shri Dwivedi submits that the U.S. Supreme Court has also moved to non- discriminatory test. He submits that even in Cole Vs. Whitfield, the Complete Auto Transit Vs. Brady was noticed. The commerce class of the American Constitution Article 1, Section 8, Clause 3 provides "to regulate commerce with foreign nations and among the several States and with the Indian tribes;" Part XIII of the Constitution has not adopted the American model and the interpretation on the commerce class is hardly relevant for interpretation of Part XIII. 315. Non-discriminatory taxation by State in reference to interstate and intrastate trade is ingrained in Article 304(a) itself, and no abstract theory needs to be referred to for following Non-discriminatory Theory.

316. We are thus of the view, that the concept as evolved in Australia and America with regard to freedom of trade and commerce, cannot be adopted in respect of interpretation of our Constitution, despite arguing against the relevance of foreign judgments, the States themselves are now relying on the foreign judgments in context of 'direct and immediate effect test theory'. The change in the legal position in Australia and America does not have any bearing on the Indian legal position as our Constitutional framework is different from those countries. 317. It is further contended before us that sometimes, it becomes difficult to draw a line as and when, legislation/taxation shall impede freedom of trade, commerce and intercourse and it becomes difficult for Court to apply any objective criteria for finding out the demarcation line. No hard and fast formula can be laid down to determine as to whether a particular legislation/taxation violates rights of freedom of trade and commerce under Article 301. It is for the Court to examine facts of each case and come to a conclusion.

In this context, observation of Subba Rao , J., is pertinent to be referred to. Referring to observation of Dixson, C.J., following was stated by Subba Rao, J.: "Dixon, C.J., in Commonwealth Freighters Proprietary Limited v. Sneddon, gives a very cogent answer to such an argument in a different context. The learned chief Justice said: "Highly inconvenient as it may be, it is true of some legislative powers limited by definition, whether according to subject-matter to purpose or otherwise, that the validity of the exercise of the power must sometimes depend on facts, facts which some how must be ascertained by the court responsible for deciding the validity of the law......All that is necessary is to make the point that if a criterion of constitutional validity consists in matter of fact, the fact must be ascertained by the court as best it can, when the court is called upon to pronounce upon validity." I entirely agree with these observations. It is common place to point out that intricate problems come before a court involving decision on different and complicated aspects of human activity.

Questions involving science, medicine, engineering, geology, biology, economics, Psychology, e[TC. all come for judicial scrutiny, and I have never heard any court saying that it is difficult to decide upon such a question and, therefore, the proceeding raising such a question is outside the jurisdiction of such a court. In saying this, I am not ignoring the difficulties inherent in a problem of fixing the rate of taxes by a court. Experience shows that the court applies certain presumptions, such as that of the wisdom, knowledge and the good intentions of the Legislature, and does not also meticulously go in to the question, but only looks at the broad features.

On the argument of learned counsel when it is permissible and possible for a court to ascertain whether a tax is fiscal or regulatory, I do not see how it becomes impossible, though it may be difficult, to hold whether a fiscal tax is reasonable or not. The distinction lies not in the nature of the enquiry but only in degree. That apart, no restriction, if it is unreasonable, can be more deleterious to the freedom than the imposition of fiscal burden on it, which may in certain circumstances destroy the very freedom."

318. In view of foregoing discussion, we are of the view that submission raised on behalf of the learned counsel for the State that 'direct and immediate effect test' is no longer a correct test, cannot be accepted. As observed above, each case has to be determined on facts of each case. The 'direct and immediate effect test' as laid down in Atiabari and approved in Automobile Transport still holds good. J. COMPENSATORY TAX THEORY

319. Two related issues pertaining to a tax which is compensatory in nature have been framed by us in the beginning of hearing. Those are a part of Question No.2, i.e., "Can a tax which is compensatory in nature also fall foul Article 301 of the Constitution ?" and "What are the tests for determining whether the tax or levy is compensatory in nature"?

Learned counsel appearing for the parties have made elaborate submissions on the concept of compensatory tax and other related issues. Most of the learned counsel appearing for the petitioners as well as respondents-States have expressed their reservation regarding compensatory tax theory. Majority of counsel are at agreement that judicial evaluation of compensatory tax theory was uncalled for and the compensatory tax theory is not compatible with a constitutional provision of Part XIII. It is submitted that compensatory theory has been judicially evolved by Seven Judge Bench in Automobile Transport case (supra) and the majority opinion had upheld the provisions of Rajasthan Motor Vehicles Taxation Act, 1951 holding it to be compensatory tax. In view of the serious reservation expressed by the learned counsel for the parties on the compensatory tax theory, it is necessary for us to examine the concept in some detail.

320. The compensatory tax theory as evolved in Automobile Transport was soon doubted by the Constitution Bench in Khyerbari Tea Company Ltd. v. State of Assam, (1964) 5 SCR 975. Gajendragadkar, J. looking into the nature of the compensatory tax theory, opined that the same is required to be reconsidered by a larger Bench, he, however, noted that since the legislation was not tried to be saved on the basis of compensatory tax theory, the question was not further pursued. Gajendragadkar, J. made following observation: "According to the majority view in the case of Atiabari Tea Co., if an Act is passed under Art. 304(b) and its validity is impeached, then the State may seek, to justify the Act on the ground that the restrictions imposed by it are reasonable and in the public interest, and in doing so, it may, for instance, rely on the fact that the taxes levied by the impugned Act are compensatory in character. On the other hand, according to the majority decision in the Automobile Transport (Rajasthan) case, compensatory taxation would be outside Art.301 and cannot therefore, fall under Art.304(b). If in the present 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."

321. The question as to what are the tests for determining whether a tax or levy is compensatory in nature becomes secondary when we have to examine sustainability of the compensatory theory itself. 322. What is the tax ? What are the ingredients of taxation ? Thomas M. Cooley in "A Treatise on the Constitutional Limitations" defined the taxes in following words: "Taxes 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.."

323. Chief Justice, Marshall in M'Culloch vs. State of Maryland, 17 US 316 (1819) while examining the nature of taxing power stated: "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 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 constituents. This is, in general, a sufficient security against erroneous and oppressive taxation."

324. A Seven Judge Bench of this Court in Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, 1954 SCR 1005: AIR 1954 SC 282 has given definition of tax which has been repeatedly quoted and relied by this Court in large number of subsequent judgments. In paragraph 45 following was stated: "45. A neat definition of what "tax" means has been given by Latham, C.J. of the High Court of Australia in Matthews v. Chicory Marketing Board. "A tax", according to the learned Chief Justice, "is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered". This definition brings out, in our opinion, the essential characteristics of a tax as distinguished from 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 revenue, which when collected forms part of the public revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority. Another feature of the taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay."

325. It is an accepted proposition that one of the characteristics 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. The taxes imposed by the Legislature, apart from being source of Revenue is also expended for various public welfare measures and when it's object is in no way connected with the public interest or public welfare it loses its character of taxation, becomes a levy which is unconstitutional.

326. Das, J. delivering majority opinion in Automobile Transport case, in his judgment has referred to Rajasthan Motor Vehicles Taxation Act, 1951 as compensatory with whose opinion Subba Rao, J. also concurred.

327. Das, J. for coming to the conclusion that 1951 Act is a compensatory in nature has referred to judgments of Australian High Court and the judgment of the Privy Council wherein validity of various statutes in the context of freedom of trade and commerce granted under Section 92 of the Constitution of Australia were considered. Das, J. has referred to following judgments: Duncan v. The State of Queensland, (1916) 22 C.L.R. 556; Mc Carter v. Brodie, (1950) 80 C.L.R. 432;

(iii)Hughes and Vale Proprietary Ltd. v. State of New South Wales, (1955) A.C. 241;

(iv) Armstrong v. State of Victoria No.2, (1957) 99 C.L.R. 28;

(v) Commonwealth of Australia v. Bank of New South Wales, (1950) A.C. 235;

(vi) Commonwealth Freighters Property Ltd. v. Sneddon, (1959) 102 C.L.R. 280.

