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PETITIONER:

VIDEO ELECTRONICS PVT. LTD. AND ANR. ETC. ETC.

Vs.

RESPONDENT:

STATE OF PUNJAB & ANR. ETC. ETC.

DATE OF JUDGMENT22/12/1989

BENCH:

MUKHARJI, SABYASACHI (CJ)

BENCH:

MUKHARJI, SABYASACHI (CJ)

RANGNATHAN, S.

VERMA, JAGDISH SARAN (J)

CITATION:

1990 AIR 820 1989 SCR Supl. (2) 731

1990 SCC (3) 87 JT 1989 Supl. 457

1989 SCALE (2)1483

ACT:

U.P. Sales Tax Act, 1948--Sections 4A, 5A and 48 and

Notification dated January 29, 1985 and December 26,

1985--Constitutional validity of Manufacturers of goods in

state--No liability to pay tax-Dealers selling goods import-

ed from outside state---liable to pay tax-whether discrimi-

natory, legal and permissible.

Constitution of India 1950--Articles 14, 19, 38, 39, 301

and 304-Sales Tax Law--Manufacturers of goods in the state

exempted from Sales Tax--Non-manufacturer of same goods

importing goods and selling--Liable to sales tax--Whether

valid, legal and constitutional.

HEADNOTE:

A common question of law having arisen for determination

in these petitions filed under Article 32 of the Constitu-

tion, they are disposed of by a Common Judgment, though the

petitioners--dealers are different and carry on their busi-

ness in different states and have challenged the respective

provisions of law by which their cases are governed.

The petitioners in WP 803/88 carry on the business of

selling cinematographic Idms and other equipments like

projector, sound recording and reproducing equipments, X-Ray

films etc. in the State of U.P. and in Delhi. The petition-

ers receive these goods from their manufacturers outside the

State of U.P. In U.P. there is a single point levy of Sales

Tax.

The State of Uttar Pradesh issued two notifications

under section 4A of the Uttar Pradesh Sales Tax Act and

under Section 8(5) of the Central Sales Tax Act exempting

new units of manufacturers as defined in the Act in respect

of the various goods for different periods ranging from 3 to

7 years, from payment of Sales Tax. The petitioners by these

petitions challenge the constitutional validity of these

Notifications. They have also challenged the constitutional

validity of section 4A of the Uttar Pradesh Sales Tax Act

and sections 8(5) of the Central Sales Tax Act, and the

proceedings taken by the Respondent under section 5A of

732

the said Act. The case of the petitioners is that they are

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discriminated on account of these notifications as the

manufacturers covered by these Notifications are entitled to

sell the articles manufactured by them without liability to

pay sales-tax while the manufacturers in other states and

non-manufacturers of the same article selling the same goods

in the State are liable to pay sales tax under the local

Sales Tax Act as well as under the Central Sales Tax Act.

Their contention, therefore, is that they became subject to

gross discrimination and their business was crippled. In

these premises the petitioners challenge the provisions as

ultra vires the constitution being violative of the provi-

sions of Articles 301 to 305 of part III of the Constitution

as also Articles 14 and 19 of the Constitution.

The Respondents counter the assertion of the petition-

ers. According to them the contention put forward by the

petitioners ignores the basic features of the Constitution

and also the fact that the concept of economic unity may not

necessarily be the same as it was at the time of the Consti-

tution making; the state which was technically and economi-

cally weak in 1950 cannot be allowed to remain in the same

state of affairs. The state has to give subsidy and grant

exemptions/concessions for the economic development of the

state to new industries. It was urged that if all the states

are economically strong or developed then only can economic

unity as a whole be assured or strengthened.

Dismissing the petitions, this Court,

HELD: Sales Tax Laws in all the States provide for exemp-

tion.

Power to grant exemption is inherent in all taxing

Legislations. Economic unity is a desired goal. Development

on parity is one of the commitments of the Constitution.

Directive Principles enshrined in Articles 38 and 39 must be

harmonised with economic unity as well as economic develop-

ment of developed and under-developed area. [756H; 757A-B]

Taxes may sometime amount to restrictions but it is only

such taxes as directly and immediately restrict trade that

would fail within the mischief of Art. 301. [740E]

See Atiabari Tea Co. Ltd. v. The State of Assam & Ors.,

[1961] 1 SCR 809 and Automobile Transport (Rajasthan) Ltd.

v. The State of Rajasthan & Ors., [1963] 1 SCR 491.

The taxes which do not directly and immediately restrict or

733

interfere with trade, commerce and intercourse throughout

the territory of India would therefore be excluded from the

ambit of Art. 30 1 of the Constitution. It has to be borne

in mind that sales tax has only an indirect effect on trade

and commerce. [747F]

In the instant case, the general rate applicable to

locally made goods is the same as that on imported goods.

Even supposing without admitting that Sales Tax is covered

by Art. 301 as a tax directly and immediately, hampering the

free flow of trade, it does not follow that it fails within

the exemption of Art. 304 and it would be hit by Art. 30 1.

Still the general rate of tax which is to be compared under

Art. 304(a) is at par, and the same qua the locally made

goods and the imported goods. [751G-H]

Concept of economic barrier must be adopted in a dynamic

sense with changing conditions. What constitutes an economic

barrier at one point of time often ceased to be so at anoth-

er point of time. It will be wrong to denude the people of

the state of the right to grant exemptions which flow from

the plenary powers of legislative heads in List III of the

7th Schedule of the Constitution. [752A-B]

Basically the concept of equality embodied in Articles

304(a) and 16 are the same. Article 14 enjoins upon the

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state to treat every person equal before the law while

Article 304(a) enjoins upon the state not to discriminate

with respect to imposition of tax on imported goods and the

locally made goods. [753C]

It is not that with changing times the meaning changes

but changing times illustrate and illuminate the meaning of

the expressions used. The connotation of the expressions

used takes its shape and colour in evolving dynamic situa-

tions. [757B-C]

James v. Commonwealth of Australia, [1936] AC 578 at

613; Firm A.T.B. Mehtab Majid & Co. v. State of Madras &

Anr., [1963] 2 Suppl. SCR 435; A. Hajee Abdul Shakoor & Co.

v. State of Madras, [1964] 8 SCR 217 at 225; State of Madras

v. N.K. Nataraja Mudaliar, [1968] 3 SCR 829 at 847; Andhra

Sugars Ltd. & Anr. etc v. State of Andhra Pradesh & Ors.,

[1968] 1 SCR 705; Bengal Immunity Co. Ltd. v. State of

Bihar, [1955] 2 SCR 603 at 754; State of Madhya Pradesh v.

Bhailal Bhai & Ors., [1964] 6 SCR 261 at 268-9; Rattan Lal &

Co. & Anr. v. The Assessing Authority & Anr., [1969] 2 SCR

544 at 557; India Cement & Ors. v. State of Andhra Pradesh &

Ors., [1988] 1 SCC 743; Weston Electroniks & Anr. v. State

of Gujarat & Ors., [1988] 2 SCC

734

568 at 571; C.A.F. Seeling Inc. v. Charles H. Baldwin, 79

L.Ed. 2d 1033 at 1038; Smt. Ujjam Bai v. State of U.P.,

[1963] 1 SCR 778 at 851; Coffee Board, Bangalore v. Joint

Commercial Tax Officer, Madras & Anr., [1970] 3 SCR 147 at

156; V. Guruviah Naidu & Sons v. State of Tamil Nadu & Anr.,

[1977] 1 SCR 1065 at 1070; Kathi Raning Rawat v. The State

of Saurashtra, [1952] SCR 435; Kalyani Stores v. The State

of Orissa & Ors., [1966] 1 SCR 865; Bharat General & Tex-

tiles Industries Ltd. v. State of Maharashtra, 72 STC 354;

H. Anraj v. Government of Tamil Nadu, [1986] 1 SCC 414; West

Bengal Hosiery Assn. & Ors. v. State of Bihar & Anr., [1988]

4 SCC 134; State of U. P. & Ors. v. Babu Ram Upadhya, [1961]

2 SCR 679 at 702; State of Tamil Nadu, v. Hind Stone etc.,

[1981] 2 SCR 742 at 757; State of Mysore v. H. Sanjeeviah,

[1967] 2 SCR 361; Kailash Nath & Anr. v. State of U.P. &

Ors., AIR 1957 SC 790 at 791; State of U.P. & Ors. v. Renu-

sagar Power Co. & Ors., [1988] 4 SCC 59 at 100; M/s Narinder

Chand Hem Raj & Ors. v. Lt. Governor, Administrator, U.T.,

Himachal Pradesh & Ors., [1971] 2 SCC 747 at 751 and Associ-

ated Tanners Vizianagram A.P.v.C.T.O., Vizianagram, Andhra

Pradesh & Ors., [1986] 1 SCR 969, reffered to.

