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CASE NO.:

Appeal (civil) 4998 of 2000

PETITIONER:

M/S SHARMA TRANSPORT REP.BY SHRI D.P.SHARMA

Vs.

RESPONDENT:

GOVERNMENT OF A.P. & ORS.

DATE OF JUDGMENT: 03/12/2001

BENCH:

B.N. Kirpal, K.G. Balakrishnan & Arijit Pasayat

JUDGMENT:

With

[C.A. No.4999-5008/2000, C.A. No. 5009/2000, C.A.

No.5010/2000, C.A. No.5011/2000, C.A. No.5012/2000]

J U D G M E N T

ARIJIT PASAYAT, J.

These appeals relate to a common judgment of the Andhra Pradesh

High Court by which challenge to Notification issued by the State

Government in G.O. Ms. No.83, Transport, Roads and Buildings (Tr.II)

Department dated 5.6.2000 was rejected. By the said Notification issued

under clause (b) of Section 9(1) of the Andhra Pradesh Motor Vehicles

Taxation Act, 1963 (in short 'the Taxation Act') an earlier order dated

1.7.1995 issued by the Transport, Roads and Buildings (Tr. II) Department,

was cancelled. The appellants who are operators of tourist buses originating

from Karnataka State (their home State) and plying in adjacent States

including the State of Andhra Pradesh filed the writ petitions assailing the

legality and constitutional validity of the said Notification dated 5.6.2000.

Case of the appellants as canvassed before the High Court and

reiterated in this Court is essentially as follows:

Vehicles of the appellants are covered by the tourist vehicles permits

issued by the State Transport Authority, Karnataka under Rule 64(1) of the

Karnataka Motor Vehicles Rules and the authorization certificates issued by

the same authority under the Motor Vehicles (All India Permit for Tourist

and Transport Operators) Rules, 1993 (in short 'permit rules) and also the

recognition certificates issued by the Director of Tourism, Bangalore under

the said Rules. By virtue of these permits and certificates, tourist vehicles of

the appellants are authorized to ply in certain contiguous States including the

State of Andhra Pradesh. Central Government after discussions with the

State Governments and with their consent formulated policies in the matter

of concessions to be extended to tourist vehicles. A Notification dated

1.7.1995 was issued pursuant to a directive of the Central Government and

its withdrawal is clearly unconstitutional. Rule 1(4) of the Permit Rules

makes it clear that the conditions prescribed in Rules 82 to 85A of the

Central Motor Vehicles Rules, 1989 (in short 'the Central Rules') do not

apply to permits granted under the scheme governed by the Permit Rules.

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Therefore, in the garb of levying taxes on fares and freights, the directives of

the Central Government are being violated and the same is impermissible.

With reference to Articles 73, 256 and 257 of the Constitution of India 1950

(for short 'the Constitution'), it is submitted that the directives of the Central

Government are binding and the withdrawal Notification i.e. G.O.Ms.No.83

dated 5th June, 2000 is clearly illegal. With reference to Entry 35 of List III

of the Seventh Schedule, it was submitted that the earlier Notification was in

accord with the said entry. Section 88(9) of the Motor Vehicles Act, 1988 (in

short 'the Act') throws considerable light on the controversy and similar is

the position in respect of Section 88(14) of the Act. State Legislature has no

competence to rescind or reverse the Notification conferring the benefits of

concessional rate of tax to tourist operators. State law cannot go counter to

the directives of Central Government on this subject. Therefore, the

impugned Notification is beyond the legislative power which the State

derives under Entry 57 of List II of the Seventh Schedule to the Constitution,

in view of the express language used in Entry 35 of List III and also by

virtue of the mandate contained in Article 254 of the Constitution. A plea of

promissory estoppel was also pressed into service. It was submitted that the

withdrawal of the concessional tax is an instance of arbitrary exercise of

power which is not backed by any relevant consideration. Article 256 of the

Constitution obligates the State to exercise its executive power to ensure

compliance with the laws made by Parliament. Therefore, the impugned

Notification could not have been withdrawn. In any event, after the

withdrawal of the Notification there was a repeal of the relevant provision

and without an operative Notification, taxes cannot be charged. Lastly, it

was submitted that the action is clearly violative of guarantees and

protections provided by Article 301 of the Constitution. It is to be noted that

except the last stand indicated above, all other stands were examined by the

High Court and negatived.

It was submitted by learned counsel appearing for the appellants that

reliance placed by the High Court on the decision of this Court in B.A.