328. The Australian Constitution provides under Section 92 'trade, commerce and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free'. In the above cases, Australian High Court and Privy Council had occasion to examine the challenge to various statutes framed by the States on the ground that these statutes violate freedom of trade and commerce, as guaranteed under Section 92. Section 92 itself does not provide for any qualification or exception to the freedom, in Duncan and Others V. State of Queensland and Another (1916) 22 CLR 556. Chief Justice Griffith, while construing the expression free had made following observations: "But the word 'free' does not mean extra legam and any more than freedom means 'anarchy' we boast of being absolutely free people, but that does not mean that we are not subject to law."

329. The most of the cases of Australian High Court which have been referred to and relied by Das, J. were the transport cases wherein various sections were enacted for registration, licensing and realisation of fee/charge from motor vehicles, goods carriages in course of inter-State and intrastate trade and commerce.

330. Justice Das has specifically referred to dissenting opinion of Fullagar, J. in McCarter and Another V. Brodie, (1950) 80 CLR 432, in which case the Parliament of Victoria had passed an Act, namely, Transport Regulation Act, 1933-47 which provided that a commercial goods vehicle should not operate on any public highway unless licensed in accordance with Act. A fee was to be paid for license, by an amendment further fee was imposed to be calculated at an annual rate determined from time to time by referring to the load capacity of the vehicle in respect of which license was sought to.

331. Chief Justice Latham delivered his opinion for the Court, after referring to various earlier decision of Australian High Court and Privy Council. Chief Justice held that the regulation of trade, commerce and intercourse in the States is compatible with absolute freedom envisaged under Section 92 and the freedom is violated only when statute operates to restrict such trade and commerce, directly and immediately, it was said:- "This quotation follows an express statement that regulation of trade, commerce and intercourse among the States is compatible with absolute freedom and 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 consequential impediment which may fairly be regarded as remote.

Thus the Privy Council in the Banking Case expressly rejected the proposition that s. 92 precluded Parliaments (Commonwealth or State) from in any way regulating or controlling inter-State trade and commerce, and a statement of the law was selected for approval which defined the relevant criterion as the distinction between regulation which was permitted, and prohibition, which was not permitted. The result is that s.92 does not mean that inter- State trade and commerce is to be free from control by law. In a passage to which I have just referred their Lordships held that if laws have only an indirect effect in relation to inter-State trade and commerce they are not invalidated by s. 92."

332. Justice Fullagar, who delivered a dissenting opinion had examined in detail the nature of legislation which can be termed as regulatory and those which cannot be held to be prohibiting the trade. In his opinion, His Lordship has illustrated his point by giving various examples. He was of the view that permitted regulations as explained do not impede freedom carrying out under Section 92, however, there may be circumstances when even regulatory statutes impede the freedom. Following was observed:

"....The distinction between what is merely permitted regulation and what is a true interference with freedom of trade and commerce must often, as their Lordships observed, present a problem of great difficulty, though it does not, in my opinion, present any real difficulty in the present case. We may begin by taking a few examples, confining out attention to the subject matter of transportation, which is now under consideration. The requirements of the Motor Car Acts of Victoria afford very good examples of what is clearly permissible. Every motor car must be registered : we may note in passing that there is no discretionary power to refuse registration.

A fee, which is not on the face of it unreasonable, must be paid on registration. Every motor car must carry lamps of a specified kind in front and at the rear, and in the hours of darkness these lamps must be alight if the car is being driven on a road. Every motor car must carry a warning device, such as a horn. A motor car must not be driven at a speed or in a manner which is dangerous to the public having regard to all the circumstances of the case. Other legislation of the State-Parliamentary or subordinate-prescribes other rules. In certain localities a motor car must not be driven at more than a certain specified speed. The weight of the load which may be carried by a motor car on a public highway is limited. The driver of a motor car must keep to the left in driving along a highway.

He must not overtake another vehicle on a curve in the road which is marked by a double line in the centre. He must observe certain "rules of the road" at intersections: for example, the vehicle on the right has the right of way. Such examples might be multiplied indefinitely. Nobody would doubt that the application of such rules to an inter-State trader will not infringe s.92. And clearly in such matters of regulation a very wide range of discretion must be allowed to the legislative body. When we ask why such rules do not infringe s.92, I think that commonsense suggests a fairly clear and satisfactory answer.

The reason is that they cannot fairly be said to impose a burden on a trader or deter him from trading: it would be foolish, for example, to suggest that my freedom to trade between Melbourne and Albury is impaired or hindered by laws which require me to keep to the left of the road and not drive in a manner dangerous to the public. Of course, even rules of the kind which I have taken as examples could be made to operate as a burden or deterrent in a high degree. Let me take an example. The town of Wangaratta is in Victoria, some fifty miles by road from the border between Victoria and New South Wales.

It is on the Hume Highway, which is the busy main highway between Melbourne and Sydney. A law which provided that a motor car should not travel on that highway at greater speeds than thirty miles per hour within the limits of towns and sixty miles per hour outside towns would not impede or interfere with the trade of persons carrying goods for reward between Melbourne and Sydney; their trade would remain 'free.' But let me suppose a law that no person should drive a motor car between Wangaratta and the border at a speed exceeding one mile per hour.

We should instantly say that such a law interfered with the freedom of inter-State trade. It would operate as a burden and a deterrent to the trader by making the journey economically impossible. The examples which I have taken seem clear. On which side of the line a particular case falls will, of course, be a question of fact...."

333. The above opinion, expressed by Fullagar, J. was specifically approved by Privy Council in Hughes and Vale Proprietary Ltd. V. State of New South Wales and Others [1955] A.C. 241. The Privy Council has noticed that the problem before the Australian High Court has been to define the qualification in the Constitution which is left unqualified. It held that the expression free 'under Section 92 though emphasized by the accompanying, absolutely must receive some qualification'. Privy Council laid down following two general propositions: "But it seems 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 section 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 consequential impediment which may fairly be regarded as remote. In the application of these general propositions, in determining whether an enactment is regulatory or something more, or whether a restriction is direct or only remote or incidental, there cannot fail to be differences of opinion. The problem to be solved will often be not so much legal as political, social, or economic, yet it must be solved by a court of law."

334. In Armstrong and Others (supra), the provisions of Commercial Goods Vehicle Act, 1955 were under challenge on the ground that it violated Section 92. The provisions require the owner of every commercial goods vehicle of loading capacity exceeding four tonnes and not engaged in conveying certain specified classes of goods to pay contribution towards the compensation for wear and tear costs to public highways. The High Court held that imposition of charge for using the roads of State is not necessarily inconsistent with the freedom of interstate trade and commerce.

335. The Chief Justice Dixson has held that a State can not single out inter-State transport or transport generally for particular charge, such charge was held not to be compensatory for the use made of them. Following observations were made: "It appears to me that on a proper scrutiny of Pt. II of the Motor Car Acts 1951-56 (Vict.) and the second schedule it must be seen that no room exists for the grounds upon which it has been sought to reconcile with s. 92 the imposition upon vehicles exclusively engaged in inter-State commerce of the rates contained in sub-par.(b) of par. B of the schedule.

(1) The exaction cannot be regarded simply as a fee contributing to the cost of registration a service in the interest of motor car owners and drivers and others so that it is nothing but an incident or adjunct of the traffic.

