State of Kerala Vs. A.B. Abdul Khadir
& Ors  INSC 159 (30 July 1969)
30/07/1969 RAMASWAMI, V.
SHAH, J.C. (CJ) GROVER, A.N.
CITATION: 1970 AIR 1912 1970 SCR (1) 700 1969
SCC (2) 363
CITATOR INFO :
F 1976 SC 182 (6) RF 1981 SC 463 (34) R 1986
SC1085 (20) RF 1990 SC 781 (74)
Constitution of India, Arts, 301 and
304--Prohibition under Art. 301 --When a tax is saved.
To avoid the decision of this Court in A. B.
Abdul Khadir v. The State of Kerala,  2 S.C.R. 741, wherein rules framed
for the issue of licences and payment of fee for storage of tobacco were 'held
to be invalid, the appellant-State promulgated Ordinance I of 1963 which was
later replaced by Luxury Tax on Tobacco (Validation) Act 9 of 1964. Consequently
the appellant-State made a demand on the respondent to repay the amount which
had been refunded to the respondent in accordance with the aforesaid judgment.
Thereupon, the respondent filed a writ
petition in the High Court. The High Court relying upon the decision of this
Court in Kalvani Stores v. State of Orissa,  1 S.C.R.
865, held that in the absence of any
production of tobacco inside the appellant-State it was not competent for the
State Legislature to impose a tax on tobacco imported from outside the State
and therefore, the provisions of the Act (9 of 1964) violated the guarantee
contained in Arts. 301 and 304 of the Constitution.
HELD: The High Court had not correctly
appreciated the import of the decision in Kalyani Stores' case. The decision
was based on the assumption that the notifications therein enhancing duty on
foreign liquor infringed the guarantee under Art. 301 and may be saved if it
fell within the exceptions contained in Art 304 of the Constitution. As no
liquor was produced or manufactured within the State the protection of Art. 304
was not available. This Court did not intend to lay down the proposition that
the imposition of a duty or tax in every case would be tantamount per se to an
infringement of Art. 301.
Only such restrictions or impediments which
directly and immediately impede the free flow of trade, commerce and
intercourse fall within the prohibition imposed by Art. 301.
A tax may in certain cases directly and
immediately restrict or hamper the flow of trade, but every imposition of tax
does not do so. Every case must be judged on its own facts and in its own
setting of time and circumstance.
In the present case the High Court had not
gone into the question whether the provisions of the Act and the notifications
constituted such restrictions or impediments as directly and immediately hamper
the free 701 flow of trade, commerce and intercourse, and, therefore, fell
within the prohibition. imposed under Art. 301 of the Constitution. Unless the
High Court first comes to the finding whether or not there is the infringement
of the guarantee under Art. 301 of the Constitution the further question as to
whether the statute is saved under Art.
304(b) does not arise and the principle laid
down in Kalyani Stores' case cannot be invoked. This case, therefore must go
back to the High Court. [709 E--710 E] Atiabari Tea Ca., Ltd. v. The State of
Assam,  1 S.C.R. 809, Automobile Transport (Rajasthan) Ltd. v. The State
of Rajasthan,  1 S.C.R. 491, Andhra Sugars Ltd. v. State of Andhra
Pradesh,  1 S.C.R. 705 and State o/Madras v. K. Nataraja Mudaliar, 
3 S.C.R. 829, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 517 of 1967.
Appeal from the judgment and order dated
October 3, 1966 of the Kerala High Court in Original Petition No. 934 of 1964.
M.R.K. Pillai, 'for the appellant.
R. Gopalakrishnan, for the respondents.
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought by certificate from the judgment of the
Kerala High Court in O.P. No. 934 of 1964.
The respondents are dealers in tobacco and
tobacco preparations and are doing business in Mattancherry in the name and
style of A.S. Bava, Tobacconist. In the year 1909, Cochin Tobacco Act 7 of 1084
(M.E.) was enacted by the Maharaja of Cochin. Section 4 of that Act prohibited
the transport, import of export, sale and cultivation of tobacco except as
permitted by the Act and Rules framed thereunder.
Section 6 of the Act gave power to the Dewan
to make rules from time to time consistent with the Act, to permit absolutely
or subject to any condition the possession for sale, or cultivation of tobacco.
