http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8

PETITIONER:

STATE OF TAMIL NADU, ETC.

Vs.

RESPONDENT:

SITALAKSHMI MILLS, ETC.

DATE OF JUDGMENT21/12/1973

BENCH:

MATHEW, KUTTYIL KURIEN

BENCH:

MATHEW, KUTTYIL KURIEN

RAY, A.N. (CJ)

KHANNA, HANS RAJ

ALAGIRISWAMI, A.

BHAGWATI, P.N.

CITATION:

1974 AIR 1505 1974 SCR (3) 1

1974 SCC (4) 408

CITATOR INFO :

RF 1975 SC1604 (3)

RF 1988 SC 567 (14)

ACT:

Central Sales Tax Act--S. 8(2)(b)--If violative of arts.

301, 302 and 303(1) of the Constitution.

HEADNOTE:

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 Seventh Schedule.

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).

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8

The High Court allowed the writ petitions.

Allowing the appeals to this Court by the State,

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, [1968] 3 S.C.R.

829 followed.

JUDGMENT:

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8

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 of clause

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8

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)[1953] S.C.R. 1069.

(2) [1955] 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 leviable.

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;

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8

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)

tran-

5

sactions 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 was higher.

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8

Sales

(1) [1961] 1 S.C.R. 809.

(2) [1963] 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 is higher.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8

(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 Isaacs, J.

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 intraState

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 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 is valid.

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.

9