(2) It cannot be treated as another contribution to the maintenance of the highways compensatory for the use made of them.

(3) It cannot be justified as a tax upon the ownership or possession of a chattel considered independently of the use of the chattel in the carriage of persons or goods, including the inter-State carriage of persons or goods.

(4) It cannot be treated as involving no appreciable burden upon the possession of a motor vehicle as a means of inter-State carriage and movement." 336. Referring to an earlier judgment of the High Court, William, J. in his concurring opinion has referred to indicia presence of which may prove a charge as truly compensatory: "In the joint judgment of Dixon C.J., McTiernan and Webb JJ. in Hughes & Vale Pty. Ltd. v. State of New South Wales [No. 2] (3) the following passage appears: "Prima facie it" (that is the legislation imposing the charge" "will present that appearance" (that is the appearance of a real attempt to fix a reasonable recompense for the use of the highway) "if it is based on the nature and extent of the use made of the roads (as for example if it is a mileage or ton-mileage charge or the like); if the proceeds are devoted to the repair, upkeep, maintenance and depreciation of relevant highways, if inter-State transportation bears no greater burden than the internal transport of the State and if the collection of the exaction involves no substantial interference with the journey.

The absence of one or all of these indicia need not necessarily prove fatal, but in the presence of them the conclusion would naturally be reached that the charge was truly compensatory."

337. From the above, it is clear that Australian High Court have read qualifications under Section 92 of the Act. The statutes regulating the trade which have no direct effect on trade and commerce and levying compensatory charge were held to be compatible with freedom under Section 92. 338. Another judgment of the Privy Council which have been referred to by Das, J. was judgment in Commonwealth of Australian and Others V. Bank of New South Wales and Others [1950] A.C. 235. The Privy Council laid down as following: "But it appears to their Lordships that, if these two tests are applied: first, whether the effect of the Act is in a particular respect direct or remote; and, secondly, whether in its true character it is regulatory, the area of dispute may be considerably narrower. It is beyond hope that it should be eliminated."

339. After referring to above cases, Das, J. recorded the conclusion in following words: "We have, therefore, come to the conclusion that neither the wide interpretation nor the narrow interpretations canvassed before us are acceptable. The interpretation which was accepted by the majority in the Atiabari Tea Co. case is correct, but subject to this clarification. 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 requireme4nts of the proviso to Article 304(b) of the Constitution."

340. The law that if a statute is compensatory in nature, it is beyond Part XIII and does not violate Article 301, was consistently followed after the above pronouncement in Automobile Transport. All State Legislations, after the above pronouncement have been challenged and saved on many grounds including on the above exceptions, as laid down in Automobile Transport. There have been various tests laid down in different cases decided by this Court to find out as to whether State Legislation is compensatory in nature or not. In Messers Bhagatram Rajiv kumar, this Court had held that if there is some link between the tax and trading facility, directly or indirectly, the statute is compensatory and is not open to challenge under Article 301.

State of Bihar and Others (supra) following the earlier judgment again reiterated the test of some connection between the tax and trading facility provided. Both the above judgments were doubted and referred to a Constitution Bench. A Constitution Bench of this Court in Jindal Stainless Steel Ltd. Vs. State of Haryana (supra) had already overruled the aforesaid two judgments. Even the test as laid down by the Constitution Bench in Jindal Stainless Steel Ltd.(2) did not quell the controversy and in the reference made by the Constitution Bench in Jaiprakash Associates(Supra), one of the questions referred was with regard to the test to prove whether levy is compensatory levy. 341. At this juncture, it is also relevant to refer to concept of "compensatory tax" as developed in United States of America.

342. The first case to be noticed is Hinson v. Lott, 8 Wall, 75 U.S. 148 (1869). The State of Alabama passed a statute by Section 13 of which all dealers on sale of liquor within the limit of the State were required to pay tax of 50 cent per gallon. A merchant of another state against whom collection of tax was sought to be enforced, questioned the tax. Tax was held to be valid by Supreme Court of Alabama and the matter was taken by the merchant to the Supreme Court of the United States. The Supreme Court held that tax is not violative of inter-State trade and commerce.

It was noticed that no greater tax is held on the liquor brought into the State than on those manufactured out of the State and the tax on the liquor brought in from other State was only complimentary provision necessary to make tax equal on all liquors sold in the States. Following was laid down: "A tax is imposed by the previous sections of the same act of fifty cents per gallon on all whiskey and all brandy from fruits manufactured in the State. In order to collect this tax, every distiller is compelled to take our a license and to make regular returns of the amount of distilled spirits manufactured by him.

On this he pays fifty cents per gallon. So that when we come in the light of these earlier sections of the act, to examine the 13th, 14th, and 15th sections, it is found that no greater tax is laid on liquors brought into the State than on those manufactured within it. And it is clear that whereas collecting the tax of the distiller was supposed to be the most expedient mode of securing its payment, as to liquors manufactured within the State, the tax on those who sold liquors brought in from other States was only the complementary provision necessary to make the tax equal on all liquors sold in the State.

As the effect of the act is such as we have described, and it institutes no legislation which discriminates against the products of sister States, but merely subjects them to the same rate of taxation which similar articles pay that are manufactured within the State, we do not see in it an attempt to regulate commerce, but an appropriate and legitimate exercise of the taxing power of the States."

343. The next case needs to be noted is judgment of the U.S. Supreme Court in Harold H. Henneford et al., V. Silas Mason Company, Inc., 300 U.S. 577.

344. Justice Cardozo delivered the opinion of the Court and upheld the compensatory tax. The facts of the case had been noted in the judgment which reads as follows: "A statute of Washington taxing the use of chattels in that state is assailed in this suit as a violation of the commerce clause (Constitution of the United States, article I, 8) in so far as the tax is applicable to chattels purchased in another state and used in Washington thereafter." .... .... .... ....

"Only two of these taxes are important for the purposes of the case at hand, the 'tax on retail sales,' imposed by title III and the 'compensating tax,' imposed by title IV on the privilege of use. Title III provides that after May 1, 1935, every retail sale in Washington, with a few enumerated exceptions, shall be subject to a tax of 2% of the selling price. Title IV with the heading 'compensating tax,' provides that there shall be collected from every person in the state 'a tax or excise for the privilege of using within this state any article of tangible personal property purchased subsequent to April 30, 1935,' at the rate of 2% of the purchase price, including in such price the cost of transportation from the place where the article was purchased."

345. However, there were several exceptions. Sub Division(b) provides that the use tax shall not be laid unless the property has been brought at retail and (c) tax shall not apply to the use of any article of tangible personal property, the sale or use of which had already been subject to a tax equal to or in excess of that imposed. Those users of the State who have produced in the State were thus not to pay the use tax whereas use tax was always payable where the user had acquired the property by retail purchase in or from another State, Unless he has paid sales or use tax elsewhere before bringing it to Washington.

Challenge was made on the ground that it violates the commerce class of the U.S. Constitution. Justice Cardozo held that the equality is a theme that runs through the above sections. Following are the reasons which were given for upholding the above compensating tax: "Equality is the theme that runs through all the sections of the statute. There shall be a tax upon the use, but subject *to an offset if another use or sales tax has been paid for the same thing. This is true where the offsetting tax became payable to Washington by reason of purchase or use within the state. It is true in exactly the same measure where the offsetting tax has been paid to another state by reason of use or purchase there.

No one who uses property in Washington after buying it at retail is to be exempt from a tax upon the privilege of enjoyment except to the extent that he has paid a use or sales tax somewhere. Every one who has paid a use or sales tax anywhere, or, more accurately, in any state, is to that extent to be exempt from the payment of another tax in Washington.