Jayaram and Ors. Vs. Union of India and Ors. (1984 (1) SCC 168) is

inappropriate as factual and legal background involved are different. In any

event, some of the observations made in the said case need re-consideration

in view of what has been stated by a 7-Judge Bench in The Automobile

Transport (Rajasthan) Ltd. Vs. The State of Rajasthan and Ors. (1963 (1)

SCR 491).

Learned Solicitor General appearing for the Union of India stated that

the letter dated 30th August, 1993 issued by the Joint Secretary to the

Government of India to which reference was made in the Notification dated

1.7.1995 cannot be construed to be a directive by the Central Government to

the States. Apparently, Articles 73, 256 and 257 deal with different

situations in which directives can be issued. But the present case is one to

which none of these Articles apply. He, however, submitted that there are

certain observations in Jayaram's case (supra) which are prima facie at

variance with the views expressed by the larger Bench in the Automobile

Transport's case (supra).

Learned counsel appearing for the State of Andhra Pradesh submitted

that there was no challenge before the High Court on the question of Article

301 of the Constitution, except a vague and general plea taken in the writ

petitions. In any event, this was a case to which Article 301 of the

Constitution had no application. In fact, President's assent had been taken

and, therefore, without any plea being taken as to how the levy is not

reasonable or is not in public interest. For the first time in these appeals,

such a plea cannot be pressed into service. It was also submitted that this

was not a case of repeal and was cancellation of a Notification in terms of

Section 9 (1)(b) of the Taxation Act.

The respective stands need careful consideration. The primary

question which appears to have been urged before the High Court was

whether the letter of Joint Secretary to the Government of India dated 30th

August, 1993 is in the nature of directive. Articles 73, 256 and 257 are the

relevant provisions. Article 73 relates to the extent of executive power of the

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Union, while Articles 256 and 257deal with obligation of States and the

Union and the control of the Union over the States in certain cases

respectively. Entry 57 of List II of 7th Schedule deals with taxes on motor

vehicles. This is, however, subject to the provisions of Entry 35 of List III.

The said Entry of the Concurrent List reads as under:

"Mechanically propelled vehicles including the principles

on which taxes on such vehicles are to be levied".

By no stretch of imagination the letter dated 30th August, 1993 can be

regarded as a law laying down the principles of taxes on vehicles. It cannot

also be treated as a subordinate legislation deriving its power or force from

the Act or any other law made by the Union. It has been fairly stated by

learned Solicitor General that though reference has been made to the consent

of the various State Governments, it cannot be treated to be a directive. It

was only a request to the States to act in terms of the deliberations which

took place at the meeting of the Transport Development Council. The letter

so far as relevant reads as follows:

"No.RT-11053/1/92-MVL (Vol.II) 30th August, 1993

To:

All the Transport Secretaries of

The State Govts./Union Territory

Administrations.

Sub: Scheme for national permits for tourist coaches.

Sir,

1

2.

3. I am writing to request you to take necessary action to

incorporate these provisions relating to composite fee in the

State Motor Vehicles Taxation Rules and also issue necessary

instructions/guidelines to the State Transport Authorities for

grant of permits. It may also be clarified that the composite fee

is in lieu of all taxes.

Yours faithfully,

(C.S.Khairwal)

Joint Secretary to the

Govt. of India"

This is not a case where the theory of occupied field can be made

applicable. The Taxation Act essentially deals with fares charged from

passengers and freight collected from them. On the contrary, the Act deals

with levy on vehicles. They are conceptually different. Whatever has been

stated above in the background of Article 73 is equally applicable to Articles

256 and 257 of the Constitution. Article 256 provides that the executive

power of every State shall be so exercised as to ensure compliance with the

laws made by Parliament and any existing laws which apply in that State and

the executive power of the Union shall extend to the giving of such

directions to a State as may appear to the Government of India to be

necessary for that purpose. This Article has application only when any law

has been made by Parliament and the executive power of the State is made

subservient to it by requiring it to ensure compliance with such laws. Where

it appears to the Government of India that it is so necessary to do, directions

can be issued. Article 257 provides that the executive power of every State

shall be so exercised as not to impede or prejudice the exercise of the

executive power of the Union. Where the Government of India feels it so

necessary to do so, it can issue a direction. At the cost of repetition it may be

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noted that there is no law specifying the principles of taxation on the subject

matter of controversy so as to bring in application of either Article 256 or

Article 257 of the Constitution.

It has to be noted that clause (b) in Article 73 cannot apply to

legislative powers of the State. The expression 'agreement' referred to in the

said clause has to be considered in terms of Article 299 of the Constitution.