JUDGMENT:

ORIGINAL JURISDICTION: Writ Petition No. 665 of 1988

(Under Article 32 of the Constitution of India).

Sanjay Parikh, M.L. Sachdev, C.S. Vaidyanathan, S.R.

Bhat, S.R. Setia, S.C. Dhanda, H.K. Puri, Harish N. Salve,

Rajiv Dutta, Anil Kumar and Sultan Singh for the Petition-

ers.

Raja Ram Agarwal, S.C. Manchanda, G.L. Sanghi, A.S.

Nambiar, Ashok K. Srivastava, R.S. Rana, P.G. Gokhale, B.R.

Agarwala, R.B. Hathikhanawala, C.M. Nayar, P.K. Manohar,

P.N. Misra, Ms. Halida Khatoon and Santhanam for the Re-

spondents.

G.L. Sanghi, Ms. Vrinda Grover, Miss Seita Vaidialingam,

Kailash Vasudev and A.C. Gulathi for the Intervenor.

The Judgment of the Court was delivered by

SABYASACHI MUKHARJI, CJ. In these several writ peti-

tions, we are concerned with the question of harmonising the

power of different States in the Union of India to legislate

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and/or give

735

appropriate directions within the parameters of the subjects

in list II of the 7th Schedule of the Constitution with the

principle of economic unity envisaged in Part XIII of the

Constitution of India. We are also concerned with the provi-

sions of exemption, encouragement/incentives given by dif-

ferent States to boost up or help economic growth and devel-

opment in those States, and in so doing the attempt of the

States to give preferential treatment to the goods manufac-

tured or produced in those States. The question essentially

is the same in all the matters but the question has to be

appreciated in the context of the provisions and the fact

situation of the different States involved in these writ

petitions. It would, therefore, be appropriate to first deal

with writ petition No. 803/88 (Niksin Marketing Associate &

Ors. v. Union of India & Anr.) which is under article 32 of

the Constitution by four petitioners.

Petitioner No. 1 in W'.P. No. 803/88 is a partnership

firm carrying on business in New Delhi. Petitioner No. 2 is

its partner and petitioner No. 3 is another partnership

business carrying on business at Kanpur in U.P. consisting

of petitioner No. 4 and other partners. The petition chal-

lenges the constitutional validity of notification No. ST-

II7558/X-9(208)-1981 U.P. Act XV-48 order 85 dated 26th

December, 1985 issued by Uttar Pradesh Govt. u/s 4A of the

Uttar Pradesh Sales Tax Act, 1948. A prior notification No.

ST-II/604-X-9(208)-198 1 U.P. Act XV-48-Order 85 dt. 29th

January, 1985 was superseded by the aforesaid notification

dt. 26th December, 1985. It also challenges the constitu-

tional validity of notification No. ST-II/8202/X-9(208)-1981

issued by Uttar Pradesh Govt. u/s 8(5) of the Central Sales

Tax Act, 1956 which superseded a previous notification. It

also challenges the constitutional validity of s. 4A of the

Uttar Pradesh Sales Tax Act, 1948 as substituted by U.P. Act

22 of 1984 and also s. 8(5) of the Central Sales Tax Act,

1956 and consequentially all actions and proceedings taken

by the respondent u/s 5A of the said Act. The respondents to

this application are the State of Uttar Pradesh, the Union

of India, and the Commissioner of Sales Tax, Uttar Pradesh.

It is stated that the petitioners carry on the business

of selling cinematographic films and other equipments like

projectors, sound recording and reproducing equipment,

industrial X-ray films, graphic art films, Photo films etc.

in the State of Uttar Pradesh and in Delhi. The petitioners

sell the goods upon receiving these from the manufacturers

from outside the State of U.P. They are dealers on behalf of

those manufacturers. The petitioners are dealers of Hindu-

stan Photo Films Mfg. Co. Ltd., a Government of India under-

taking. In

736

U.P. there is a single point levy of sales taX. The State of

U.P. had issued two notifications u/s 4A of the U.P. Sales

Tax Act and u/s 8(5) of the Central Sales Tax Act exempting

new units of manufacturers as defined in the Act in respect

of the various goods for different periods ranging from 3 to

7 years as the case may be, from payment of any sales tax.

These notifications are annexed and terms thereof are set

out in annexures A- 1 & B- 1 to the writ petition.

The notification dated 26th December, 1985 stated, inter

alia:

"The Governor is pleased to direct that in

respect of any goods manufactured in an indus-

trial unit, which is a new unit as defined in

the aforesaid Act of 1948 established in the

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areas mentioned in column 2 of the Table given

below, the date of starting production whereof

falls on or after the first day of October,

1982 but not later than 31st March, 1990, no

tax under the aforesaid Act of 1956 shall be

payable by the manufacturer thereof on the

turnover of sales on such goods for the period

specified in column 3 against each, which

shall be reckoned from the date of first sale

if such sale takes place not later than 6

months from the date of starting production

subject to certain conditions mentioned."

It is not necessary to set out the conditions. In the

annexure several districts have been mentioned. In column 2

categories have been made for exemption and have been divid-

ed in 2 categories, one in case of units with capital in-

vestment not exceeding 3 lakhs of rupees and another in

cases of the units with capital investment exceeding 3 lakhs

of rupees. For one the period of exemption is 5 years while

for the latter it is 7 years. Period of exemption various

from 3 to 7 years in different districts. More or less

similar were the terms of notification dated 29th January

1985.

The case of the petitioners is that they did not ini-

tially feel the adverse effects or discrimination on account

of these notifications. Petitioners point out that the

manufacturers covered by the said notification are entitled

to sell the articles manufactured by them without liability

to pay sales tax while the manufacturers in other States and

non-manufacturers of the same article selling the same goods

in the State are liable to pay sales tax under the local

Sales Tax Act as well as under the Central Sales Tax Act.

The petitioners found that they had become liable to pay

sales tax on their sales at 12% + 10% surcharge

737

(13.2%) under the U.P. Sales Tax Act on photographic and

graphic arts material and @ 8% + 10% surcharge (8.8%) on

medical x-ray films and chemicals and a minimum of 10% on

their inter-State turnover whereas the manufacturers in the

State of U.P. and their dealers had no tax liability by

virtue of the exemption granted under the impugned notifica-

tions. Thus the petitioners contend that the goods sold by

them became costlier by 8.8% to 13.2% depending on the item

sold compared to the goods of manufacturers in the State of

U.P. They had given a chart illustrating the position. They,

hence, contended that they became subject to gross discrimi-

nation and their business was crippled and wanted to sustain

the said contention by referring to a chart showing gross

sale prices of the products in diverse States. In the prem-

ises the petitioners challenge these provisions as ultra

vires of the Constitution of India, the rights guaranteed

under part XIII as also under articles 14 & 19(l)(g) of the

Constitution.

The question is, are these notifications valid, proper

and sustainable in the light of part XIII of the Constitu-

tion of India judged in the background of the said articles.

Appearing in support of the petition, Mr. Sanjay Parikh in

writ petitions Nos. 790,665 and 1939-40/88, Mr. C.S. Vaidy-

nathan and Mr. S.C. Dhanda in writ petition No. 761/88, Mr.

Harish N. Salve for the petitioners in writ petition No.

803/88. Miss Seita Vaidialingam, Mr. G.L. Sanghi, Kailash

Vasudev for the intervenors. Mr. Raja Ram Agarwal, Mr. G.L.