When the account is made up, the stranger from afar is subject to no greater burdens as a consequence of ownership than the dweller within the gates. The one pays upon one activity or incident, and the other upon another, but the sum is the same when the reckoning is closed. Equality exists when the chattel subjected to the use tax is bought in another state and then carried into Washington. It exists when the imported chattel is shipped from the state of origin under an order received directly from the state of destination. In each situation the burden borne by the owner is balanced by an equal burden where the sale is strictly local."

346. The contents of the compensatory tax doctrine were reiterated by the U.S. Supreme Court in Associated Industries Of Missouri, et al., V. Janette M. Lohman 128 L Ed 2d 639. In the above cases State of Missouri imposed a uniform state-wide use tax on all goods purchased outside the State and stored, used or consumed within the State. The tax was purportedly designed to compensate for sales tax imposed by local jurisdiction on sales of goods in the State. Local sales tax varied very widely, on several occasions the use tax exceeded the sales tax.

The tax was challenged, as violating interstate commerce on the ground that it placed greater burden on interstate trade, referring to judgment of Justice Cardozo in Silas Mason; Following was stated: "In Silas Mason, Justice Cardozo was explicit in explaining for the Court that the compensatory tax doctrine requires precision to ensure that, upon the "reckoning" of "account(s)," the "sum" on the interstate side of the ledger is "the same" as that on the intrastate side. 300 US, at 584, 81 L Ed 814, 57 S Ct 524. More recently, we have reiterated that strict parity is demanded by the compensatory tax doctrine as we have explained that a compensatory tax leaves a consumer free to make choices "without regard to the tax consequences"; if he purchases within the State he may pay a tax, but if he purchases from outside the State he will pay a "tax of the same amount."

347. Another case which needs to be noted is Oregon Waste Systems V. Department of Environmental Quality of the State of Oregon 511 U.S. 93 (1994). The U.S. Supreme Court noticed that compensatory tax doctrine has been recognised at least since 1869. Following was stated by the U.S. Supreme Court: "At least since our decision in Hinson V. Lott, 8 Wall. 148 (1869), these principles have found expression in the "compensatory" or "complementary" tax doctrine.

Though our cases sometimes discuss the concept of the compensatory tax as if it were a doctrine unto itself, it is merely a specific way of justifying a facially discriminatory tax as achieving a legitimate local purpose that cannot be achieved through non-discriminatory means. See Chemical Waste, supra, at 346, n. 9 (referring to the compensatory tax doctrine as a "justification" for a facially discriminatory tax). Under that doctrine, a facially discriminatory tax that imposes on interstate commerce the rough equivalent of an identifiable and "substantially similar" tax on intrastate commerce does not offend the negative Commerce Clause. Maryland, supra, at 758-759. See also Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue,

MANU/USSC/0058/1987: 483 U.S. 232, 242-243(1987); Armco, U.S., AT 643. To justify a charge on interstate commerce as a compensatory tax, a State must, as a threshold matter, "identify... the [intrastate tax] burden for which the State is attempting to compensate." Maryland, supra, at 758. Once that burden has been identified, the tax on interstate commerce must be shown roughly to approximate - but not exceed - the amount of the tax on intrastate commerce. See. e.g., Alaska v. Arctic Maid,

MANU/USSC/0062/1961 : 366 U.S. 199, 204-205 (1961). Finally, the events on which the interstate and intrastate taxes are imposed must be "substantially equivalent"; that is, they must be sufficiently similar in substance to serve as mutually exclusive "proxies" for each other. Armco, supra, at 643. As Justice Cardozo explained for the Court in Henneford, under a truly compensatory tax scheme, "the stranger from afar is subject to no greater burdens as a consequence of ownership than the dweller within the gates."

348. Another judgment which needs to be noted is Fulton Corporation V. Jenice H. Folkner, Secretary of Revenue of North Carolina 516 US 325, 133 L Ed 2d 796. For valid compensatory tax three conditions were noticed by the U.S. Supreme Court in following words: "Since Silas Mason, our cases have distiled three conditions necessary for a valid compensatory tax. First, "a State must, as a threshold matter, 'identify ... the [intrastate tax] burden for which the State is attempting to compensate.'" Oregon Waste, supra, at 103, 128 L Ed 2d 13, 114 S Ct 1345 (quoting Maryland v Louisiana, 451 US 725, 758, 68 L Ed 2d 576, 101 S Ct 2114 (1981). Second, "the tax on interstate commerce must be shown roughly to approximate-but not exceed-the amount of the tax on intrastate [516 US 333] commerce." Oregon Waste, 511 US, at 1103, 128 L Ed 2d 13, 114 S Ct 1345. "Finally, the events on which the interstate and intrastate taxes are imposed must be 'substantially equivalent'; that is, they must be sufficiently similar in substance to serve as mutually exclusive 'proxies' for each other."

349. The above cases of Supreme Court give different concept of compensatory tax as compared to cases in Australia as well as in Automobile Transport. In U.S., The compensatory tax doctrine was invoked to save facially discriminatory taxes imposed on interstate trade, to make interstate commerce bear a burden already borne by intrastate commerce. In Automobile Transport compensatory tax has been referred to a tax or charge to provide for trade facilities like construction of road, bridges e[TC. which was treated as recompense to the traders who were required to pay tax.

350. Law of compensatory charge as developed in Australia was due to the fact that Section 92 did not contain any qualification to the absolute freedom of trade and commerce granted therein. Various qualifications and restrictions to the above freedom were culled out by judicial decisions of the High Court of Australia and Privy Council to justify the said qualifications and restrictions. The ratio contained in various judgments of the High Court of Australia and the Privy Council on Section 92 of the Constitution of Australia cannot be a guiding factor for interpreting Part XIII of the Constitution of India.

351. The Constitution Bench of this Court in State of Bombay v. R.M.D. Chamarbaugwala and another, AIR 1957 SC 699 had sounded a caution in paragraph 35: "35. In construing the provisions of our Constitution the decisions of the American Supreme Court on the commerce clause and the decisions of the Australian High Court and of the Privy Council on Section 92 of the Australian Constitution should, for reasons pointed out by this Court in State of Travancore-Cochin v. Bombay Co. Ltd. be used with caution and circumspection. Our Constitution differs from both American and Australian Constitutions. There is nothing in the American Constitution corresponding to our Article 19(1)(g) or Article 301. In the United States the problem was that if gambling did not come within the commerce clause, then neither the Congress nor any State Legislature could interfere with or regulate inter- State gambling.

Our Constitution, however, has provided adequate safeguards in clause (6) of Article 19 and in Articles 302-305. The scheme of the Australian Constitution also is different from that of ours, for in the Australian Constitution there is no such provision as we have in Article 19(6) or Articles 302-304 of our Constitution. The provision of Section 92 of the Australian Constitution being in terms unlimited and unqualified the judicial authorities interpreting the same had to import certain restrictions and limitations dictated by common sense and the exigencies of modern society. This they did, in some cases, by holding that certain activities did not amount to trade, commerce or intercourse and, in other cases, by applying the doctrine of pith and substance and holding that the impugned law was not a law with respect to trade, commerce or intercourse.

The difficulty which faced the judicial authorities interpreting Section 92 of the Australian Constitution cannot arise under our Constitution, for our Constitution did not stop at declaring by Article 19(1)(g) a fundamental right to carry on trade or business or at declaring by Article 301 the freedom of trade, commerce and intercourse but proceeded to make provision by Article 19(6) and Articles 302-305 for imposing in the interest of the general public reasonable restrictions on the exercise of the rights guaranteed and declared by Article 19(l)(g) and Article 301."