Article 246 deals with subject matter of laws made by Parliament and

Legislatures of States. Clause (1) of the said Article gives exclusive power

to deal with the matters enumerated in List II of the Seventh Schedule. The

expression 'for that purpose' in Article 256 refers to the requirement of

compliance with the laws made by Parliament. Article 256 operates if the

Government of India feels that the executive power of the States is being

exercised in a manner which may amount to impediment with the executive

power of the Union. It has to be noted that Entry 56 of List II of the Seventh

Schedule deals with passengers and the Union has no power to levy taxes in

respect of passengers. Above being the position, there is no substance in the

plea of the appellants that the letter of the Joint Secretary to the Government

of India dated 30th August, 1993 was in the nature of a direction.

It is also submitted that Rule 1(4) of the Permit Rules is intended to

curtail the power of State to levy taxes in respect of vehicles. This plea also

is without any substance. The said rule is not intended to have the effect of

curtailing power of States to levy taxes under relevant enactments. The said

Rule reads as follows:

"1(4): The conditions prescribed in Rules 82 to 85-A of

the Central Motor Vehicles Rules, 1989 shall not apply

to the permits granted under this scheme".

Power to levy taxes on vehicles, whether mechanically propelled or

not vests solely on the State Legislature, though it may be open to the

Parliament to lay down the principles on which the taxes may be levied on

mechanically propelled vehicles in the background of Entry 35 of List III.

To put it differently, Parliament may lay down the guidelines for the levy of

taxes on such vehicles, but the right to levy such taxes vests solely in the

State Legislature. No principles admittedly have been formulated by the

Parliament. In that sense, the Government of India's communication dated

30th August, 1993 does not in any sense violate the power of the State

Legislature or its delegatee to levy or exempt taxes from time to time.

It is the stand of the appellants that what is ruled out by application of

Rule 1(4) of the Permit Rules has been indirectly brought into force.

Reference has been made to Rule 84 of the Central Rules to submit that the

levy which is permitted in terms of that rule is clearly excluded of its

application. This plea is equally without any substance as Rule 84 states that

the liability to pay taxes under the law does not cease merely on account of

obtaining a tourist permit. Said rule is not a substantive charging provision

as far as levy is concerned. The power to levy tax, to reduce or exempt the

tax and to withdraw concession granted did not have its source in Rule 84,

but are clearly founded on the taxing statutes i.e. Taxation Act. It is

nobody's case that State is authorized to levy or collect taxes only by

operation of Rule 84.

Next plea is the oft repeated one of promissory estoppel. It has to be

noted that even though a concession is extended for a fixed period, the same

can be withdrawn in public interest. In Sales Tax Officer and another Vs.

M/s Shree Durga Oil Mills and Anr. (1997 (7) SCALE 726), it has been held

by this Court that a Notification granting exemption of tax can be

withdrawn by any point of time. There cannot be estoppel against any

statute. Where it is in public interest, the Court will not interfere because

public interest must override any consideration of private loss or gain [see

Kasinka Trading & Anr. Vs. Union of India & Anr. (1995 (1) SCC 274)]. In

Shrijee Sales Corporation & Anr. Vs. Union of India (1997 (3) SCC 398), it

was observed that where there was supervening public interest, the

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Government is free to change its stand and withdraw the exemption already

granted. One such reason for changing its policy decision can be resource

crunch and the loss of public revenue. There is preponderance of judicial

opinion that to invoke the doctrine of promissory estoppel, clear, sound and

positive foundation must be laid in the petition itself by the party invoking

the doctrine and that bald expressions, without any supporting material, to

the effect that the doctrine is attracted because the party invoking the

doctrine has altered its position relying on the assurance of the Government

would not be sufficient to press into aid the doctrine. The principle of

promissory estoppel is that where one party has by his word or conduct

made to the other a clear and unequivocal promise or representation which is

intended to create legal relations or affect a legal relationship to arise in the

future, knowing or intending that it would be acted upon by the other party

to whom the promise or representation is made and it is in fact so acted upon

by the other party, the promise or representation would be binding on the

party making it and he would not be entitled to go back upon it, if it would

be inequitable to allow him to do so, having regard to the dealings which

have been taken place between the parties. The doctrine of promissory

estoppel is now well established one in the field of administrative law. The

foundation for the claim based on the principle of promissory estoppel in

public law was laid by Lord Denning in 1948 in Robertson Vs. Minister of

Pensions (1949 (1) K.B. 227). Prof. De Smith in his "Judicial Review of

Administrative Action" (4th Edition at page 103) observed that "the citizen is

entitled to rely on their having the authority that they have asserted".