Sanghi and Mr. Nambiar for the State of U.P. and respondents

have made their elaborate submissions. These petitions have

been heard together.

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Apart from the submission that the provisions impugned

violate articles 19(l)(g) and 14 of the Constitution, and

are in violation of the principles of natural justice, the

main challenge to these provisions by Mr. Salve was that

they violated the provisions of articles 301 to 305 of Part

XIII of the Constitution of India. The contention of the

petitioners was that, subject to other provisions of Part

XIII, trade, commerce and intercourse throughout the terri-

tory of India was enjoined to be free. Article 302 of the

Constitution empowers the Parliament by law to impose such

restrictions on the freedom of trade, commerce or inter-

course between one State and another or within any part of

the territory of India as may be required in the public

interest. Article 303 indicates the restrictions on the

legislative powers of the Union and the States with regard

to trade and commerce, and stipulates that, notwithstanding

anything contained in article 302, neither Parliament nor

the legislature of the States shall have power to make any

law giving or authorising the giving of any preference to

one State

738

over another or making or authorising the making of any

discrimination between one State and another by virtue of

any entry relating to trade and commerce in any list of the

7th Schedule. Sub-clause (2) of article 303 enjoins that

nothing in clause (1) shall prevent Parliament from making

any law giving, or authorising the giving of, any preference

or making, or authorising the making of, any discrimination

if it is declared by such law that it is necessary to do so

for the purpose of dealing with a situation arising from

scarcity of goods in any part of the territory of India.

Article 304 deals with restrictions on trade, commerce and

intercourse among States, which is as follows:

"304. Restrictions on trade, commerce and

intercourse among States.--

Notwithstanding anything in Article 301 or

Article 303, the Legislature of a State may by

law--

(a) impose on goods imported from other States

or the Union territories any tax to which

similar goods manufactured or produced in that

State are subject, so, however, as not to

discriminate between goods so imported and

goods so manufactured or produced; and

(b) impose such reasonable restrictions on the

freedom of trade, commerce or intercourse with

or within that State as may be required in the

public interest;

Provided that no Bill or amendment for the

purposes of clause (b) shall be introduced or

moved in the Legislature of a State without

the previous sanction of the President."

Article 305 saves certain existing laws and laws provid-

ing for State monopolies.

Our attention was drawn to the decision of this Court in

Atiabari Tea Co. Ltd. v. The State of Assam & Ors., [1961] 1

SCR 809. There this Court was concerned with the Assam

Taxation (on goods carried by Roads and Inland Waterways)

Act, 1954 which was passed under entry 56 of list II of the

7th Schedule to the Constitution. The appellants therein

contended that the Act had violated the freedom of trade

guaranteed by article 301 of the Constitution and as it was

not passed after obtaining the previous sanction of the

President as

739

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required by art. 304(b), it was ultra vires. The respondent

therein had urged that taxing laws governed only by Part XII

and not Part XIII (which contained articles 301 & 304) and

in the alternative that the provisions of Part XIII applied

only to such legislative entries in the 7th Schedule as

dealt specifically with trade, commerce and intercourse.

Gajendragadkar, Wanchoo and Das Gupta, JJ. held that the Act

violated art. 301 and since it did not comply with the

provisions of art. 304(b) it was ultra vires and void. On

the contrary, Chief Justice Sinha held that the Assam Act

did not contravene art. 301 and was not ultra vires. Accord-

ing to the learned Chief Justice, neither the one extreme

position that art. 301 included freedom from all taxation

nor the other that taxation was wholly outside the purview

of art. 301 was correct; and that the freedom conferred by

art. 301 did not mean freedom from taxation simpliciter but

only from the erection of trade barriers, tariff walls and

imposts which had a deleterious effect on the free flow of

trade, commerce and intercourse. Justice Shah on the other

hand expressed the view that the Assam Act infringed the

guarantee of freedom of trade and commerce under art. 301

and as the Bill was not moved with the previous sanction of

the President as required by art. 304(b) nor was it validat-

ed by the assent of the President under art. 255(c), it was

ultra vires and void.

In construing the provisions with which we are concerned

herein, in our opinion, it is instructive to remind our-

selves, as was said in James v. Commonwealth of Australia,

[19361 AC 578 at 613, that the relevant provision of the

Constitution has to be read not in vacuo but as occurring in

a single complex instrument in which one part may throw

light on another, and therefore, Gajendragadkar, J. as the

learned Chief Justice then was, at p. 860 of the said re-

port, rightly in our opinion. posed the problem as follows:

"In construing Art. 301 we must, therefore,

have regard to the general scheme of our

Constitution as well as the particular provi-

sions in regard to taxing laws. The construc-

tion of Art. 301 should not be determined on a

purely academic or doctrinaire considerations;

in construing the said Article we must adopt a

realistic approach and bear in mind the essen-

tial features of the separation of powers on

which our Constitution rests. It is a federal

constitution which we are interpreting, and so

the impact of Art. 30 1 must be judged accord-

ingly. Besides, it is not irrelevant to remem-

ber in this connection that the Article 23 are

construing imposes a constitutional limitation

on the power of

740

the Parliament and State Legislatures to levy

taxes, and generally, but for such limitation,

the power of taxation would be presumed to ,be

for public good and would not be subject to

judicial review or scrutiny. Thus considered

we think it would be reasonable and proper to

hold that restrictions freedom from which is

guaranteed by Art. 301, would be such restric-

tions as directly and immediately restrict or

impede the free flow or movement of trade.

Taxes may and do amount to restrictions; but

it is only such taxes as directly and immedi-

ately restrict trade that would fall within

the purview of Art. 30 1. The argument that

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all taxes should be governed by Art. 301

whether or not their impact on trade is imme-

diate or mediate, direct or remote, adopts, in

our opinion, an extreme approach which cannot

be upheld. If the said argument is accepted it

would mean, for instance, that even a legisla-

tive enactment prescribing the minimum wages

to industrial employees may fall under Part

XIII because in an economic sense an addition-

al wage bill may indirectly affect trade or

commerce. We are, therefore, satisfied that in

determining the limits of the width and ampli-

tude of the freedom guaranteed by Art. 301 a

rational and workable test to apply would be:

Does the impugned restriction operate directly

or immediately on trade or its movement?"

It is in that light we must examine the impugned provi-

sion. It is necessary to bear in mind that taxes may and

sometimes do amount to restrictions but it is only such

taxes as directly and immediately restrict trade that would

fall within the mischief of art. 301. Mr. Salve, however,

rightly reminded us that regulatory measures or measures

imposing compensatory taxes for using trading facilities do

not come within the purview of restrictions contemplated

under art. 301. Here, it is necessary to refer to the deci-

sion of this Court in the Automobile Transport (Rajasthan)

Ltd. v. The State of Rajasthan & Ors., [1963] 1 SCR 491

which was a decision of a bench of this Court consisting of

7 learned Judges, and was concerned with the Rajasthan Motor

Vehicles Taxation Act, 1951. Sub-section (1) of s. 4 of that

Act provided that no motor vehicle shall be used in any

public place or kept for use in Rajasthan unless the owner

thereof had paid in respect of it, a tax at the appropriate

rate specified in the schedules to that Act within the time

allowed. The appellants therein were carrying on the busi-

ness of plying stage carriages in the State of Ajmer. They

held permits and plied their buses on diverse routes. There

was one route which lay

741

mainly in Ajmer State but it crossed narrow strips of the

territory of the State of Rajasthan. Another route, Ajmer to

Kishangarh, was substantially in the Ajmer State, but a

third of it was in Rajasthan. Formerly, there was an agree-

ment between the Ajmer State and the former State of Kishan-

garh, by which neither State charged any tax or fees on

vehicles registered in Ajmer or Kishangarh. Later, Kishan-

garh became a part of Rajasthan. On the passing of the

Rajasthan Motor Vehicles Taxation Act, 1951, and the promul-

gation of the rules made thereunder, the Motor Vehicles

Taxation Officer, Jaipur, demanded of the appellants payment

of the tax due on their motor vehicles for the period from

April 1, 1951 to March 31, 1954. The appellants challenged

the legality of the demand on the grounds that s. 4 of the

Act read with the Schedules constituted a direct and immedi-

ate restriction on the movement of trade and commerce with

and within Rajasthan inasmuch as motor vehicles which car-

ried passenger and goods within or through Rajasthan had to

pay tax which imposed a pecuniary burden on commercial

activity and was therefore hit by art. 301 of the Constitu-

tion and was not saved by Art. 304(b) inasmuch as the provi-

so to Art. 304(b) was not complied with, nor was the Act

assented to by the President within the meaning of art. 255

of the Constitution. It was held by Das, Kapur, Sarkar and

Subba Rao, JJ. as the learned Judges then were, that the

Rajasthan Motor Vehicles Taxation Act, 1951 did not violate

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the provisions of art. 301 of the Constitution of India and

