State of Tamil Nadu, Vs. Sitalakshmi
Mills,  INSC 256 (21 December 1973)
MATHEW, KUTTYIL KURIEN MATHEW, KUTTYIL KURIEN
RAY, A.N. (CJ) KHANNA, HANS RAJ ALAGIRISWAMI, A.
CITATION: 1974 AIR 1505 1974 SCR (3) 1 1974
SCC (4) 408
CITATOR INFO :
RF 1975 SC1604 (3) RF 1988 SC 567 (14)
Central Sales Tax Act--S. 8(2)(b)--If
violative of arts.
301, 302 and 303(1) of the Constitution.
Clause (b) of s. 8(2) of the Central
Sales-tax Act, 1956 enacts that in the case of goods other than declared goods
sold to persons other than registered dealers or government, sales-tax shall be
calculated at the rate of 10 per cent or at the rate applicable to the sale or
purchase of such goods inside the appropriate State, whichever is higher. Art. 301
provides that, subject to the other provisions of Part XIII, trade, commerce
and intercourse throughout the territory of India shall be free. Article 302
provides that 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. Art.
303 (1) provides that notwithstanding anything in art. 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
authorizing 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
The respondents claimed (i) that they were
not liable to be taxed at the higher rate prescribed in s. 8 (2)(b) of the
Central Sales-tax Act, 1956 on the turnover of their sales in the course of
interstate trade to government on the ground that s.8(2)(b) is violative of
arts. 301 and 303(1) of the Constitution and, therefore void ; (ii) that there
will be varying rates of tax on interstate sales in different States depending
upon their rates of sales-tax for intrastate sales and that that will lead to
the imposition of dissimilar tax on the sale of the same or similar commodities
and so the section is violative of art. 303(1).
The High Court allowed the writ petitions.
Allowing the appeals to this Court by the
HELD : (1) (a) There is no reason to hold
that s. 8(2)(b) is bad for the reason that it violates art. 301. If prevention
of evasion of tax is a measure in the public interest them can be no doubt that
Parliament is competent to make a provision for that purpose under art. 302
even if the provision would impose restrictions on the interstate trade or
commerce. [7 A, D] (b) It cannot be presumed that because the rate of tax was
10 per cent at the material time on this class of transactions or the rate
fixed by the appropriate State in respect of intrastate sales, whichever is
higher, the imposition of this rate was not in the public interest. [7 C]
Therefore, in any view of the matter, Parliament was competent to enact s.
8(2)(b) of the Act.
(2) . There is no merit in the contention
that s.8(2)(b) of the Act offends tile provisions of art. 303(1). In N. K.Nataraja
Mudaliar's case the court held that the existence of different rates of tax on
the sale of the same or similar commodity in different States by itself would not
be discriminatory as the flow of trade does not necessarily depend upon the
rates of sales-tax ; it depends upon a variety of factor such as the source of
supply, place of consumption, existence of trade channels, the rate of freight,
trade facilities, availability of efficient transport and other facilities for
carrying on the trade. (7 F) State of Madras v. N. K. Nataraja Mudaliar, 
CIVIL APPELLATE JURISDICTION: Civil Appeal
Nos. 2547-2549 of 1969.
2 From the judgment and order dated the 1st
March 1968 of the Madras High Court at Madras in Writ Petition Nos. 84 and 2356
of 1967 and Tax No. 228 of 1964.
CIVIL APPEAL Nos. 105-106 OF 1970.
From ,he Judgment and Order, dated the 1st
March, and 1st April, 1968 of the Madras High_Court in Writ Petition Nos. 983
and 687 of 1967.
S. V. Gupte and A. V. Rangam, for the
appellants (in C.A. Nos. 2457-49/69 and 105 & 106/70) B. Sen, S. D. Sharma
and S. P. Nayar, for respondent No. 2 (in 2547/69 1105 & 106/70) and
respondent no. 3 (in 105/70).
C. B. Aggarwala and Saroja Gopalakrishnan,
for respondent no. 1 (in 2547/69 & J,05/70).