Doctrine of 'Promissory Estoppel' has been evolved by the courts, on

the principles of equity, to avoid injustice.

'Estoppel' in Black's Law Dictionary, is indicated to mean that a

party is prevented by his own acts from claiming a right to the detriment of

other party who was entitled to rely on such conduct and has acted

accordingly. Section 115 of the Indian Evidence Act is also, more or less,

couched in a language which conveys the same expression.

'Promissory Estoppel' is defined as in Black's Law Dictionary as 'an

estoppel which arises when there is a promise which promisor should

reasonably expect to induce action or forbearance of a definite and

substantial character on the part of promise, and which does induce such

action or forbearance, and such promise is binding if injustice can be

avoided only by enforcement of promise'.

These definitions in Black's Law Dictionary which are based on

decided cases, indicate that before the Rule of 'Promissory Estoppel' can be

invoked, it has to be shown that there was a declaration or promise made

which induced the party to whom the promise was made to alter its position

to its disadvantage.

In this backdrop, let us travel a little distance into the past to

understand the evolution of the Doctrine of 'Promissory Estoppel'.

Dixon, J. as Australian jurist, in Grundt & Ors. Vs. The Great Boulder

Proprietary Gold Mines Ltd. (1938 (59) CLR 641), laid down as under:

"It is often said simply that the party asserting the

estoppel must have been induced to act to his detriment.

Although substantially such a statement is correct and

leads to no misunderstanding, it does not bring out

clearly the basal purpose of the doctrine. That purpose is

to avoid or prevent a detriment to the party asserting the

estoppel by compelling the opposite party to adhere to

the assumption upon which the former acted or abstained

from acting. This means that the real detriment or harm

from which the law seeks to give protection is that which

would flow from the change of position if the assumption

were deserted that led to it."

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The principle, set out above, was reiterated by Lord Denning in

Central London Property Trust Ltd. Vs. High Trees House Ltd. (1947 KB

130), when he stated as under:

"A promise intended to be binding, intended to be acted

upon, and in fact acted upon is binding"

Lord Denning approved the decision of Dixon, J. (supra) in Central

Newbury Car Auctions Ltd. Vs. Unity Finance Ltd. & Anr. (1956 (3) All ER

905). Apart from propounding the above principle on judicial side, Lord

Denning wrote out an article, a classic in legal literature, on "Recent

Developments in the Doctrine of Consideration", Modern Law Review,

Vol.15, in which he expressed as under :

"A man should keep his word. All the more so when the

promise is not a bare promise but is made with the

intention that the other party should act upon it. Just a

contract is different from tort and from estoppel, so also

in the sphere now under discussion promises may give

rise to a different equity from other conduct.

The difference may, lie in the necessity of showing

'detriment'. Where one party deliberately promises to

waive, modify or discharge his strict legal rights,

intending the other party to act on the faith of promise,

and the other party actually does act on it, then it is

contrary, not only to equity but also to good faith, to

allow the promisor to go back on his promise. It should

not be necessary for the other party to show that he acted

to his detriment in reliance on the promise. It should be

sufficient that he acted on it."

This principle has been evolved by equity to avoid injustice. It is neither in

the realm of contract nor in the realm of estoppel. Its object is to interpose

equity shorn of its form to mitigate the rigour of strict law. In Union of

India & Ors. Vs. M/s Anglo Afgan Agencies etc. (AIR 1968 SC 718), it was

inter alia observed as follows:

"We are unable to accede to the contention that the

executive necessity releases the Government from

honouring its solemn promises relying on which citizens

have acted to their detriment. Under our constitutional set

up no person may be deprived of his authority of law, if a

member of the Executive seeks to deprive a citizen of his

right or liberty otherwise than in exercise of power

derived from the law common or statute the Courts will

be competent to and indeed would be bound to protect

the rights of the aggrieved citizens."

It was further held in its summing up thus :

"Under our jurisprudence the Government is not exempt

from liability to carry out the representation made by it as

to its future conduct and it cannot on some undefined and

undisclosed ground of necessity or expediency fail to

carry out the promise solemnly made by it, not claim to

be the Judge of its own obligation to the citizen on an ex

parte appraisement of the circumstances in which the

obligation has arisen."

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In Century Spinning and Manufacturing Co. Ltd. & Anr. Vs. The

Ulhasnagar Municipal Council & Anr. (1970 (3) SCR 854), this doctrine of

promissory estoppel against public authorities was extended thus:

"This Court refused to make distinction between the

private individual and a public body to far as the doctrine

of promissory estoppel is concerned."