that the taxes imposed under the Act were compensatory or

regulatory taxes which did not hinder the freedom or trade,

commerce and intercourse assured by that article. Das, Kapur

and Sarkar, JJ. held that the concept of freedom of trade,

commerce and intercourse postulated by art. 301 must be

understood in the context of an ordinary society and as part

of a Constitution which envisaged a distribution of powers

between the States and the Union, and if so understood, the

concept must recognise the need and legitimacy of some

degree of regulatory control, whether by the Union or the

States. Mr. Justice Subba Rao, as the learned Chief Justice

then was, observed that the freedom declared under art. 30 1

referred to the right of free movement of trade without any

obstructions by way of barriers, inter-State or intra-State,

or other impediments operating as such barriers; and the

said freedom was not impeded, but on the other hand, promot-

ed, by regulations creating conditions for the free movement

of trade, such as, police regulations, provisions for

services, maintenance of roads, provision for aerodromes,

wharfs etc., with or without compensation. Parliament may be

law impose restrictions, it was stated, on such freedom in

the public interest, and the States also, in exercise of

their legislative power, may impose similar restrictions,

742

subject to the proviso mentioned therein. Laws of taxation

were not outside the freedom enshrined either in Art. 19 or

301. Mr. Justice Hidayatullah, as the learned Chief Justice

then was, and Rajagopala Ayyangar and Mudholkar, JJ. held

that s. 4(1) of the Rajasthan Motor Vehicles Taxation act,

195 1 offended art. 301 of the Constitution, and as resort

to the procedure prescribed by art. 304(b) was not taken it

was ultra vires the Constitution. The pith and substance of

the Act was the levy of tax on motor vehicles in Rajasthan

or their use in that State irrespective of where the vehi-

cles came from and not legislation in respect of inter-State

trade or commerce. A tax which is made the condition prece-

dent of the right to enter upon and carry on business is a

restriction on the right to carry on trade and commerce

within art. 30 1 of the Constitution. The tax levied under

the Act was not truly a fair recompense for wear and tear of

roads but a restriction which art. 30 1 forbade. The act was

not, in its true character, regulatory. In judging the

situation it would be instructive to bear in mind the obser-

vations of Mr. Justice Das at p. 5 12 of the report, where

he observed that in evolving an integrated policy on this

subject our Constitution makers seem to have kept in mind

three main considerations which may be broadly stated thus:

first, in the larger interests of India there must be free

flow of trade, commerce and intercourse, both inter-State

and intra-State; second, the regional interests must not be

ignored altogether; and third, there must be a power of

intervention by the Union in any case of crisis to deal with

particular problems that may arise in any part of India. At

p. 523 of the report, it was reiterated that 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. Dealing

with wide interpretation Justice Das observed at p. 523-5 of

the said report as follows:

"The widest view proceeds on the footing that

Art. 301 imposes a general restriction on

legislative power and grants a freedom of

trade, commerce and intercourse in all its

series of operations, from all barriers, from

all restrictions, from all regulation, and the

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only qualification that is to be found in the

article is the opening clause, namely,

subject to the other provisions of Part XIII.

This in actual practice will mean that if the

State Legislature wishes to control or regu-

late trade, commerce and intercourse in such a

way as to facilitate its free movement, it

must yet proceed to make a law under Art.

304(b) and no such bill can be introduced or

moved in the Legislature of a State without

the previous sanction of the President. The

practi-

743

cal effect would be to stop or delay effective

legislation which may be urgently necessary.

Take, for example, a case where in the inter-

ests of public health, it is necessary to

introduce urgently legislation stopping trade

in goods which are deleterious to health, like

the trade in diseased potatoes in Australia.

If the State Legislature wishes to introduce

such a bill, it must have the sanction of the

President. Even such legislation as imposes

traffic regulations would require the sanction

of the President. Such an interpretation

would, in our opinion, seriously affect the

legislative power of the State Legislatures

which power has been held to be plenary with

regard to subjects in list II."

Mr. Justice Subba Rao, as the learned Chief Justice then

was, at page 550 of the report, observed that if a law

directly and immediately imposes a tax for general revenue

purposes on the movement of trade, it would be violating the

freedom. The learned Judge reiterated that the Court will

have to ascertain whether the impugned law in a given case

affects directly the said movement or indirectly and remote-

ly affects it.

Mr. Salve, however, sought to contend that as regards

the local sales tax, there were broadly two well accepted

propositions, namely, sales tax was a tax levied for the

purpose of general revenue. Secondly, it was neither a

compensatory tax nor a measure regulating any trade. Reli-

ance was placed on the observations of Mr. Justice Raghubar

Dayal, J. in Firm A.T.B. Mehtab Majid & Co. v. State of

Madras & Anr., [1963] 2 Suppl. SCR 435 but the context in

which the said observations were made has to be examined.

That case dealt with a petition under art. 32 of the Consti-

tution. The petitioners therein were dealers in hides and

skins in the State of Madras. The impugned sales tax assess-

ment related to turnover sales tanned hides and skins which

had been obtained from outside the State of Madras. The main

contention was that the tanned hides and skins imported from

outside and sold inside the State were, under r. 16 of the

Madras General Sales Tax Rules, subject to a higher rate of

tax than the tax imposed on hides and skins tanned and sold

within the State and this discriminatory taxation offended

art. 304 of the Constitution. The contentions of the re-

spondents therein were that sales tax did not come within

the purview of art. 304(a) as it was not a tax on the im-

port. of goods at the point of entry, that the impugned rule

was not a law made by the State legislature, that the im-

pugned rule by itself did not impose the tax but fixed the

single point at which the tax was imposed by ss. 3 & 5 of

the Act was to

744

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be levied; and that the impugned rule was not made with an

eye on the place of origin of the goods. It was held that

taxing laws can be restrictions on trade, commerce and

intercourse, if they hamper the flow of trade and if they

are not what can be termed to be compensatory taxes or

regulating measures.

Reliance was also placed by Mr. Salve on the observa-

tions of Justice Raghubar Dayal in A. Hajee Abdul Shakoor &

Co. v. State of Madras, [1964] 8 SCR 2 17 at 225. See also

the observations in State of Madras v. N.K. Nataraja Mudali-

ar, [1968] 3 SCR 829 at 847 and Andhra Sugars Ltd. & Anr.

etc. v. State of Andhra Pradesh & Ors., [1968] 1 SCR 705

where at p. 7 18 of the report it was reiterated that a sale

tax which discriminates against goods imported from other

States may impede the free flow of trade and is then invalid

unless protected by art. 304(a). It is, however, necessary

to bear in mind that in N.K.N. Mudaliar's, case (supra) at

p. 850 Mr. Justice Bachawat after referring to several cases

observed as follows:

"But, there can be no doubt that a tax on such

sales would not normally offend Article 301.

That Article makes no distinction between

movement from one part of the State to another

part of the same State and movement from one

State to another. Now, if a tax on intra-State

sale does not offend Article 301, logically, I

do not see how a tax on inter-State sale can

do so. Neither tax operates directly or imme-

diately on the free flow of trade or the free

movement of the transport of goods from the

part of the country to the other. The tax is

on the sale. The movement is incidental to and

a consequence of the sale."