In pursuance of the power given by this section the Dewan was making rules from
time to time relating to the matters specified in the Act.
Cochin State was integrated with Travancore
on April 1, 1960 in order to form the new .State of Travancore-Cochin.
On that date, after the Constitution came
into force the State of Travancore-Cochin became a Part B State and by the
Finance Act, 1960 the Central Excise and Salt Act 1 of 1944 was extended to the
Travancore-Cochin State. Section 13(2) of the Act provided that if immediately
before the first day of .April, 1960 there was in force in any State other than
Jammu & Kashmir a law corresponding to, but 702 other than, an Act referred
to in sub-s. (1) or (2) of s.
11, such law was repealed with effect from
such date. In consequence of this provision in the Finance Act rules which were
in force on April 1, 1950 were changed in Cochin and by a notification dated
August 3, 1950 the system of auction sales of A and B Class shops was done away
with and instead graded licence fees were introduced for various classes of
licences including 'C' class licences. The State of Travancore-Cochin was collecting
licence fee from the respondents for the period from August 17, 1950 to
December 31, 1967 on the strength of the said rules framed by the
Travancore-Cochin State. In 1956 the respondents filed O.P. No. 70 of 1956 in
the High Court of Kerala for the refund of the licence fee collected after
April 1, 1950 on the ground that the Cochin Tobacco Act stood repealed by the
Finance Act, 1960 because of the extension of the Central Excise and Salt Act 1
of 1944 to the Part B State of Travancore-Cochin and in consequence the
notifications issued in August 1950 and January 1961 framing new rules for the
issue of licences and prescribing fees there for under the powers conferred by
the Cochin and Travancore Acts were ab initio void because the Acts under which
the notifications .were purported to be issued stood repealed from April 1,
The petition was opposed by the appellant on
the ground that the Act and the rules were not repealed by the extension of the
Central Excise and Salt Act 1 of 1944 to TravancoreCochin State. The High Court
dismissed the writ petition holding that the tax levied by virtue of the rules
framed under the Travancore-Cochin Tobacco Acts was not a duty of excise coming
within the Union List but it was a tax on luxuries coming within entry 62 of
the State List. The respondents took the matter in appeal to this Court which
held that the rules framed under the Cochin Tobacco Act of 1084 (M.E.) and the
Travancore Tobacco Regulation of 1087 (M.E.) requiring licences to be taken out
for storage and sale of tobacco and for payment of licence fee in respect
thereof were law corresponding to the provisions of the Central Excise and Salt
Act, 1944 and hence were superseded on April 1, 1960 by virtue of s. 13(2) of
the Finance Act, 1960. Consequently, the new rules framed in August 1950 and
January. 1951 for the respective areas of Cochin and Travancore for the issue
of licences and payment of fee for storage of tobacco were invalid ab initio.
The Court did not consider it necessary to decide whether the Cochin and
Travancore Acts were within the competence of the State Legislature under Entry
62 of List II for that question would only arise if those Acts were not
repealed as corresponding law under s. 13(2) of the Finance Act.
Soon after the decision of this Court the
respondent complained to the appellant that a sum of Rs. 1,11,750 had been
illegally collected as licence fee from 1125 to 1133 M.N. On 703 April 29, 1962
the appellant refunded a sum of Rs. 73,500 but did not return the balance.
On December 16, 1963 the Government of Kerala
Promulgated Ordinance I of 1963 which was later replaced by Act 9 of 1964. The
Ordinance was promulgated in order to avoid the effect of the decision of this
Court in A.B.
Abdulkhadir & Ors v. The State of Kerala(1)
in respect of the period from August 17, 1950 to December 31, 1957.
Section 3 of the Act provides:
"For the period beginning with the 17th
day of August, 1950 and ending on the 31st day of December, 1957 every person
rending or stocking tobacco within any area to which this Act extends shall be
liable and shall be deemed always to have been liable to pay a luxury tax on
such tobacco in the form of a fee for licence for the vend and stocking of the
tobacco, at such rates as may be prescribed not exceeding the rates specified
in the schedule." Section 4 confers rule making power and states:
"(1) The Government may, by notification
in the Gazette, make rules to carry out the purposes of this Act.