352. Hidayatullah, J. in Automobile Transport itself held that the technique justifying laws as regulatory as evolved in Australia is not applicable while interpreting Article 301 of Constitution. Following observations were made by Hidayatullah, J. at page 639: "The technique of justifying laws as regulatory was evolved in Australia in view of the intractable language of s.92 without any indication of the circumstances in which the absolute freedom could be curtailed. The detailed provisions contained in Part XIII render such a construction of Art.301 at once unnecessary and impermissible."

353. Gajendragadkar, J. in Khyerbari Tea Company Ltd.(supra) had also expressed opinion that compensatory or regulatory tax theory as introduced in the Australian decisions is not to be made applicable in Part XIII. Following was observed: "The majority view in the Atiabari case proceeded on the basis that the Australian decisions which dealt with the scope and effect of s.92 of the Australian Constitution would be of no assistance in constructing the effect of the provisions in Part XIII of our Constitution, because the legislative, historical and political background,the structure and the effect of the relevant provisions contained in Part XIII were in material particulars different from those of s. 92 of the Australian Constitution; s.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 s.92. In our Constitution, however, though Art. 301 is worded substantially in the same way as s.92, Art.302 and 304 provide for reasonable restrictions being imposed on the freedom of trade subject to the requirements of the said two Articles, and so, the problem facing of the said two Articles, and so, the problem facing judicial decisions in Australia and in this country in regard to the freedom of trade and the restrictions which it may be permissible to impose on it, is not exactly the same."

354. The answer to the question as to whether a compensatory tax is out of reach of Article 301 has to be found out from the Scheme of Part XIII of the Constitution itself and not from the theory of compensatory charge as evolved in Australia or United States of America. Two fundamental principles of taxes are: (i) that it is an imposition made for public purpose, (ii) without reference to any special benefit to be conferred on the payer of the tax.

355. The compensatory doctrine evolved in Automobile Transport is that compensatory tax is to compensate for facility extended, for example, wear and tear of the Road. The compensatory tax can be imposed only for public purpose which fact is not denied by any of the parties before us. Can it be said that a tax which is a compensatory in nature need not to be subject to restriction as contained in part XIII ? If it is accepted that once a tax is held compensatory tax it goes out of reach of Part XIII, it will be carving a new exception to Article 301 which is not contemplated in the constitutional scheme. The framers of the Constitution after providing for freedom of trade, commerce and intercourse in Article 301 laid down exceptions to the said freedom in Article 302 to 306.

The exceptions laid down in the constitutional scheme are self-contained and no new exception can be added by judicial interpretation. Can a compensatory tax not impede trade, commerce and intercourse even if it is a non-discriminatory tax ?

We take an example to illustrate the point. Entry Tax is imposed on vehicles carrying goods in a local area to the extent of 50% of the value of goods, the statute further declares that entire amount received from tax will be expended for providing facilities to the entrants in the local area, i.e., on roads, lights, free fooding, free lodging, facility for free servicing, repairs of the vehicles, e[TC.e[TC. Can the mere fact that entire amount collected is expended for providing facilities shall take out the statute from the scrutiny of Part XIII ?

Answer has to be in negative. The fact that a tax statute compensates the payer of the tax does not take out the statute beyond Part XIII, all taxes, being for one or other public purposes. The tax legislation which professes to compensate the payer cannot take the tax legislation on a higher pedestal beyond the reach of Part XIII, making such legislation "not subject to Constitution". When all legislative power is "subject to Constitution" as per Article 245 and 246 of the Constitution, a legislation, namely, compensatory tax legislation cannot be said to be beyond Part XIII. Any such interpretation is clearly against the constitutional scheme.

356. Thus the judgments of the High Court of Australia and the Privy Council relied in Automobile Transport did not furnish a foundation for evaluation of compensatory tax theory in part XIII of the Constitution.

357. The scheme of Constitution of India indicates that wherever it was contemplated to insulate any provision from challenge, expressed provisions have been made to provide for such insulation. Article 31B is one of such examples which provides that none of the Acts and Regulations specified in IXth Schedule shall be deemed to be void or ever to have become void on the ground of such Act, Regulation or provision is inconsistent with or takes away or abridges any of the rights conferred by Part III. The Constitutional Scheme as delineated by Part XIII does not indicate that a particular type of legislation, i.e., compensatory tax is out of Part XIII. Reading any such protection to compensatory tax legislation is against the constitutional provision.

We, thus, are of the opinion that the compensatory theory as evolved in Automobile Transport (supra) is not compatible to the constitutional scheme and a compensatory tax legislation cannot be insulated from challenge under Part XIII of the Constitution.

358. We may, however, observe that it is always open to scrutinize the true nature and character of legislation to decipher as to whether it contains any restriction on freedom of trade, commerce and intercourse violating Article 301. A legislation which is compensatory in nature may shed light while determining whether it contains restriction on trade, commerce and intercourse or facilitate the trade, commerce and intercourse. But all legislations be it a compensatory tax legislation or otherwise has to be tested in accordance with provisions of Part XIII of the Constitution. The ratio of judgment of Automobile Transport is overruled in so far as it lays down that the compensatory tax legislations are out of part XIII of the Constitution.

PART V "OUR CONCLUSIONS"

1. All legislative powers of the State are "subject to the Constitution" as per article 245 of the Constitution of India. Legislative power of the State is also subject to the limitation as provided in Part XIII of the Constitution.

2. Part XIII of the Constitution covers tax legislation which restrict freedom of trade, commerce and intercourse.

3. Word 'restriction' as used in Part XIII as well as in Article 304(b) of the Constitution includes tax legislation also.

4. For enabling a State to make a law under Article 304(a) following two pre-conditions which are independent of each other have to be satisfied:-

(i) It may impose on goods imported from other States or the Union Territory any tax to which similar goods manufactured or produced in that State are subject.

(ii) So, however, as not to discriminate between goods so imported and goods so manufactured and produced.

5. Word "and" between Clause(a) and Clause(b) of Article 304 has to be read as joint and several. Both the meaning can be assigned, as per requirement of State legislation.

6. A law made by State legislature exercising the power under Clause(a) in Article 304, which does not impose any restriction on the freedom of trade, commerce and intercourse need not comply with Article 304(b), however, a law even though complying with Article 304(a) containing restriction on freedom of trade, commerce and intercourse is to obtain sanction of the President, as contemplated by proviso to Clause(b). The requirement of obtaining the previous sanction of the president has to be decided in accordance with the nature and content of the State Legislation.

7. The proviso of Article 304(b) is part of Constitutional Scheme which is neither against the federal structure of the Constitution nor affects the State's sovereignty.

8. Word 'restriction' used in Article 304(b) is wide enough to include restrictions placed both by fiscal or non-fiscal law.

9. State Legislature in exercise of its taxing power can grant exemptionset off to locally produced and manufactured goods only to a limited extent based on intelligible differentia which is not in nature of generalunspecified exemption.

10. The ratio of judgment of Video Electronics(supra) has to be read as justifying only exemption limited to specified category for a short period. Exemption in general terms for unlimited period cannot be approved. Any exemption can not be used as measure of discrimination between goods imported from other States and goods manufactured or produced in the State.

11. A law passed by State Legislature imposing tax only on the imported goods coming from other States and Union Territories and there being no similar tax imposed to the locally producedmanufactured goods, the law is not saved by Article 304(a) and violates Article 301.

12. A law imposing tax on goods imported from other States and Union Territories, facially taxing goods locally manufactured and produced but granting set off exemption in general terms is discriminatory and violates Article 301.

13. What have been expressly prohibited under Article 302, 303 and 304 are restrictions in the freedom of trade and commerce violating Article 301. A law containing restriction impeding freedom of trade and commerce and intercourse which is not saved by Article 302, 303 and 304 violates Article 301.