There was a reference in the said judgment to the obser-

vations of Jagannathadas, J. in The Bengal Immunity Co. Ltd.

v. State of Bihar, [1955] 2 SCR 603 at 754 wherein it was

stated:

"Now it is not disputed that a tax on a purely

internal sale which occurs as a result of the

transportation of goods from a manufacturing

centre within the State to a purchasing market

within the same State is clearly permissible

and not hit by anything in the Constitution.

If a sale in that kind of trade can bear the

tax and is not a burden on the freedom of

trade, it is difficult to see why a single

point tax on the same kind of sale where a

State boundary intervenes bet-

745

ween the manufacturing centre and the consum-

ing centres need be treated as a burden,

especially where that tax is ultimately to

come out of the residents of the very State by

which such sale is taxable. Freedom of trade

and commerce applies as much within a State as

outside it. It appears to me again, with great

respect, that there is no warrant for treating

such a tax as in any way contrary either to

the letter or the spirit of the freedom of

trade, commerce and' intercourse provided

under Article 301."

It was contended that the Central Sales Tax Act ex-

hypothesi violates art. 301 of the Constitution since it is

a tax on inter-State movement of goods. Shah, J. in Mudali-

ar's case (supra) at p. 84 1 of the report observed that tax

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under the Central Sales Tax Act on interState sales, it must

be noticed, is in its essence a tax which encumbers movement

of trade or commerce, if it--(a) occasions the movement of

goods from one State to another; (b) is effected by a trans-

fer of documents of title to the goods during their movement

from one State to another. It was contended by Mr. Salve

that by exempting the local manufacturers from both local

and central sales tax, the State Govt. has clearly made the

imposition of both local and central sales tax discriminato-

ry and prejudicial to outside goods. The goods of the local

manufacturer, when sold by him, do not bear any tax whereas

the goods imported from outside the State have to bear the

burden of sales tax. It was also contended that similarly,

the goods of a 'local manufacturer, when exported from the

State of U.P. do not have to bear tax, while goods brought

into the State of U.P. and further ex- , ported in competi-

tion with the local goods have to bear the tax, so there is

clear discrimination against goods produced by manufacturers

situated outside the State. The discrimination within the

meaning of art. 301 read with art. 304 arises where there is

a difference in the rates of sales tax levied, it was sought

to be emphasised by Mr. Sanjay Parikh for some of the peti-

tioners. This proposition has been reiterated by this Court

in a large number of cases, according to counsel, and we

were referred to the observations in State of Madhya Pradesh

v. Bhailal Bhai & Ors., [1964] 6 SCR 261 at 268-9 and Mudal-

iar's case (supra) where at p. 847 Shah, J. reiterated that

imposition of differential rates of tax by the same State on

goods manufactured or produced in the State and similar

goods imported in the State is prohibited under art. 304(a).

It was also reiterated by this Court in Rattan Lal & Co. &

Anr. v. The Assessing Authority & Anr., [1969] 2 SCR 544 at

557 dealing with the Punjab General Sales Tax Act that when

a taxing State was not imposing rates of tax on imported

goods different from the rates of

746

tax on goods manufactured or produced, art. 304 had no

application. So long as the rate was the same, art. 304 was

satisfied. Reference was made to India Cement & Ors. v.

State of Andhra Pradesh & Ors., [1988] 1 SCC 743, whereas at

p. 759 this Court observed that variation of the rate of

inter-state sales tax did affect free trade and commerce and

created a local preference which was contrary to the scheme-

of Part XIII of the Constitution. To similar effect are the

observations to which Mr. Sanjay Parikh has referred us in

Weston Electronics & Anr. v. State of Gujarat & Ors.,

[1988] 2 SCC 568 at 571. Mr. Salve strongly relied on the

observations of Justice Cardozo in C.A.F. Seeling Inc. v.

Charles H. Baldwin, 79 L. Ed. 2d 1033 at 1038 where the

learned Judge observed while he was dealing with Art. (1) s.

8, clause (3) of the American Constitution which is known as

the 'Commerce Clause'--"This part of the Constitution was

framed under the dominion of a political philosophy less

parochial in range. It was framed upon the theory that the

peoples of the several States must sink or swim together and

that in the long run prosperity and salvation are in union

and not division". This passage has been cited with approval

in this Court in Atiabari's case (supra) by Gajendragadkar,

J. as aforesaid.

We were referred to the observations of Firm A.T.B.

Mehtab Majid & Co.s case [1963] 2 Suppl. SCR 435 at 445. It

was contended that the acceptance of the petitioner's case

would not conflict with the plenary power of the State to

grant exemptions under the Act because statutory powers have

to yield to constitutional inhibitions and, therefore,

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article 304(a) & (b) being envisaged to safeguard the eco-

nomic unity of the country, these must have precedence. It

was also contended that the petitions under art. 301 read

with 304(a) are clearly maintainable.

Reliance was placed in Smt. Ujjam Bai v. Stale of U.P.,

[1963] 1 SCR 778 at 85 1 and Coffee Board, Bangalore v.

Joint Commercial Tax Officer, Madras & Anr., [1970] 3 SCR

147 at 156. In light of these, it was contended by the

petitioners that the petition under art. 32 is clearly

maintainable.

The question as we see is, how to harmonise the con-

struction of the several provisions of the Constitution. It

is true that if a particular provision being taxing provi-

sion or otherwise impedes directly or immediately the free

flow of trade within the Union of India then it will be

violative of art. 301 of the Constitution. It has further to

be borne in mind that art. 301 enjoins that trade, commerce

and

747

intercourse throughout the territory of India shall be free.

The first question, therefore, which one has to examine in

this case is, whether the sales tax provisions (exemption

etc.) in these cases directly and immediately restrict the

free flow of trade and commerce within the meaning of art.

30 1 of the Constitution. We have examined the scheme of

art. 30 1 of the Constitution read with art. 304 and the

observations of this Court in Atiabari's case (supra),

as,also the observations made by this Court in Automobile

Transport, Rajasthan's case (supra). In our opinion, Part

XIII of the Constitution cannot be read in isolation. It is

part and parcel of a single constitutional instrument envis-

aging a federal scheme and containing general scheme confer-

ring legislative powers in respect of the matters relating

to list II of the 7th Schedule on the State. It also confers

plenary powers on States to raise revenue for its purposes

and does not require that every legislation of the State

must obtain assent of the President. Constitution of India

is an organic document. It must be so construed that it

lives and adapts itself to the exigencies of the situation,

in a growing and evolving society, economically, politically

and socially. The meaning of the expressions used there

must, therefore, be so interpreted that it attempts to solve

the present problem of distribution of power and rights of

the different States in the Union of India, and anticipate

the future contingencies that might arise in a developing

organism. Constitution must be able to comprehend the

present at the relevant time and anticipate the future which

is natural and necessary corollary for a growing and living

organism. That must be part of the constitutional adjudica-

tion. Hence, the economic development of States to bring

these into equality with all other States and thereby devel-

op the economic unity of India is one of the major commit-

ments or goals of the constitutional aspirations of this

land. For working of an orderly society economic equality of

all the States is as much vital as economic unity.

The taxes which do not directly or immediately restrict

or interfere with trade, commerce and intercourse throughout

the territory of India, would therefore be excluded from the

ambit of art. 301 of the Constitution. It has to be borne in

mind that sales tax has only an indirect effect on trade and

commerce.

Reference may be made to the Constitution bench judgment

of this Court in Andhra Sugar Ltd. & Anr. v. State of A. P.

& Ors., [1968] 1 SCR 705 where this Court observed that

normally a tax on sale of goods does not directly impede the

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free movement of transport. See also the observations in

Mudaliar's case (supra) where at p. 851 it was observed that

a tax on sale would not normally offend art. 301. That

748

article made nO distinction between movement from one part

of State to another part of the same State and movement from

one State to another. In this connection, reference may also

be made to the observations in Bengal Immunity's case

(supra). Both the preceding cases clearly establish that if

a taxing provision in respect of intra-State sale does not

offend art. 30 1, logically it would not affect the freedom

of trade in respect of free flow and movement of goods from

one part of the country to the other under art. 301 as well.