In M/s Motilal Padampat Sugar Mills Co. (P) Ltd. Vs. State of Uttar Pradesh

& Ors. (1979 (2) SCR 641), the doctrine of promissory estoppel was applied

to the executive action of the State Government and also denied to the State

of the doctrine of executive necessity as a valid defence. It was held that in a

republic governed by the rule of law, no one high or low, is above the law.

Every one is subject to the law as fully and completely as any other and the

Government is no exception. The Government cannot claim immunity from

the doctrine of promissory estoppel. Equity will, in a given case where

justice and fairness demands, prevent a person from exercising strict legal

rights even where they arise not in contract, but on his own Title deed or in

statute. It is not necessary that there should be some pre-existing contractual

relationship between the parties. The parties need not be in any kind of legal

relationship before the transaction from which the promissory estoppel takes

its origin. The doctrine would apply even where there is no pre-existing

legal relationship between the parties, but the promise is intended to create

legal relations and effect a legal relationship which will arise in future. It

was further held that it is indeed pride of constitutional democracy and rule

of law that the Government stands on the same footing as a private

individual so far as the obligation of the law is concerned. The former is

equally bound as the latter. Therefore, the Government cannot claim any

immunity from the doctrine of promissory estoppel and it cannot say that it

is under no obligation to act in a manner, i.e., fair and just or that it is not

bound by the considerations of honesty and good faith. In fact, the

Government should be held a high standard of rectangular rectitude while

dealing with citizens. Since the doctrine of promissory estoppel is an

equitable doctrine, it must yield where the equity so requires. If it can be

shown by the Government that having regard to the facts as they have

transpired, it would be inequitable to hold the Government or public

authority to the promise or representation made by it, the Court would not

raise an equity in favour of the promise and enforce the promise against the

Government. The doctrine of promissory estoppel would be displaced in

such a case, because on the facts, equity would not require that the

Government should be held bound by the promise made by it. But the Govt.

must be able to show that in view of the fact as have been transpired, public

interest would not be prejudiced. Where the Govt. is required to carry out

the promise the Court would have to balance, the public interest in the

Government's carrying out the promise made to the citizens, which helps

citizens to act upon and alter his position and the public interest likely to

suffer if the promises were required to be carried out by the Government and

determine which way the equity lies. It would not be enough just to say that

the public interest requires that the Govt. would not be compelled to carry

out the promise or that the public interest would suffer if the Govt. were

required to honour it. In order to resist its liability the Govt. would disclose

to the Court the various events insisting its claim to be except from liability

and it would be for the Court to decide whether those events are such as to

render it equitable and to enforce the liability against the Govt.

It is equally settled law that the promissory estoppel cannot be used

compelling the Government or a public authority to carry out a

representation or promise which is prohibited by law or which was devoid of

the authority or power of the officer of the Government or the public

authority to make. Doctrine of promissory estoppel being an equitable

doctrine, it must yield place to the equity, if larger public interest so

requires, and if it can be shown by the Government or public authority for

having regard to the facts as they have transpired that it would be inequitable

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to hold the Government or public authority to the promise or representation

made by it. The Court on satisfaction would not, in those circumstances

raise the equity in favour of the persons to whom a promise or representation

is made and enforce the promise or representation against Government or the

public authority. These aspects were highlighted by this Court in

Vasantkumar Radhakishan Vora Vs. The Board of Trustees of the Port of

Bombay (AIR 1991 SC 14), Sales-tax Officer and another Vs. M/s Shree

Durga Oil Mills and another (supra) and Dr. Ashok Kumar Maheshwari Vs.

State of U.P. and another (1998 (2) SCC 502). Above being the position, the

plea relating to promissory estoppel has no substance.

It has been pleaded as noted above that withdrawal is without any

rational or relevant consideration. In this context, it has to be noted that the

operators in the State of Andhra Pradesh are required to pay the same tax as

those registered in other states. Therefore, there cannot be any question of

irrationality. The tests of arbitrary action applicable to executive action do

not necessarily apply to delegated legislation. In order to strike down a

delegated legislation as arbitrary it has to be established that there is

manifest arbitrariness. In order to be described as arbitrary, it must be shown

that it was not reasonable and manifestly arbitrary. The expression

"arbitrarily" means: in an unreasonable manner, as fixed or done

capriciously or at pleasure, without adequate determining principle, not

founded in the nature of things, non-rational, not done or acting according to

reason or judgment, depending on the will alone. In the present cases all

persons who are similarly situated are similarly affected by the change. That

being so, there is no question of any discrimination. That plea also fails.