14. The compensatory tax theory as judicially evolved in Automobile Transport is not compatible with the Constitutional provisions contained in Part XIII. The ratio in judgment of this Court in Automobile Transport to the extent that the legislation which is compensatory in nature is out of Article 301, cannot be approved and is overruled

15. All legislation, including a compensatory or regulatory has to be examined in accordance with Constitutional Scheme, as contained in Part XIII of the Constitution. The nature and content of legislation at best may shed light on the aspect as to whether it impede/restrict the freedom of trade, commerce and intercourse or facilitate the same.

PART VI OUR ANSWERS QUESTION NO.1

Levy of a non-discriminatory 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 non-discriminatory infringe Article 301 unless they are saved under Article 302 - 304. Question NO.2 and Question No.3

The compensatory tax theory as judicially evolved in Automobile Transport is not compatible to constitutional scheme as delineated by Part XIII of the Constitution. The Automobile Transport case in so far as it lays down that compensatory taxes are out of the reach of Article 301 cannot be approved. The nature and content of taxation at best may throw light on the aspect as to whether it contains restriction on freedom of trade, commerce and intercourse. The compensatory tax theory being not compatible with the Constitution, it is not necessary to answer Question No.3.

Question No.4 To find out as to whether Entry Tax levied by different States in the present batch of cases violates Article 301 of the Constitution, each statute has to be looked into and examined as per our discussions and conclusions as above. A law made by State Legislature complying clause(a) of Article 304 and not containing any restriction on the freedom of trade, commerce and intercourse need not comply Article 304(b). However, a law even though complies with Article 304(a)but contains restrictions on freedom of trade, commerce and intercourse has to be routed through proviso to clause (b) of Article 304 of the Constitution. The compliance of Article 304(b) proviso whether required or not shall depend on the nature and content of the State legislation. Answer to incidental questions.

(1) Levy of taxes is an attribute of a sovereign State as per Constitutional scheme and limited to the extent as provided in the Constitution.

(2) Article 245 read with Article 246 recognises the exclusive power of the State to make laws including law of levying taxes on subject matter enumerated in List II of VIIth Schedule in accordance with limitations and restrictions contained in the Constitution of India.

(3) The power to make law and levy taxes reserved in favour of the State under Article 246 read with List II of VIIth Schedule is subject to Part XIII of the Constitution. Article 245 has to be read along with Article 246 for finding out the source of the legislative power.

(4) Part XIII (including Article 301) of the Constitution to which legislative power of State is subject, does not have effect of denuding any sovereign power of the State or effecting the federal structure of the Constitution.

(5) The levy of taxes is presumed to be in public interest.

(6) Levy of taxes which may be presumed to be in public interest still has to comply with Part XIII of the Constitution for it to be justified as reasonable restriction.

(7) Imposition of restriction by way of tax legislation under Article 304(b) is part of constitutional scheme and Presidential sanction has been provided to keep a check on the legislative power of the State impeding freedom of trade, commerce and intercourse. All legislative powers under the Constitution are subject to judicial review and the mere fact that a legislation passed under Article 304(b) is also subject to judicial review, in no manner, militants against the Constitutional scheme.

(8) There is no question of affecting the separation of power between the Legislature and judiciary on the ground that levy of taxes under Article 304(b) which contains restriction to the freedom of trade, commerce and intercourse have to be routed through the President of India as per the Constitutional scheme.

The Constitution contains large number of provisions including Article 304(b) where a State legislation is subject to Presidential sanction which provisions are in accordance with the Constitutional scheme and does not affect the separation of power between the Legislature and judiciary. Article 304(b) enables the State Legislature to frame legislations containing restriction on freedom of trade, commerce and intercourse after routing the legislation through proviso to Article 304(b). The question of judicial review arises only when there is challenge to such legislation. Judicial review of such legislation in no manner affects the separation of power.

(9) The compensatory tax theory as propounded in Automobile Transport is not compatible with the Constitutional scheme as delineated in the Part XIII of the Constitution. Framers of the Constitution have provided for all exceptions under which freedom of trade, commerce and intercourse guaranteed under Article 301 can be overridden, the compensatory tax not being included as one of the exceptions, the same cannot be added as an exception by any judicial interpretation. The compensatory tax theory brings dichotomy which is inconsistent with the language employed in Article 301.

...........................J. ( ASHOK BHUSHAN )

NEW DELHI,

NOVEMBER 11 , 2016].

[1]

[2]Journey Started from Atiabari Tea Co., Ltd. V. The State of Assam and Ors., A.I.R 1961 S.C 232 [hereinafter 'Atiabari']; continued in Automobile Transport (Rajasthan) Ltd. V. The State of Rajasthan, A.I.R 1962 S.C 1406 [hereinafter 'Automobile']. Doubted for first time in G. K. Krishnan v. State of Tamil Nadu, A.I.R 1975 S.C 583 [hereinafter 'GK Krishnan']. Dilution of compensatory took place in Bhagatram Rajeev Kumar v. CIT, MP, 1995 Supp. (1) S.C.C 673 [hereinafter 'Baghatram'] and State of Bihar v. 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 [hereinafter 'Jindal (3)'].

[3]

[4]Lord Denning, Family Story, p. 207 (1999])

[5]

[6]Jindal Strips Ltd. v. State of Haryana, [2003]] 129 S.T.C 534

[7]

[8]2003] (8) S.C.C 60

[9]

[10]2006 (7) S.C.C 271

[11]

[12](2009]) 21 V.S.T 10 (P & H) [13]

[14]2009] (7) S.C.C 339.

[15]

[16] Questions are-

1.Whether the State enactments relating to levy of Entry Tax have to be tested with reference to both Clauses (a) and (b) of Article 304 of the Constitution for determining 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 compensatory character of the Entry Tax.

3.Whether Entry 52, List II, 7th Schedule of the Constitution like other taxing entries in the Schedule, merely provides a taxing field for exercising the power to levy and whether collection of Entry tax which ordinarily would be credited to the Consolidated Fund of the State being a revenue received by the Government of the State and would have to be appropriated in accordance with law and for the purposes and in the manner provided in the Constitution as per Article 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. 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 within which they are not sold, used or consumed?

7. Whether interpretation of Articles 301 to 304 in the context of Tax on vehicles (commonly known as 'transport') cases in Atiabari's (supra) and Automobile Transport's case (supra) apply to Entry Tax cases and if so, to what extent.

8. Whether the non discriminatory 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 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 re- imbursement/recompense for the provider of the services/facilities) to be provided in the concerned 'local area' and whether the entire State or a part thereof can be comprehended as local area for the purpose of Entry Tax?

[17]

[18]2010] (4) S.C.C 595

[19]

[20]A.I.R 1965 S.C 1636

[21]

[22]2005] (2) S.C.C 673

[23] [24]A. Lakshminath, Precedent in India (3rd Ed.) p. 178 (2009])

[25]

[26]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.R 1967 S.C 1643 (hereinafter 'Golak Nath') (11 judge bench); Naresh ShridharMirajkar v. State of Maharastra, A.I.R 1967 S.C 1 (9 judge bench); Suptd. And Remembrancer of Legal Affair v. Corp. of Calcutta, A.I.R 1967 S.C 997 (9 judge bench); RC Cooper v. UOI, (1970) 1 S.C.C 248 (11 judge bench); Madho Rao JivajiScindia v. Union of India, (1971) 1 S.C.C 85 (11 judge bench); Kesavananda Bharti v. State of Kerala, 1973 4 S.C.C 225 (hereinafter Keshavananda Bharti) (13 Judge bench); Ahmedabad St. Xavier 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 (9 judge bench); TMA Pai Foundation Case, (2002]) 8 S.C.C 481 (11 judge bench); I.R. Coelho v. State of TN, (2007]) 2 S.C.C 1 (9 judge bench).