It has to be examined whether difference in rates per se

discriminates so as to come within articles 301 and 304(a)

of the Constitution. It is manifest that free flow of trade

between two States does not necessarily or generally depend

upon the rate of tax alone. Many factors including the cost

of goods play an important role in the movement of goods

from one State to another. Hence the mere fact that there is

a difference in the rate of tax on goods locally manufac-

tured and those imported would not amount to hampering of

trade between the two States within the meaning of art. 301

of the Constitution. As in manifest, art. 304 is an excep-

tion to art. 30 1 of the Constitution..The need or taking

resort to exception will arise only if the tax impugned is

hit by articles 301 and 303 of the Constitution. If it is

not then art. 304 of the Constitution will not come into

picture at all. See the observations in Nataraja Mudaliar's

case (supra) at pp. 843-6 of the report. It has to be borne

in mind that there may be differentiations based on consid-

eration of natural or business factors which are more or

less in force in different localities. A State might be

allowed to impose a higher rate of tax on a commodity either

when it is not consumed at all within the State or if it is

felt that the burden falling on consumers within the State,

will be more than that and large benefit is derived by the

revenue. The imposition of rates of sales tax is influenced

by various political, economic and social factors. Preva-

lence of differential rate of tax on sales of the same

commodity cannot be regarded in isolation as determinative

of the object to discriminate between one State and another.

Under the Constitution originally flamed revenue from sales

tax was reserved for the States.

In V. Guruviah Naidu & Sons. v. State of Tamil Nadu &

Anr., [1977] 1 SCR 1065 at 1070 this Court observed as

follows:

"Article 304(a) does not prevent levy of tax

on goods; what it prohibits is such levy of

tax on goods as would result in discrimination

between goods imported from other States and

similar goods manufactured or produced within

the

749

State. The object is to prevent discrimination

against imported goods by imposing tax on such

goods at a rate higher than that borne by

local goods since the difference between the

two rates would constitute a tariff wall or

fiscal barrier and thus impede the free flow

of inter-State trade and commerce. The ques-

tion as to when the 'levy of tax would consti-

tute discrimination would depend upon a varie-

ty of factors including the rate of tax and

the item of goods in respect of the sale of

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which it is levied. The scheme of items 7(a)

and 7(b) of the Second Schedule to the State

Act is that in case of raw hides and skins

which are purchased locally in the State, the

levy of tax would be at the rate of 3 per cent

at the point of last purchase in the State.

When those locally purchased raw hides and

skins are tanned and are sold locally as

dressed hides and skins, no levy would be made

on such sales as those hides and skins have

already been subjected to local tax at the

rate of 3 per cent when they were purchased in

raw form. As against that, in the case of

hides and skins which have been imported from

other States in raw form and are thereafter

tanned and then sold inside the State as

dressed hides and skins, the levy of tax is at

the rate of 1-1/2 per cent at the point of

first sale in the State of the dressed hides

and skins. This levy cannot be considered to

be discriminatory as it takes into account the

higher price of dressed hides and skins com-

pared to the price of raw hides and skins. It

also further takes note of the fact that no

tax under the State Act has been paid in

respect of those hides and skins. The Legisla-

ture, it seems, calculated the price of hides

and skins in dressed condition to be double

the price of such hides and skins in raw

state. To obviate and prevent any discrimina-

tion of differential treatment in the matter

of levy of tax, the Legislature therefore

prescribed a rate of tax for sale of dressed

hides and skins which was half of that levied

under item 7(a) in respect of raw hides and

skins."

The object is to prevent discrimination against the

imported goods by imposing tax on such goods at a rate

higher than that borne by local goods. The question as to

when the levy of tax would constitute discrimination would

depend upon a variety of factors including the rate of tax

and the item of goods in respect of the sale on which it is

levied. Every differentiation is not discrimination. The

word 'discrimination' is not used in art. 14 but is used in

articles 16, 303 & 304(a).

750

When used in art. 304(a), it involves an element of inten-

tional and purposeful differentiation thereby creating

economic barrier and involves an element of an unfavorable

bias. Discrimination implies an unfair classification.

Reference may be made to the observations of this Court in

Kathi Raning Rawat v. The State Of Saurashtra, [1952] SCR

435 where Chief Justice Shastri at p. 442 of the report

reiterated that all legislative differentiation is not

necessarily discriminatory. At p. 448 of the report, Justice

Fazal Ali noticed the distinction between 'discrimination

without reason' and 'discrimination with reason'. The whole

doctrine of classification is based on this and on the

well-known fact that the circumstances covering one set of

provisions or objects may not necessarily be the same as

these covering another set of provisions and objects so that

the question of unequal treatment does not arise as between

the provisions covered by different sets of circumstances.

Where the general rate applicable to the goods locally

made and on those imported from other States is the same

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nothing more normally and generally is to be shown by the

State to dispel the argument of discrimination under art.

304(a), even though the resultant tax amount on imported

goods may be different. Here, reference may be made to Ratan

Lal's case (supra). In the instant writ petition, in the

State of U.P. those producers or manufacturers who do not

come within the ambit of notifications, have to pay tax on

their goods at the general rate described and there is no

differentiation or discrimination qua the imported goods.

The question naturally arises whether the power to grant

exemption to specified class of manufacturers for a limited

period on certain conditions as provided by s. 4A of the

U.P. Sales Tax Act is violative of art. 304(a). It was

contended by the petitioners that Part XIII of the Constitu-

tion was envisaged for preserving the unity of India as an

economic unit and, hence, it guarantees free flow of trade

and commerce throughout India including between State and

State and as such art. 304(a), even though an exception to

art. 301, yet applies where an exemption is granted by one

State to a special class of manufacturers for a limited

period on certain conditions. It was so submitted that

either a State should grant exemption to all goods irrespec-

tive of the fact that the goods are locally manufactured or

imported from other States, else it would be violative of

art. 304 and 304(a).

It was submitted by the respondents that this is not the

correct position. This argument ignores the basic feature of

the Constitution and also the fact that the concept of

economic unity may not necessa-

751

rily be the same as it was at the time of Constitution

making. The result of the same would be acceptance of the

view that a State which was technically and economically

weak in 1950 due to various factors, must always remain the

same and cannot be helped to develop economically by grant-

ing concessions/exemptions or allowing subsidies etc. for

-establishing new industries so as to be economically de-

veloped. It was also submitted that if all the parts of

India i.e. to say all the States are economically strong or

developed then only can economic unity as a whole be assured

and strengthened. Hence, the concept of economic unity is

ever changing with very wide horizons and cannot and should

not be imprisoned in a strait-jacket of the concept and

notion as advocated by the petitioner. Economic unity of

India is one of the constitutional aspirations of India and

safeguarding the attainment and maintenance of that unity

are objectives of the Indian Constitution. It would be

wrong, however, to assume that India as a whole is already

an economic unit. Economic unity can only be achieved if all

parts of whole of Union of India develop equally, economi-

cally. Indeed, in the affidavits of opposition various

grounds have been indicated on behalf of the respondents

suggesting the need for incentives and exemptions, and these

were suggested to be absolutely necessary for economic

viability and survival for these industries in these States.

These were based on cogent and intelligible reasons of

economic encouragement and growth. There was a rationale in

these which is discernible. The power to grant exemption is

always inherent in all taxing Statutes. If the

suggestions/submissions as advanced by the petitioners are

accepted, it was averted, and in our opinion rightly, that

it will destroy completely or make nugatory the plenary

powers of the States. If the exemption is based on natural

and business factors and does not involve any intentional

bias, the impugned notifications to grant exemption for

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limited period on certain specific conditions cannot be held

to be bad. Judged by that yardstick, the present notifica-

tions cannot be held to be violative of the constitutional

provisions. An examination of art. 304(a) would reveal that

what is being prohibited by this article which is really an

exception to art. 30 1 will not apply if art. 301 does not

apply.

In the instant case the general rate applicable to

locally made goods is the same as that on imported goods.

Even supposing without admitting that sales tax is covered

by art. 301 as a tax directly and immediately hampering the

free flow of trade, it does not follow that it falls within

the exemption of art. 304 and it would be hit by art. 301.