What remains now to be considered is plea in the background of

Article 301 of the Constitution. The said Article talks of freedom of trade,

commerce and intercourse. Imposition of a tax does not in every case

tantamount to infringement of Article 301. One has to determine whether the

impugned provision amounts to a restriction directly and immediately on the

movement of trade or commerce. In the Automobile's case (supra), this

question was elaborately and succinctly stated by this Court. Some of the

observations relevant for the present dispute are as follows:

"We have tried to summarise above the various stand

points and views which were canvassed before us and we

shall now proceed to consider which, according to us, is

the correct interpretation of the relevant articles in Part

XIII of the Constitution. We may first take the widest

view, the view expressed by Shah, J., in the Atiabari Tea

Co. case ( 1961)1 SCR 809) a view which has been

supported by the appellants and one or two of the

interveners before us. This view, we apprehend, is based

on a purely textual interpretation of the relevant articles

in Part XIII of the Constitution and this textual

interpretation proceeds in the following way. Article 301

which is in general terms and is made subject to the other

provisions of Part XIII imposes a general limitation on

the exercise of legislative power, whether by the Union

or the States, under any of the topics taxation topics as

well as other topics enumerated in the three lists of the

Seventh Schedule, in order to make certain that "trade,

commerce and intercourse throughout the territory of

India shall be free". Having placed a general limitation

on the exercise of legislative powers by Parliament and

the State Legislatures, Article 302 relaxes that restriction

in favour of Parliament by providing that that authority

"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". Having relaxed the

restriction in respect of Parliament under Article 302, a

restriction is put upon the relaxation by Article 303(1) to

the effect that Parliament shall not have the power to

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make any law giving any preference to any one State

over another or discriminating between one State and

another by virtue of any entry relating to trade and

commerce in lists I and III of the Seventh Schedule.

Article 303(1) which places a ban on Parliament against

the giving of preferences to one State over another or of

discriminating between one State and another, also

provides that the same kind of ban should be placed upon

the State Legislature also legislating by virtue of any

entry relating to trade and commerce in lists II and III of

the Seventh Schedule. Article 303(2) again carves out an

exception to the restriction placed by Article 303(1) on

the powers of Parliament, by providing that nothing in

Article 303(1) shall prevent Parliament from making any

law giving preference to one State over another or

discriminating between one State and another, if 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. This exception applies only to

Parliament and not to the State Legislatures. Article 304

comprises two clauses and each clause operates as a

proviso to Articles 301 and 303. Clause (a) of that article

provides that the Legislature of a State may "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." This clause, therefore, permits the levy on

goods imported from sister States any tax which similar

goods manufactured or produced in that State are subject

to under its taxing laws. In other words, goods imported

from sister States are placed on a par with similar goods

manufactured or produced inside the State in regard to

State taxation within the State allocated field. Thus, the

States in India have full power of imposing what in

American State legislation is called the use tax, gross

receipts tax, etc., 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. As

was observed by Patanjali Sastri, C.J., in State of

Bombay Vs. United Motors ( 1953 SCR 1069), 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 States. Now, clauses (b) of

Article 304 provides that notwithstanding anything in

Article 301 or Article 303, the Legislature of a State may

by law 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. The

proviso to clause (b) says that no bill or amendment for

the purpose of clause (b) shall be introduced or moved in

the Legislature of a State without the previous sanction of

the President. This provision appears to be the State

analogue to the Union Parliament's authority defined by

Article 302, in spite of the omission of the word

'reasonable' before the word 'restrictions' in the latter

article. Leaving aside the pre-requisite of previous

Presidential sanction for the validity of State legislation

under clause (b) provided in the proviso thereto, there are

two important differences between Article 302 and

Article 304(b) which require special mention. The first is

that while the power of Parliament under Article 302 is

subject to the prohibition of preferences and

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discriminations decreed by Article 303(1) unless

Parliament makes the declaration contained in Article

303(2), the State's power contained in Article 304(b) is

made expressly free from the prohibition contained in

Article 303(1), because the opening words of Article 304

contain a non-obstante clause both to Article 301and

Article 303. The second difference springs from the fact

that while Parliament's power to impose restrictions

under Article 302 upon freedom of commerce in the

public interest is not subject to the requirement of

reasonableness, the power of the States to impose

restrictions on the freedom of commerce in the public

interest under Article 304 is subject to the condition that

they are reasonable".