(2) In particular, and without prejudice to
the generality of the foregoing power, such rules may provide for :-(i) the
prohibition of the vending of tobacco except under a licence;
(ii) the issue of licences for the vend 'and
stocking of tobacco and the procedure therefor;
(iii) classification of licences and the rate
at which tax in the form of a fee for licence may be levied for each class of
(iv) appeals from orders under the rules.
(3) The rules and notifications specified
'below purported to have been issued under the Tobacco Act of 1087 (Travancore
Act I of 1087) or the Cochin Tobacco Act VII of 1084 as the case may be, in so
far as they relate or purport to relate to the levy and collection of fees for
licences for the vend and stocking of tobacco, shall be deemed to be rules
issued ,under this (1)  Supp. S.C.R. 741.
704 section and shall be deemed to have been
in force at all material times:
. . . . . . . . .
Section 5 provides:
"Notwithstanding any judgment, decree or
order of any court, all fees for licences for the vend or stocking of tobacco
levied or collected or purported to have been levied or collected under any of
the rules or notifications specified in sub-section (39 of section 4 for the
period beginning with the 17th day of August, 1950 and ending on the 31st day of
December, 1957 shall be deemed to have been validly levied or collected in
accordance with law-as if this Act were in force on and from the 17th day of
August, 1960 and the fees for licences were a luxury tax on tobacco levied
under the provisions of this Act and accordingly (a) no suit or other
proceeding shall be maintained or continued in any court for the refund of any
fees, paid or purported to have been paid under any of the said rules or
(b) no court shall enforce a decree or order directing
the refund of any fees paid or purported to have been paid under any of the
said rules or notification." Section 6 enacts:
"Where any amount paid or purported to
have been paid as a fee for licence under any of the rules or notifications
specified in sub-section (3) of section 4 has been refunded after the 24th day
of January, 1962 and such amount would not have been liable to be refunded' if
this Act had been in force on the date of the refund,the person to whom the
refund was made shall pay the amount so refunded to the credit of the
Government in any Government treasury on or before the 16th day of April, 1964
where such amount is not so paid, the amount may be recovered from him as an
arrear of land revenue under the Revenue Recovery Act for the time being in
force." The notification dated January 25, 1951 issued under the Cochin
Tobacco Act of 1084 reads as follows:
"In exercise of the powers conferred by
section 5 of the Cochin Tobacco Act VII of 1084 as subsequently 705 amended and
as continued in force by the Travancore-Cochin Administration and Application
of Laws Act Vl of 1125 and in supersession of all previous notifications and
Rules on the subject, the following Rules are prescribed under sanction of His
Highness the Raj Pramukh for the import, export, sale, transport, possession,
disposal of things confiscated and the grant of rewards under the said Act and
for generally carrying out the provisions thereof.
. . . . . . . . .
(i) Holders (stockist or 'A' Class licences
shall be entitled to purchase tobacco from any dealer within or without the
State without any quantative restriction. This class of licencees shall sell
only to other 'A' Class licencees or to 'B' class licencees.
(ii) the annual fees for these licencees shall
be as follows:
of tobacco Maximum Minimum fee Fee payable stocked Quantity Cds Prescribed for
stocking Rs. additional quantities Rs.
tobaco 100 1500 100 for additional quantity of 100 Cds or fraction thereof.
B.Tobacco produced 100 1000 Rs 750 Do.
in India(Mfd) C.Beedi or Beedi 25 1000 Rs 750
for add it tobacco ional quantity of 25 Cds or fraction thereof D.Tobacco
preparation to the 1000 Rs 750 for additional of all kinds. Value of quantity
to 20,000 the value of 20,000 or fraction thereof.
For the purpose of calculating stockist license fee in respect of tobacco
preparations, the cost price of the article will be taken into account. The
licence fee will be realised only for the quantities brought in from outside
the State." After the enactment of Act 9 of 1964 the appellant made a
demand on the respondent to repay the amount of Rs. 73,500 which had been
refunded to the respondent in accordance with the Supreme Court judgment.