N. Natesan, V. Nataraj and D. N. Gupta, for
respondent No. 1 (in 106/70).
O.P. Rana, for respondent no. 5 (in 105/70).
The Judgment of the Court was delivered by
MATHEW J.-Before the High Court of Madras, the respondents claimed that they
were not liable to be taxed at the higher rate prescribed in s. 8(2) (b) of the
Central Sales Tax Act, 1956 (hereinafter called the Act on the turnover of
their sales in the course of inter-State trade to government or unregistered
dealers even though they had not obtained 'C' or 'D' forms, as the case may be,
for the reason that s. 8(2)(b) is violative of articles 501 and 303(1) of the
Constitution and was, therefore, bad. The High Court accepted the claims by a
common judgment. These appeals are preferred against the judgment on the basis
of certificates granted by the High Court and they raise the common question,
name1y, whether s.8(2)(b) or the Act is bad for the reason that the provisions
thereof offend articles 301 and 303(1) of the Constitution.
In Larsen and Toubro Ltd. v. Joint Commercial
Tax Officer (1), the High Court of Madras held that sub-sections (2), (2A) and
(5) of s. 8 of the Act were bad for the reason that they violated the
provisions of articles 301 and 303(1) of the Constitution This was on the basis
that the different rates of tax and exemptions in the sales tax law of the
various States placed an unequal burden on the sale of same or similar goods
which impeded their free flow and movement in inter.State trade and commerce.
In the appeal preferred from the decision, this Court set aside the decision of
the High Court (see State of Madras v. N. K. Nataraja Mudaliar (2)). The
question whether s.8 (2) (b) is violative of the provisions of article 301 or
303(1) was not specifically considered in either the majority judgment
delivered by Shah, J. or in the concurring judgment of Bachawat, J.
Hegde, J., however, made certain observations
in his judgment that s. 8(2)(b) was enacted to check evasion of sales tax and
the restriction imposed by it was in the public interest.
(1) 20 S.T.C. 150.
(2) [1968 ] 3 S.C. R. 829.
3 Sales tax has been one of the most
important sources of revenue for the States. The framers of the Constitution
realised that this power of taxation was being exercised by the States in a
manner prejudicial to the free flow of trade and commerce throughout the
country as. each State, relying upon some ingredient of sale which had a
territorial nexus, levied the tax which led to multiple taxation of interState
sales. This multiple taxation increased the burden on the consuming public. The
Constitution-makers, therefore, while retaining sales tax as a source of
revenue for the States, imposed restrictions on the taxing power of the States.
Article 286 of the Constitution was one of
the articles enacted for that purpose. As framed, the article sought to put
restraints upon. the legislative power of the States ;
but the language in Which the article and
particularly the Explanation was couched, instead of clarifying the intention
of the Constituent Assembly, only darkened it. The scope of article 286 was
considered by this Court in The State of Bombay v. United Motors (India) Ltd.
(1) in an appeal to this Court in which the validity of the provisions ,of the
Bombay Sales Tax Act, 1952, was challenged. The majority of the judges who
heard the appeal held that article 286(1)(a) prohibited taxation of sales or
purchases involving inter- State elements by all States except the State in
which the goods were actually delivered for the purpose of consumption therein
and that the effect of the Explanation thereto was to convert interstate
transactions into intraState transactions and to remove them from the operation
2. This interpretation of article 286 was not
accepted by a larger Bench of this Court which heard. and decided The Bengal
lmmunity Company Limited v. The State of Bihar and Others(2). That case held
that the ban imposed by article 286 of the Constitution on the taxing powers of
the States were independent and separate and each one of them had to be got
over before a State legislature could impose tax on transactions of sale or
purchase. of goods. The case further held that the Explanation to article 286(1)(a)
determined by the legal fiction created therein the situs of the sale in the
case of transactions coming within that category and that once it is determined
by the application of the Explanation that a transaction is outside the State,
it followed that the State, with reference to which the transaction can thus be
predicated to be outside it, can never tax the transaction. The Constitution
was thereafter amended, Explanation 1 of article 286 was deleted and clauses
(2) and (3) thereto were altered by the amendment.