Still the general rate of tax which is to be compared under

art. 304(a) is at par and the same qua the locally made

goods and the imported goods.

752

Concept of economic barrier must be adopted in a dynamic

sense with changing conditions. What constitutes an economic

barrier at one point of time often cease to be so at another

point of time. It will be wrong to denude the people of the

State of the right to grant exemptions which flow from the

plenary powers of legislative heads in list II of the 7th

Schedule of the Constitution. In a federal polity, all the

States having powers to grant exemption to specified class

for limited period, such granting of exemption cannot be

held to be contrary to the concept of economic unity. The

contents of economic unity by the people of India would

necessarily include the power to grant exemption or to

reduce the rate of tax in special cases for achieving the

industrial development or to provide tax incentives to

attain economic equality in growth and development. When all

the States have such provisions to exempt or reduce rates

the question of economic war between the States inter se or

economic disintegration of the country as such does not

arise. It is not open to any party to say that this should

be done and this should not be done by either one way or the

other. It cannot be disputed that it is open to the States

to realise tax and thereafter remit the same or pay back to

the local manufacturers in the shape of subsidies and that

would neither discriminate nor be hit by art. 304(a) of the

Constitution. In this case and as in all constitutional

adjudications the substance of the matter has to be looked

into to find out whether there is any discrimination in

violation of the constitutional mandate.

In Kalyani Stores v. The State of Orissa & Ors., [1966]

1 SCR 865, Shah, J. (as the learned Chief Justice then was),

speaking for himself and on behalf of Chief Justice Gajen-

dragadkar, Wanchoo, J. and Sikri, J. observed that the

restriction on the freedom of trade, commerce and inter-

course throughout the territory of India declared by Article

301 of the Constitution cannot be justified unless it falls

within Art. 304. Exercise of power under art. 304(a) can be

effective only if the tax or duty on goods imported from

other States and the tax or duty imposed on similar goods

manufactured or produced in that State is such that there is

no discrimination. Hidayatullah, J. as the learned Chief

Justice then was, observed, at p. 883 of the report, that

art. 304(a) imposes no ban but lifts the ban imposed by

articles 30 1 & 303 subject to one condition. That article

is enabling and prospective.

Counsel for the respondents drew out attention to arti-

cles 38 & 39 of the Constitution. The striving for the

attainment of the objects enshrined in these Articles is

enjoined. For achieving these objects the States have neces-

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sarily to develop themselves economically so as to

753

secure economic unity and to minimise the inequalities and

imbalances between State and State and region and region. If

the power to grant exemption has been conferred for achiev-

ing these objects on all, it is not possible to assail these

as violative of art. 304 as the latter article has to be

interpreted in conjunction with others and not in isolation.

Reference may be made to the observations of this Court in

Bharat General & Textiles Industries Ltd. v. State of Maha-

rashtra, 72 STC 354 where it was held that s. 41 of the

Bombay Sales Tax Act, did not contravene articles 14 & 19 of

the Constitution of India and the State Govt. could validly

classify new units producing edible oil as distinct and

separate from other units and validly withdraw the exemption

in relation to such units only. It is true that the afore-

said observations were made in the context different from

art. 304(a) but basically the concept of equality embodied

in articles 304(a) & 16 are the same. Art. 14 enjoins upon

the State to treat every person equal before the law while

art. 304(a) enjoins upon the State not to discriminate with

respect to imposition of tax on imported goods and the

locally made goods. The petitioners made reference to sever-

al decisions of this Court, namely, H. Anraj v. Government

of Tamil Nadu, [1986] 1 SCC 414; Indian Cement & Ors. v.

State of Andhra Pradesh & Ors., (supra); Weston Electronics

v. State of Gujarat, (supra) and West Bengal Hosiery Assn. &

Ors. v. State of Bihar & Anr., [1988] 4 SCC 134 wherein it

has been reiterated that difference in rate of sales tax is

hit by articles 301 & 304 but the said conclusions were

arrived at in the context of a controversy not in the

present form and the question of exemption as such did not

arise in these cases, as explained later. These cases were

not at all concerned with granting of exemption to a special

class for a limited period on specific conditions of main-

taining the general rate of tax on the goods manufactured by

all those producers in the State who do not fall within the

exempted category at par with the rate applicable to import-

ed goods as we have read these cases. Hence, it was not

necessary in those decisions to consider the problem in its

present aspect. If, however, the said power is exercised in

a colourable manner intentionally or purposely to create

unfavorable bias by prescribing a general lower rate on

locally manufactured goods either in the shape of general

exemption to locally manufactured goods or in the shape of

lower rate of tax, such an exercise of power can always be

struck down by the courts. That is not the situation in the

instant cases. The aforesaid decisions, therefore, are not

authorities for the general proposition that while, main-

taining the general rate at par, special rates for certain

industries for a limited period could not be prescribed by

the States.

754

There was another subsidiary question in these matters

as to whether the legislation in the shape of notification

is law within the meaning of art. 304 of the Constitution.

The phrase used in the opening part of art. 304 should

necessarily mean any law enacted either by legislature

itself or by its delegate. Here it may be instructive to

refer to clause 10 of art. 366 of the Constitution which

defines existing law and even though the word 'Notification'

is not to be found, yet in Kalyani Stores v. The State of

Orissa & Ors., (supra) it has been held that it was an

existing law. In The State of U.P. & Ors. v. Babu Ram Upad-

hya, [196] 12 SCR 679 at 702 this Court relied on a passage

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from Maxwell "On the Interpretation of Statutes" and held

that a rule framed in the absence of any specific provision

in the Act shall be deemed to be a part of the Act itself.

In the State of Tamil Nadu v. Hind Stone etc., [1981] 2 SCR

742 at 757 this Court relied upon the aforesaid dictum in

the case of Babu Ram Upadhya, (supra) and distinguished the

decision in State of Mysore v. H. Sanjeeviah, [1967] 2 SCR

361 cited on behalf of the petitioner. This Court in Kailash

Nath & Anr. v. State of U. P. & Ors., AIR 1957 SC 790 at 791

has held that the notification having been made in accord-

ance with the power conferred by the Statute has statutory

force and validity and, therefore, exemption is as if con-

tained in the Act itself. The U.P. Sales Tax Act by s. 24(4)

confers rule making powers on the State Government. Section

25 confers powers on the State Government to issue notifica-

tions with retrospective effect. Hence, it cannot be disput-

ed that the exemption notification is the exercise of the

legislative power. This Court in State of U.P. & Ors. v.

Renusagar Power Co. & Ors., [1988] 4 SCC 59 at 100 has held

that the power to grant exemption is quasi legislative. In

M/s Narinder Chand Hem Raj & Ors. v. Lt. Governor, Adminis-

trator, U.T., Himachal Pradesh & Ors., [1971] 2 SCC 747 at

751 it was held that the exercise of the power is legisla-

tive whether it is by the legislature or by the delegate.

In respect of the decisions aforesaid relied on behalf

of the petitioner, on examination of the observations in

India Cement's case (supra) to the contrary to which stated

hereinbefore on this aspect must be confined to the facts of

that case alone as the said decision had no occasion to

consider it in the full light. In the aforesaid view of the

matter the challenge in these petitions to the aforesaid

exemptions cannot, in our opinion, be upheld. The writ

petitions dealing with the U.P. matters on the same conten-

tions, therefore, fail.

Writ petition No. 665/88 being M/s Video Electronics

Pvt. Ltd. & Anr. v. State of Punjab & Anr., deals with the

notification issued by

755

the Punjab Government whereby two different rates of taxes

are provided. By that notification the State Government has

differentiated between the manufacturers of electronics

goods outside the State and within the State. Under section

5 of the Punjab General Sales Tax Act (hereinafter referred

to as 'the Act'), the State of Punjab had been imposing

sales tax @ 10% + 2% surcharge on electronics goods sold

within the State irrespective of their manufacture. The

State Govt. in pursuance of the powers conferred on it u/s 5

of the Act issued the notification date 11.12.1986 stating

that the rate of sales tax payable by an electronic manufac-

turing unit existing in Punjab in cases of electronic goods

specified in Annexure-A of the petition within the State

will be 1%. Thus the rate of sales tax was brought down from

10% (+ 2% surcharge) to 1% while for similar goods manufac-

tured outside the State and sold within the respondent-

State, the rate of sales tax remained 10% (+ 2% surcharge).