Thereupon the respondent filed writ petition 706 No. C.P. 984 of 1964 which was
allowed by the High Court on the ground that Act 9 of 1964 and the rules were
ultra vires the Constitution of India.
It was held by the High Court that in the
absence of any production of tobacco inside the Kerala State it was not
competent for the Kerala Legislature to impose a tax on tobacco imported from
outside the State and therefore the provisions of the Luxury Tax on Tobacco
(Validation) Act, 1964 violated the guarantee contained in Arts. 301 and 304 of
the Constitution. In reaching this conclusion the High Court purported to
follow the decision of this Court in Kalyani Stores v. The State of Orissa(1).
It is necessary at this stage to set out the
relevant Articles in Part XIII of the Constitution as it stood at the material
Subject to the other provisions of this Part,
trade, commerce and intercourse throughout the territory of India shall be
"Parliament may by law impose such
restrictions on the freedom of trade, commerce or intercourse between one State
and another or within any part of the territory of India as may be required in
the public interest." Article 304: ' "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 (1) [19661 1 S.C.R.
707 Legislature of a State without the
previous sanction of the President." The true scope and effect of those
Articles was the subject matter of consideration in Atiabari Tea Co. Ltd. v.
The State of Assam(1).' The majority view vas
expressed by Gajendragadkar J. at p. 860 as follows:
"In construing Art. 301 we must,
therefore, have regard to the general scheme of our Constitution as well as the
particular provisions in regard to taxing laws. The construction of Art. 301
should not be determined on a purely academic or doctrinaire considerations; in
construing the said Articles we must adopt a realistic approach and bear in
mind the essential features of the separation of powers on which our
Constitution rests. It is a federal Constitution which we are interpreting, and
so the impact of Art. 301 must be judged accordingly. Besides, it is not
irrelevant to remember in this connection that the Article we are construing
imposes a constitutional limitation on the power of the Parliament and State
Legislatures to levy taxes, and generally, but for such limitation, the power
of taxation would be presumed to be for public good and would not be subject to
judicial review or scrutiny. Thus considered we think it would be reasonable
and proper to hold that restrictions freedom from which is guaranteed by Art. 301,
would be such restrictions as directly and immediately restrict or impede the
free flow or movement of trade. Taxes may and do amount to restrictions; but it
is only such taxes as directly and immediately restrict trade that would fall
within the purview of Art. 301. The argument that all taxes should be governed
by Art. 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. If the said argument is accepted it would mean, for instance, that even
a legislative enactment prescribing the minimum wages to industrial employees
may fall under Part XIII because in an economic sense an additional wage bill
may in-directly affect trade or commerce. We are, therefore, satisfied that in
determining the limits of the width and amplitude of the freedom guaranteed by
Art. 301 a rational and workable test to apply would be: Does the impugned
restriction operate directly or immediately on trade or its movement ?"
(1)  1 S.C.R. 809.
708 In the Automobile Transport (Rajasthan)
Ltd v. The State of Rajasthan(1) the view of Gajendragadkar, J., was accepted
as correct by the majority of the Judges. The principle was reiterated by this
Court in Andhra Sugars Ltd. v. State of Andhra Pradesh(2). In that case the
question which arose was whether s. 21 of the Andhra Pradesh Sugarcane
(Regulation of Supply and Purchase) Act which authorised the State Government
to levy a tax at such rate ..not exceeding five rupees per metric tonne as may
be prescribed on the purchase of cane required for use, consumption or sale in
a factory Was constitutionally valid. It was held by this Court that normally a
tax on the sale of goods-did not ,directly impede or hamper the flow of trade
and s. 21 was no exception and was not violative of Art. 301 of the
Constitution. A similar view was expressed in the State of Madras v. K.
Nataraja Mudaliar(3) in which the question at issue was whether ss. 8(2) and
8(5) of the Central Sales Tax Act, 1956 were intra vires of Arts. 301 and 303
of the Constitution. It was pointed out that an Act which was merely enacted
for the purpose of imposing tax which was to be collected and to be retained by
the State did not amount to a 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 prevailing in different States. At p. 150 of the report Shah, J.,
speaking. for the Court observed:
"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
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 (1)  1 S.C.R. 491. (2)  1 S.C.R.