Simultaneously, item 92A was incorporated in
List I of the Seventh Schedule authorising Parliament to legislate for levying
tax on the sale or purchase of goods other than newspapers, where such sale or
purchase took place in the course of interstate trade or commerce and item 54
of List II was amended to exclude taxation of inter-State sales from the
competence of the State legislatures. Article 269, clause 1(g) was also amended
by clause 3 to that article and after the amendment it reads :
"Parliament may by law formulate
principles for determining when a sale or purchase of goods takes place in the
course of inter-State trade or commerce".
(1) S.C.R. 1069.
(2)  2 S.C.R. 603.
4 The effect of these amendments made by the
Constitution .(Sixth Amendment) Act, 1956, was to invest the Parliament with
exclusive authority to enact laws imposing tax on sale or purchase of goods
where such sale or purchase takes place in the course of inter-State trade or
commerce, and the tax collected by the States was to be assigned in the manner
provided by clause (2) of article 269 to the States within which the tax was
In exercise of authority conferred upon the
Parliament by article 286 and article 269, clause 3, Parliament enacted the Central
Sales Tax Act (74 of 1956). By Chapter 3 of the Act, detailed provisions were
made for imposing liability to pay, tax on inter-State sales, for registration
of dealers, fixing rates of tax and for levy and collection of tax and for
imposing penalties for breach of the provisions of the Act relating to levy and
collection of inter-State sales tax. By s. 5, every dealer was made liable to
pay tax on all sales effected by him in the course of inter-State trade or
commerce. The material part of s. 8 provides :
"8 (1) Every dealer, who in the course
of inter-State trade or trade or commerce- (a) sells to the Government any
goods ; or (b) sells to a registered dealer other than the Government goods of
the description referred to in sub-section (3) ;
shall be liable to pay tax under this Act,
which shall be three per cent of his turnover.
(2) The tax payable by any dealer on his
turnover in so far as the turnover or any part thereof relates to the sale of
goods in the course of inter-State trade or commerce not falling within
sub-section (1)- (a) in the case of declared goods, shall be calculated at the
rate applicable to the sale or purchase of such goods inside the appropriate
State ; and (b) in the case of goods other than declared goods, shall be calculated
at the rate of ten per cent or at the rate applicable to the sale or purchase
of such goods inside the appropriate State, whichever is higher;
and for the purpose of making any such
calculation any such dealer shall be deemed to be a dealer liable to pay tax
under the sales tax law of the appropriate State, notwithstanding that he, in
fact, may not be so liable under that law." Thus, the transactions in
goods which were made subject to tax in the course of inter-State trade or
commence fall into three broad classes : (1) transactions falling within s.8(1)
ie. all sales to Government and sales to a registered dealer other than the
Government of goods referred to in sub- section (3) of s. 8; (2) transactions
falling within s.- 8(2)(a) i.e. sales in respect of declared goods and (3) transactions
falling within s.8(2)(b) i.e. sales (not falling within (1)) in respect of
goods other than declared goods.
Sales of goods in category (1) were declared
exigible to a tax of 3 per cent on the turnover. On sales of declared goods,
tax was to be calculated at the rate applicable to the sale or purchase of such
goods inside the appropriate State. On turnover of sale of goods not falling
within categories (1) and (2), the rate was ten per cent or the rate applicable
to the sale or purchase of such goods in- side the appropriate State, whichever
Article 301 provides "Subject to the
other provisions of this Part (Part XIII), trade, commerce and intercourse
throughout the territory of India shall be free".
The freedom of trade so declared is against
the imposition of barriers or obstructions within the State as well as
inter-State: all restrictions which directly and immediately affect the
movement of trade are declared by article 301 to be ineffective. 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. That general limitation is relaxed in favour of Parliament by
article 302 which provides:
"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".