[27]

[28]A.I.R 1971 S.C 530

[29]

[30]A.I.R 1970 S.C 564

[31]

[32] RBI v. Pearless General Finance, A.I.R 1987 S.C 1023

[33]

[34] 1939 F.C.R 18

[35]

[36] (1986) 2 S.C.C 249

[37]

[38]Ibid.

[39]

[40]Minerva Mills v. Union of India, A.I.R 1980 S.C 1789

[41]

[42] NITI Aayog (last visited on 15.10.2016]): http://niti.gov.in/state-statistics. Relevant table is http://niti.gov.in/content/gsdp-constant-2004]-05prices-2004]-05-2014]-15

[43]

[44] Ibid. [45]

[46] Ibid.

[47]

[48] Ibid.

[49]

[50]NitiAayog, GSDP and at constant prices, percent growth available at table (last visited on 15.10.2016]): http://niti.gov.in/content/gsdp- constant2004]-05prices-percent-growth-2004]-05-2014]-15

[51] [52] Tendulkar committee report. The table is available at PRS website (last visited on 15.10.2016]), http://www.prsindia.org/theprsblog/?tag=tendulkar-committee

[53]

[54] Uttar Pradesh, Census of India (last visited on 15.10.2016]) http://censusindia.gov.in/2011]census/censusinfodashboard/stock/profiles/en/I ND009_Uttar%20Pradesh.pdf Kerala http://censusindia.gov.in/2011]census/censusinfodashboard/stock/profiles/en/I ND032_Kerala.pdf

[55]

[56] (last visited on 15.10.2016]) http://censusindia.gov.in/2011]-prov- results/data_files/india/Final_PPT_2011]_chapter6.pdf

[57]

[58] Kerala State Profile, Census of India (last visited on 15.10.2016]) http://censusindia.gov.in/2011]census/censusinfodashboard/stock/profiles/en/I ND032_Kerala.pdf Haryana state profile, Census of India http://censusindia.gov.in/2011]census/censusinfodashboard/stock/profiles/en/I ND006_Haryana.pdf

[59]

[60] (Last visited on 15.10.2016]) http://www.census2011].co.in/slums.php.

[61]

[62] Constituent Assembly Debate, Vol. IX, September 8, 1949.

[63]

[64]There is only one point of Constitutional import to which I propose to make a reference. A serious complaint is made on the ground that there is too much of centralization 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 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 their legislative or executive authority. The center and the States are co-equal in this matter.It is difficult to see how such a Constitution can be called centralism. It may be that the Constitution assigns to the center too 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 center 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.

(Emphasis Supplied)

[65]

[66]State of West Bengal v. Union of India, [1964] 1 S.C.R 371 [hereinafter 'West Bengal'] S. R. Bommai, State of Karnataka v. Union of India and ANR., [1978] 2 S.C.R1, (Special Reference No. 1 of 1964) AIR 1965 SC 745, I[TC Ltd. v. Agricultural Produce Market Committee and Ors, (2002])1 S.C.R 441 [hereinafter 'I[TC'].

[67] [68]1973 (4) S.C.C 225

[69]

[70]A.I.R 2005] S.C 1646

[71]

[72]Jaganathbaksh Singh v. State of UP, (1963) 1 S.C.R 220; Dena Bank v. BhikhabhaiPrabhudas Parekh & Co., (2000]) 5 S.C.C 694; Commissioner of Income Tax, Udaipur, Rajasthan v. McDowell and co. Ltd., (2009]) 10 S.C.C 755.

[73]

[74] Cooley on taxation-volume 1, 4th ed., Ch. 2.

[75]

[76]Repealed Article 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 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 the expiration of five years from such commencement terminate or modify any such agreement if, after consideration of the report of the Finance Commission constituted under article 280, he thinks it necessary to do so."

[77]

[78]B. Shiva Rao, The Framing of India's Constitution, Vol.II, p. 69 (1967). [hereinafter 'B. Shiva Rao'] Extract from the Note and draft Articles on Fundamental Rights by Dr. K. M. Munshi, dt. March 17, 1947 -

Article V- (1) Every Citizen within the limits of the law of the Union and in accordance therewith has : (i)The right of free movement and trade within the territories of the Union.

[79]

[80] B. Shiva Rao, p. 68 Extract from the Note on Fundamental 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...'

[81]

[82]B. Shiva Rao, p. 253

[83]

[84]B. Shiva Rao, p. 701

[85]

[86]B. Shiva Rao, p. 524 and p. 610

[87]

[88] Draft of Constitution, February 21, 1948-Seventh Schedule, List II- State List 33. Regulation of trade, commerce and intercourse with other states for the purposes of the provisions of Article 244 of this Constitution.

[89]

[90] Constituent Assembly Debate, Vol. IX, 8th September 1949

[91]

[92] Longest River of Australia

[93]

[94] River in United States of America

[95]

[96] (1988) 165 C.L.R 360

[97]

[98](1990) 169 C.L.R 436

[99]

[100](2008]) 234 C.L.R 418

[101]

[102] Ibid, p. 399

[103]

[104] Common wealth v. Bank of new South Wales, (1949) 79 C.L.R 497.

[105]

[106] Ibid.

[107]

[108] Constituent Assembly Debate, Vol. IX, 8th September 1949

[109]

[110]25 U.S. (12 Wheat.) 419 (1827)

[111]

[112]4 Wheat. 316 (1819)

[113]

[114]329 U.S. 249 (1946)

[115]

[116]430 U.S. 274 (1977)

[117]

[118]486 U.S. 24 (1988)

[119]

[120]453 U.S. 609 (1981)

[121]

[122] Constitutional Law of Canada, Peter W. Hogg, Vol.1, pg. 857.

[123]

[124] Gold Seal Ltd. V. Alberta AG, (1921) 62 S.C.R 424.

[125]

[126] Ibid. at 456

[127]

[128] Ibid. at 470.

[129]

[130] (1964) 5 SCR 975 : AIR 1964 SC 925 [131]

[132] Concise Oxford Dictionary, p. 474 (10th Ed.)

[133]

[134] 1980 (4) S.C.C 463

[135]

[136] Maharaj Umeg Singh v. State of Bombay, A.I.R 1955 S.C 540.

[137]

[138]M.P.V. Sundararamier & Co. vs. The State of Andhra Pradesh and ANR., AIR 1958 SC 468

[139]

[140]B. Shiva Rao, Framing of India's Constitution, A Study (2nd Ed.), p. 699 to 707

[141]

[142]Ibid., p. 157-161

[143] [144]Ibid.

[145]

[146]Ibid., p. 253

[147]

[148] Ibid., P. 297

[149]

[150]B. Shiva Rao, Framing of India's Constitution, Vol. III, p. 9 (2nd Ed.)

[151]

[152]Ibid, p. 330

[153]

[154]Ibid., p. 453 to 454

[155]

[156]B. Shiva Rao, The Framing of India's Constitution, Vol. IV, pg. 329

[157]

[158] Video Electronics v. State of Punjab, (1990) 3 SCC 87.

[159]

[160] Ibid. p. 113

[161]

[162] Ibid, p. 106-107.

[163] [164] Constituent Assembly Debates, 1949, vol. IX, Page 1145. '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 the general public and are not inconsistent with the provision of Article 13 be substituted.'

[165]

[166] Constituent Assembly debates, 1949, Vol. IX, p. 1125.