(3)  3 S.C.R. 829.
709 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.
On behalf of the appellant it was contended
that the High Court was not right in holding that the ratio of Kalyani Stores
case(1) applied to the present case and, that, Kerala Act 9 of 1964 was
violative of Art. 301 of the Constitution. The view taken by the High Court was
that in the absence of any production of tobacco inside Kerala State it was not
competent for the Kerala Legislature to enact the impugned Act under Art.
304(a) of the Constitution. In support of this view the High Court relied upon
the following passage from the judgment of this Court:
"Exercise of the power under Art. 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 Art.
304 is not available and the restriction
which is declared on the ground of trade, commerce or intercourse by Art. 301
of the Constitution remains unfettered." In our opinion the High Court has
not correctly appreciated the import of the decision of this Court in the
Kalyani Stores case(1). The appellant in that case challenged the imposition of
a duty of excise on 'foreign liquor' imported' into the Orissa State which had
been levied at Rs. 40 per L.P. Gallon until March 31, 1961 by virtue of a
notification issued in 1937 under s. 27 of the Bihar and Orissa Excise Act,
1915 and which had been enhanced with effect from April 1, 1961 by a fresh
notification. It was contended on behalf of the appellant that since no
'foreign liquor' was .manufactured within the State and consequently no excise
duty was being levied on any locally manufactured 'foreign liquor'
countervailing duty could not be charged on such liquor brought from outside
the State and that the impost was in violation of Arts. 301,303 and 304 of the
Constitution. It was held by the majority of Judges that the notification dated
March 31,1961 enhancing the levy by Rs. 30 per L.P. Gallon infringed the
guarantee of freedom under Art. 301 and may be saved only if it falls within
the exception contained in Art. 304. As no liquor was produced or manufactured
within the State, the protection of Art. 304 was not available.
The decision was based on the (1)  1
710 assumption that the notification dated
31-3-1961 enhancing duty, on foreign liquor infringed the guarantee under Art.
301 and may be saved if it fell within the
exceptions contained in Art. 304 of the Constitution. The Court did not intend
to lay down the proposition that the imposition of a duty or tax in every case
would be tantamount per se to an infringement of Art. 301. As we have already
pointed out it is well established by numerous authorities of this Court that
only such restrictions or impediments which directly and immediately impede the
free flow of trade, commerce and intercourse fall within the prohibition
imposed by Art.
301. A tax may in certain cases directly and
immediately restrict or hamper the flow of trade, but every impoSition of tax
does not do so. Every case must be judged on its own facts and in its own
setting of time and circumstance. In the present case the High Court has not gone
into the question whether the provisions of Act 9 of 1964 and the notification
dated January 25, 1951 issued under the Cochin Tobacco Act constitute such
restrictions or impediments as directly and immediately hamper free flow of
trade, commerce and intercourse and, therefore, fall within the prohibition
imposed under Art. 301 of the Constitution. Unless the High Court first comes
to the finding on the available material whether or not there is infringement
of the guarantee under Art. 301 of the Constitution the further question as to
whether the statute is saved under Art. 304Co) does not arise and the principle
laid down by this Court in Kalyani Stores case(1) cannot be invoked.
It was also said on behalf of the respondents
that the State Legislature had no power to levy and collect licence fee under
the impugned Act as it was in substance a duty of excise falling under the
Union List. The contrary viewpoint was presented on behalf of the appellant and
it was contended that the legislation falls under Entry 62 of List II and the
State Legislature was competent to enact. It is open to the parties to argue
this matter before the High Court at the time of re-hearing.
For the reasons already expressed we hold
that the appeal should be allowed and the judgment of the Kerala High Court
dated October 3, 1966 in O.P. 934 of 1964 should be set aside and the case
should go back for hearing in the light of the law laid down in this judgment.
It is desirable that the High Court should
give an opportunity to the parties to file further affidavits before taking up
the case for re-hearing.
(1)  1 S.C.R. 865.
711 On behalf of the appellants Mr. Chagla
has given an undertaking that the provisions of the Act would not be enforced
against the respondents for a month from this date.
The respondents say that they will apply. to
the Kerala High Court for stay in the meanwhile.
Y.P. Appeal allowed.