Freedom granted by Article 301 is of the widest amplitude and is

subject to only such restrictions as are contained in the succeeding Articles

in Part XIII of the Constitution. The following observations in Automobile's

case are relevant:

"Even in the matter of textual construction there are

difficulties. One of the difficulties which was adverted to

during the Constituent Assembly debates related to the

somewhat indiscriminate or inappropriate use of the

expressions 'subject to' and 'notwithstanding' in the

articles in question. Article 302, as we have seen, makes

a relaxation in favour of Parliament. Article 303 again

imposes a restriction on that relaxation 'notwithstanding

anything in Article 302 but Article 303 relates both to

Parliament and the State Legislature, though Article 302

makes no relaxation in favour of the State Legislature.

The non obstante clause in Article 303 is, therefore,

somewhat inappropriate. Clause (2) of Article 303 carves

out an exception from the restriction imposed on

Parliament by clause (1) of Article 303. But again clause

(2) relates only to Parliament and not to the State

Legislature even though clause (1) relates to both. Article

304again begins with a non-obstante clause mentioning

both Article 301 and Article 303, though Article 304

relates only to the Legislature of a State. Article 303

relates to both the State Legislature and Parliament and

again the non obstante clause in article 304 is somewhat

inappropriate. The fact of the matter is that there is such a

mix up of exception upon exception in the series of

articles in Part XIII that a purely textual interpretation

may not disclose the true intendment of the articles. This

does not mean that the text of the articles, the words

used therein, should be ignored. Indeed, the text of the

articles is a vital consideration in interpreting them; but

we must at the same time remember that we are dealing

with the constitution of a country and the inter-

connection of the different parts of the Constitution

forming part of an integrated whole must not be lost sight

of. Even textually, we must ascertain the true meaning of

the word 'free' occurring in Article 301. From what

burden or restrictions is the freedom assured? This is a

question of vital Importance even in the matter of

construction. In Section 92 of the Australian Constitution

the expression used was 'absolutely free' and repeatedly

the question was posed as to what this freedom meant.

We do not propose to recite the somewhat chequered

history of the Australian decisions in respect of which

Lord Porter, after a review of the earlier cases, said in

Commonwealth of Australia V. Bank of New South

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Wales ( 1950 AC 235) that in the 'labyrinth of cases

decided under Section 92 there was no golden thread.'

What is more important for our purpose is that he

expressed the view that two general propositions stood

out from the decisions: (i) that regulation of trade,

commerce and intercourse among the States is

compatible with its absolute freedom, and (ii) that

Section 92 of the Australian Constitution is violated only

when a legislative or executive act operates to restrict

such trade, commerce and intercourse directly and

immediately as distinct from creating some indirect or

inconsequential impediment which may fairly be

regarded as remote. Lord Porter admitted "that 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 difference of opinion."

It seems clear, however, that since "the conception of

freedom of trade, commerce and intercourse in a

community regulated by law presupposes some degree of

restriction upon the individual", that freedom must

necessarily be delimited by considerations of social

orderliness. In one of the earlier Australian decisions

(Duncan v. The State of Queensland) (1916 (22) CLR

556), Griffith, C.J. said:

"But the word "free" does not mean extra legem, any

more than freedom means anarchy. We boast of being an

absolutely free people, but that does not mean that we are

not subject to law". (p.573)

As the language employed in Article 301 runs

unqualified the Court, bearing in mind the fact that

provision has to be applied in the working of an orderly

society, has necessarily to add certain qualifications

subject to which alone that freedom may be exercised.

This point has been very lucidly discussed in the

dissenting opinion which Fullagar,J., wrote in Mc Carter

v. Brodie [(1950) 80 CLR 432], an opinion which was

substantially approved by the Privy Council in Hughes

and Vale Proprietary Ltd. V. State of New South Wales

[(1955) AC 241]. The learned Judge gave several

examples to show the distinction between what was

merely permitted regulation and what true interference

with freedom of trade and commerce. He pointed out that

in the matter of motor vehicles most countries have

legislation which requires the motor vehicle to be

registered and a fee to be paid on registration. Every

motor vehicle 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 vehicle is being driven on the

road, every motor vehicle must carry a warning device,

such as a horn; it must not be driven at a speed or in a

manner which is dangerous to the public. In certain

localities a motor vehicle must not be driven at more than

a certain speed. The weight of the load which may be

carried on a motor vehicle on a public highway is limited.

Such examples may be multiplied indefinitely. Nobody

doubts that the application of rules like the above does

not really affect the freedom of trade and commerce; on

the contrary they facilitate the free flow of trade and

commerce. The reason is that these rules cannot fairly be

said to impose a burden on a trader or deter him from

trading: it would be absurd, for example, to suggest that

freedom of trade is impaired or hindered by laws which

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require a motor vehicle to keep to the left of the road and

not drive in a manner dangerous to the public. If the word

'free' in Article 301 means 'freedom to do whatever one

wants to do' then chaos may be the result; for example,

one owner of a motor vehicle may wish to drive on the

left of the road while another may wish to drive on the

right of the road. If they come from opposite directions,

there will be an inevitable clash. Another class of

examples relates to making a charge for the use of

trading facilities, such as, roads, bridges, aerodromes etc.