It was contended that there was differentiation. In support

of this contention the petitioners reiterate more or less

the same submissions, as indicated before. It is true that

there was difference in rate yet there was reason for this

differentiation. The State Government in its counter affida-

vit has stated that a lower rate of tax i.e. to say 1% in

the case of new units and 2% in the case of existing units

has been levied to boost this industry and to stop the

existing industry shifting to neighboring States. The pre-

vailing peculiar circumstances of Punjab were one of the

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factors indicated for the same. The lower rate, it was

reiterated, was imposed in view of the peculiar circum-

stances and also to attract new entrepreneurs from other

States and from within the State. It was contended that the

said notification was issued in public interest in view of

the peculiar position; and that while the States of Gujarat

and Maharashtra are fully developed States, on the other

hand, Punjab is comparatively a backward State in industry.

Unless some incentives are given, the industries which have

already shifted to other States, will have further deterring

effects. Hence, in view of the situation the concessional

rate was introduced and was not discriminatory.

As mentioned hereinbefore, reliance was placed mainly on

H. Anraj v. Govt. of Tamil Nadu, (supra) to which one of us

was a party. That was a decision dealing with lottery tick-

ets, and dealt with the question whether lottery tickets

amounted to movable property so as to be within the purview

of the Sale of Goods Act. But in relation to the question

relevant to the present purpose it was reiterated that the

real question is, whether direct and immediate result of the

impugned notification was to impose an unfavourable and

discriminatory tax burden on the imported goods (in those

cases lottery tickets of other

756

States) when they are sold within the State of Tamil Nadu as

against indigenous goods (Tamil Nadu Government lottery

tickets) when these are sold within the State, from the

point of view of the purchaser and this question had to be

considered from the normal business of commercial point of

view. It has to be reiterated that more or less all States

used to issue and sell lottery tickets, hence, the lottery

tickets from other States were specifically discriminated

against in the sense that there was differentiation without

any valid or justifiable reason. That would certainly work

as deterrent. Trade, commerce and intercourse throughout the

territory of India, come within art. 301 of the Constitu-

tion. It prevents imposing on goods imported from other

States a tax to which similar goods in the State are not

subject so as to discriminate between the goods so imported

and goods produced locally. In that light the decision in

Anraj's case has to be understood.

The cases of India Cement & Ors. v. State of Andhra

Pradesh & Ors., (supra); Weston Electronics v. State of

Gujarat & Ors., (supra) and West Bengal Hosiery Assn. & Ors.

v. State of Bihar & Anr., (supra) were cases where there was

a naked blanket preference in favour of locally manufactured

goods as against goods coming from outside the State. These

cases, as we read these, dealt with a conferment of exemp-

tion without any reason or concession in favour of indige-

nous manufactured goods which was not available in respect

of the goods imported into that State. In case, however, of

U.P. as well as State of Punjab the provisions which we have

examined, proceeded on a different basis. In these cases, it

cannot be suggested, in our opinion, that there is discrimi-

nation against goods manufactured outside the State. In case

of Punjab an Overwhelmingly large number of local manufac-

turers of similar goods are subject to sales tax and, there-

fore, the general statement that the manufacturers within

the State are favoured against the manufacturers outside the

State, is incorrect. Under the notifications in case of

Punjab, only newly set up units are eligible to claim the

benefits thereunder for a limited period of 5 years and that

also only if they strictly comply with the terms and condi-

tions set out in the notification.

It has to be reiterated that sales tax laws in all the

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States provide for exemption. It is well-settled that the

different entries in lists I, II and III of the 7th Schedule

deal with the fields of legislation, and these should be

construed widely, liberally and harmoniously. And these

entries have been construed to include ancillary or inciden-

tal power. Power to grant exemption is inherent in all

taxing legislations. Economic unity is a desired goal,

economic equilibrium and prosperity

757

is also the goal. Development on parity is one of the com-

mitments of the Constitution. Directive principles enshrined

in articles 38 & 39 must be harmonised with economic unity

as well as economic development of developed and under-

developed areas. In that light on art. 14 of the Constitu-

tion, it is necessary that the prohibition in art. 301 and

the scope of art. 304(a) & (b) should be understood and

construed. Constitution is a living organism and the latent

meaning of the expressions used can be given effect to only

if a particular situation arises. It is not that with chang-

ing times the meaning changes but changing times illustrate

and illuminate the meaning of the expressions used. The

connotation of the expressions used takes its shape and

colour in evolving dynamic situations. A backward State or a

disturbed State cannot with parity engage in competition

with advanced or developed States. Even within a State,

there are often backward areas which can be developed only

if some special recentives are granted. If the incentives in

the form of subsidies or grant are given to any part of

units of a State so that it may come out of its limping or

infancy to compete as equals with others, that, in our

opinion, does not and cannot contravene the spirit and the

letter of Part XIII of the Constitution. However, this is

permissible only if there is a valid reason, that is to say,

if there are justifiable and rational reasons for differen-

tiation. If there is none, it will amount to hostile dis-

crimination. Judge in this light, despite the submissions of

Mr. Sanjay Parikh and Mr. Vaidyanathan, we are unable to

accept the contentions that the petitioners sought to urge

in this application.

The next petition is W.P. No. 1124/88--Computer Graphics

(P) Ltd. & Anr. v. Union of India & Ors., which challenges

the concession given in favour of manufacturers in U.P. and

Goa. The same contentions were reiterated for the reasons

discussed hereinbefore. We are unable to accept this peti-

tion. It may be relevant to refer to Associated Tanners

Vizianagram, A. P. v. C.T. 0., Vizianagram, Andhra Pradesh &

Ors., [1986] 1 SCR 969 where it was stated that when a

taxing statute was not imposing rates of tax on imported

goods different from rates of tax on goods manufactured

locally, art. 304 had no application. In case an exemption

was granted applying the same rate the resulting tax might

be somewhat higher but that did not contravene the equality

clause contemplated by art. 304.

In the instant writ petition in view of the terms of the

notification impugned and the facts and the circumstances

stated in the affidavit of the State Government as well as

the interveners, Goa and Pondicherry, being comparatively

under-developed in electronic industry, in

758

our opinion, it cannot be said that there was violation of

either Part XIII of the Constitution or Article 14 of the

Constitution. This application must also, therefore, fail.

Writ petition No. 70/89--Spartek Ceramics India Ltd. v.

Union of India & Ors., under art. 32 also challenges the

notification under the Central Sales Tax Act and the U.P.

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Act as mentioned hereinbefore. In the state of facts as

appearing, this petition also fails. We have considered the

submissions and the statements made by the interveners in

these matters. Writ Petition No. 761/89--Weston Electronics

Ltd. & Anr. v. State of Punjab & Anr., dealing with the

notifications issued by the State of Karnataka and writ

petition No. 1140/88--M/s Survo Udyog Pvt. Ltd. & Anr. v.

State of Bihar & Anr., deal with the same controversy and

with similar notification. In view of the averments made

which we have examined in detail on behalf of the concerned

State Governments in the light of the principles we have

reiterated before, we are of the opinion that the notifica-

tions impugned cannot be challenged and the petition cannot

succeed.

We have also considered writ petition No. 10 16/88--M/s

Disco Electronics Ltd. & Anr. v. State of U.P. & Others, and

in light of the facts and the circumstances and the aver-

ments made in the background of the principles reiterated,

we are unable to sustain the challenge to the impugned

notifications. In these matters we had the advantage of

having the views of the interveners and we have considered

the submissions made on their behalf.

In the aforesaid light the intervention applications are

allowed, submissions considered and the aforesaid writ

petitions are dismissed but in the facts and the circum-

stances of the case, there will be no order as to costs.

Y. Lal Petitions

dismissed.

759