In Atiabari Tea Co. Ltd. v. The State of
Assam and Others (1) Gajendragadkar, J. speaking for himself Wanchoo and Das
Gupta, JJ. observed :
We think it would be reasonable and proper to
hold restrictions, freedom from which is guaranteed by article would be such
restrictions as directly and immediately or impede the free flow or movement of
trade." In Automobile Transport (Rajasthan) Ltd. v. The State of Rajasthan
and Others (2), the Court practically agreed with the view of the majority in
Atiabari Tea Co. Ltd.'s case but added a clarification that a regulatory
measure or a measure imposing a compensatory tax for the using of trading
facilities would not come within the purview of restrictions contemplated by
article 301. 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 (supra) proceeds on the basis that tax under the Central
Sales (1)  1 S.C.R. 809.
(2)  Supp. 2 S.C.R. 435.
6 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.
Bachawat , J. in his judgment in the case
said that if a tax on intraState 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 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.
As already stated, s. 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 ten 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 them-selves 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" In other
words, it was to discourage inter-State sale to unregistered dealers that
Parliament provided a high rate of tax, namely 10 percent. But even that might
not serve the purpose if the rate applicable to intrastate of such goods was
more than 10 percent. The rate of 10 percent 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 percent or the rate applicable to intra- State sales whichever
(1) see Report of the Taxation Enquiry
Commission, 1953-54, Vol. 3, p. 57.
7 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.
But quite apart from this, the majority
judgment in State Of Madras v. N.K.Natraja Mudaliar (supra) has categorically
stated that "the exercise of the power to tax may normally be presumed to
be in the public interest". We do not think it necessary to go into the question
whether it is open to the Court to conduct an enquiry whether the levy of a tax
is them imposition of a restriction on the freedom of trade and commerce in the
public interest. It cannot be presumed, because the rate of tax was 10 percent
at the material time on this class of transaction or them rate fixed by the
appropriate State in respect of intrastate sales, whichever was higher, the
imposition of this rate was not in the public interest Therefore, in any view
of the matter.
Parliament was competent to, enact s. 8(2)
(b) of the Act.
In other words, even if it be assumed that
the tax at the higher rate imposed under s.8(2) (b) places restrictions, on the
freedom of trade and commerce throughout the territory of India, as Parliament
is competent to impose restrictions on that freedom in the public interest and
as the imposition of a tax is normally to be presumed in the public interest,
we see no reason to hold that s. 8(2) (b) is bad for the reason that it
violates article 301.
As regards the contention that s.8(2) (b) is
violative of article 303(1) in that there will be varying rates of tax on
inter-State sales in different States depending upon their rates of sales tax
for intra-State sales and that that will lead to the imposition of dissimilar
tax on them sale of same or similar commodities, it is enough to state that
this, question has been considered by this Court in State of Madras A,. N. K.
Nataraja Mudaliar (supra) and the Court has rejected the contention. The Court
said that the existence of different rates of tax on the sale of the same or
similar commodity in different States by itself would not be discriminatory as
the flow of trade does not necessarily depend upon the rates of sales tax; it
depends, according to the Court, 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 the trade. The Court referred to the observations of
in King v. Barger (1) and said :
" The Central Sales tax though levied
for and collected in the name of the Central Government is a part of the
sales-tax levy imposed for the benefit of the States. By leaving it to the
States to levy sales-tax in respect of a commodity on intra State transactions
no discrimination is practised;
and by authorising the State from which the
movement of goods commences to levy on transactions of sale Central sales-tax,
at rates prevailing in the State, subject to the limitation already set out, in
our judgment, no discrimination can be deemed to be practised." (1) (1908)
6 C. L. R. 41, at 108.
8 We think there is no merit in the
contention that s.8(2) (b) of the Act offends the provision of article 303(1).
We, therefore, set aside the decision of the
High Court and hold that s. 8(2) (b) does not offend articles 301 and 303 and
Civil Appeals No. 2547-2549 of 1969 are
allowed with costs.
In Civil Appeals No. 105-106 of 1970, the
respondents submitted that they have raised other contentions before the High
Court and that those contentions were not considered by the High Court and will
have now to be considered by it. We allow these appeals with costs and remit
the cases to the High Court for consideration of the other questions raised.
One hearing fee.
P.D.R Appeals allotted.