The collection of a toll or a tax for the use of a road or for

the use of a bridge or for the use of an aerodrome is no

barrier or burden or deterrent to traders who, in their

absence, may have to take a longer or less convenient or

more expensive route. Such compensatory taxes are no

hindrance to anybody's freedom so long as they remain

reasonable; but they could of 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".

It was further observed:

"After carefully considering the arguments advanced

before us we have come to the conclusion that the narrow

interpretation canvassed for on behalf of the majority of

the State cannot be accepted, namely, that the relevant

articles in Part XIII apply only to legislation in respect of

the entries relating to trade and commerce in any of the

lists of the Seventh Schedule. But we must advert here to

one exception which we have already indicated in an

earlier part of this judgment. Such regulatory measures as

do not impede the freedom of trade, commerce and

intercourse and compensatory taxes for the use of trading

facilities are not hit by the freedom declared by Article

301.They are excluded from the purview of the

provisions of Part XIII of the Constitution for the simple

reason that they do not hamper trade, commerce and

intercourse but rather facilitate them".

The following conclusions really constitute the core of the principles:

"Regulatory measures or measures imposing

compensatory taxes for the use of trading facilities do not

come within the purview of the restrictions contemplated

by Article 301 and such measures need not comply with

the requirements of the proviso to Article 304(b) of the

Constitution".

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It has to be noted that in Automobile's case (supra) as quoted above, it

was held that 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

rema`ins compensatory it cannot operate as a hindrance. A Constitution

Bench of this Court considered an identical question in M/s Sainik Motors,

Jodhpur & Ors. Vs. State of Rajasthan (AIR 1961 SC 1480).

Observations in Jayaram's case (supra) to the following effect do not

appear to have kept the said aspect in view when it was observed as follows:

"Taxes of a compensatory and regulatory character are

outside the expanse of Article 301 of the Constitution.

Regulatory measures and compensatory taxes far from

impeding the free flow of trade and commerce, often

promote such free flow of trade and commerce by

creating agreeable conditions and providing appropriate

services. All that is necessary to uphold a tax which

purports to be or is claimed to be a compensatory tax is,

"the existence of a specific, identifiable object behind the

levy and a nexus between the subject and the object of

the levy".

(underlined for emphasis)

A mere claim that tax is compensatory would not suffice. To that

extent the observations in Jayaram's case (supra) do not reflect the correct

position in law. Whether a tax is compensatory or not cannot be made to

depend on the preamble of the statute imposing it. A tax cannot also be said

not to be compensatory because the precise or specific amount collected is

not actually used to providing any facilities.

We may note here that though arguments were advanced in the

background of Article 301 of the Constitution, as has been rightly submitted

by the learned counsel for the State of Andhra Pradesh, there were no

pleadings in this regard in the writ petitions, excepting some general

statements about violation of Article 301. It has been fairly considered that

President's assent as required has been obtained. Thus the case is not

relatable to Article 301, but Article 304. With reference to clause (b) of the

said Article, it is submitted that mere obtaining assent is not sufficient, and

it has to be shown that the levy was in public interest. There was no

averment in the petitions before the High Court in this regard. There was

also no view expressed by the High Court on this issue, in the absence of

any argument or plea before it. The question whether public interest was

involved or not required a factual adjudication. Since there were no

pleadings, the State did not have an opportunity to indicate its stand. Under

the circumstances, we do not think it appropriate to consider that question

for the first time in these appeals, particularly, when factual adjudication

would be necessary.

Coming to the plea relating to repeal of the Notification, it is to be

noted that the Notification dated 1.7.1995 was issued in exercise of powers

conferred under Section 9(1)(a) of the Taxation Act, while the impugned

Notification was issued in exercise of powers conferred under Section

9(1)(6) of the said Act. It is to be noted that originally Notification was

issued under Section 3 of the said Act and its operation has not been

questioned. That being the position, there was no requirement to issue a

fresh Notification to make the levy. Notification dated 1.7.1995, did not

supersede the original Notification issued under Section 3 of the Taxation

Act.

In the result, the appeals are dismissed.

.J.

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(B.N. KIRPAL)

.J.

(K.G. BALAKRISHNAN)

J.

(ARIJIT PASAYAT)

December 3, 2001

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