[167]

[168]9 Judges decisions : Ahmedabad St. Xaviers College Society v. State of Gujarat (1974) 1 SCC 717; Indra Sawhney v. Union of India 1992 Supp (3) SCC 217; Supreme Court Advocates-on-Record Association v. Union of India (1993) 4 SCC 441; S.R.Bommai v. Union of India (1994) 3 SCC 1; Attorney General of India v. Amratlal Prajivandas (1994) 5 SCC 54; Mafatlal Industries Ltd v. Union of India (1997]) 5 SCC 536; Special Reference No. 1 of 1997] (1997]) 7 SCC 739; I. R. Coelho Vs. State of Tamil Nadu (2007]) 2 SCC 1.

[169]

[170] P.S. Deshmukh : Constituent Assembly Debates, Vol. IX, pp. 1131; see also: B. Shiva Rao, The Framing of India's Constitution - A study, p. 704 (1978)

[171]

[172] Justice S K Das : (1963) 1 SCR 491, Para 10, pg. 520

[173]

[174] Cri De Coeur :

(i) According to Merriam-Webster: passionate ou[TCry (as of appeal or protest)

(ii) According to Oxford Dictionary: A passionate appeal, complaint or protest.

[175]

[176] 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.

[177]

[178] Article 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 or the territory of India as may be required in the public interest.

[179]

[180] Article 303 : Restrictions on the legislative powers of the Union and of the States with regard to trade and commerce :

(i) Notwithstanding anything in article 302, neither Parliament nor the Legislature of a State shall have power to make any law giving, or authorizing the giving of, any preference to one State over another, or making, or authoring 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.

(ii) 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.

[181]

[182] Article 304 : 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 restrictions on the freedom of trade, 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.

[183]

[184] (Chapter 22 Part. 699)

[185]

[186] (supra at page 703)

[187]

[188] (1961) 1 SCR 809

[189]

[190] (1963) 1 SCR 491

[191]

[192] Id. at p-637

[193]

[194] Id. at p-523 [195]

[196] (1964) 5 SCR 975

[197]

[198] Id. at p-985

[199]

[200] Id. at p. 986

[201]

[202] [1972] 4 SCC 635

[203]

[204] [1974] 2 SCC 777

[205]

[206] [1975] 1 SCC 375

[207]

[208] [1981] 2 SCC 318, 1981 SCC (Tax) 103

[209]

[210] [1983] 3 SCC 237, 1983 SCC (Tax) 162

[211]

[212] AIR (1983) SC 1283 , (1984) Supp SCC 326, (1984) SCC (Tax) 206

[213]

[214] [1984] 1 SCC 168

[215]

[216] [l988] 4 SCC 290, (1988) SCC (Tax) 506

[217]

[218] (1981) 2 SCC 318

[219]

[220] [1975] 1 SCC 375

[221]

[222]

[1995 Supp (1) SCC 673]

[223]

[224] (1980) 4 SCC 697

[225]

[226] (1996) 9 SCC 136

[227]

[228] (1990) 1 SCC 12

[229]

[230] (2003]) 8 SCC 60 [231]

[232] (2006) 7 SCC 241

[233]

[234] (1992) Supp 2 SCC 651

[235]

[236] (2002]) 8 SCC 481

[237]

[238] (1964) 1 SCR 371

[239]

[240] (Id at p. 396)

[241]

[242] (Id at p.396)

[243]

[244] (1961) 1 SCR 413

[245]

[246] (1994) 3 SCC 1 [247]

[248] (2002]) 9 SCC 232

[249]

[250] (2006) 7 SCC 1

[251]

[252] (2012]) 7 SCC 106

[253]

[254] (Indian Reprint 2005])

[255]

[256] AIR (1963) SC 1667

[257]

[258] (1963) 1 SCR 220

[259]

[260] (1992) 2 SCC 411

[261]

[262] (2000]) 5 SCC 694

[263]

[264] AIR (1955) SC 540

[265]

[266] (1966) Supp SCR 81

[267]

[268] (1946) FCR 111

[269]

[270] (1953) 1 BLJR 48

[271]

[272] (1997]) 7 SCC 339

[273]

[274] (1985) 1 SCC 641

[275]

[276] (1987) 1 SCC 38

[277]

[278] (1988) 1 SCC 266

[279]

[280] (1989) 3 SCC 634

[281]

[282] (1989) 3 SCC 677

[283]

[284] (1994) 5 SCC 198

[285]

[286] (1986) Supp. 1 SCC 201

[287]

[288] AIR (1950) SC 468

[289]

[290] (1968) 3 SCR 829

[291]

[292] (1974) 4 SCC 408 [293]

[294]14th Edition, page 190- in foot note 91. Bengal Immunity Co.Ltd. v. State of Bihar, AIR 1955 SC 661, p.676 : (1955) 2 SCR 603. See also Golaknath v. State of Punjab, AIR 1967 SC 1643, p. 1658:1967 (2) SCR 762, where marginal note to Article 368 was referred.

[295]

[296] (1964) 4 SCR 280

[297]

[298] (1953) 4 SCR 1069

[299]

[300] (1986) 4 SCC 447

[301] [302] (1964) 4 SCR 280

[303]

[304] Id. at p. 530

[305]

[306] (1951) 2 SCR 127

[307]

[308] 1961 (3) SCR 77

[309]

[310] 1962 (2) SCR 983

[311]

[312] (1962) Supp. (2) SCR 1

[313]

[314] (1963) 1 SCR 220

[315]

[316] (1989) 3 SCC 634

[317]

[318] AIR (1963) SC 1237

[319]

[320] (1963) Suppl.(2) SCR 435

[321]

[322] AIR (1964) SC 1729

[323]

[324] (1968) 3 SCR 829

[325]

[326] (1966) 1 SCR 865

[327]

[328] (1970) 1 SCR 700

[329]

[330] (1969) 2 SCR 544

[331]

[332] (1977) 1 SCC 234

[333]

[334] (1980) 4 SCC 697

[335]

[336] (1988) 2 SCC 568

[337]

[338] (1990) 3 SCC 87

[339]

[340] (Id. at p. 112, Para 35)

[341]

[342] (1996) 11 SCC 39

[343]

[344] (1996) 11 SCC 39

[345]

[346] (1961) 3 SCR 242

[347]

[348] (1961) 3 SCR 707

[349]

[350] (1963) Supp. 2 SCR 216

[351]

[352] (1995) 1 SCC 351

[353]

[354] (Permanent Ed. Vol. 19A)

[355]

[356] (IInd Ed. Vol. II, p. 59)

[357]

[358] (4th Ed. Vol. III, Id. at p. 3134)

[359]

[360] (1989) 3 SCC 488

[361]

[362] (2007]) 7 SCC 527

[363]

[364] (2002]) 5 SCC 203

[365]

[366] (2000]) 1 SCC 688 (Pr. 24)

[367]

[368] 1942 F.C.R.90

[369]

[370] AIR (1945) PC 98

[371]

[372] AIR (1950) SC 11

[373]

[374] (1962) Supp. 1 SCR 282

[375]

[376] (1980) 2 SCC 410

[377]

[378] (1971) 2 SCC 779 [379]

[380] (1996) 3 SCC 105

[381]

[382] (1980) 3 SCC 330

[383]

[384] (2005]) 2 SCC 515

[385]

[386] (1983) 4 SCC 45

[387]

[388] (2004]) 10 SCC 2011]

[389]

[390] (1963) 3 SCR 787

[391]

[392] Supra note 109

[393]

[394] (1989) 3 SCC 677

[395]

[396] (1970) 1 SCC 248

[397]

[398] (1950) 1 SCR 88

[399]

[400] (1972) 2 SCC 788

[401]

[402] (1978) 1 SCC 248


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