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CASE NO.:

Appeal (civil) 3545-3562 of 1991

Appeal (civil) 12094-12258 of 1996

Appeal (civil) 827-833 of 1995

PETITIONER:

The State of Himachal Pradesh & others etc.

The State of Himachal Pradesh & others etc.

State of Himachal Pradesh & another etc.

RESPONDENT:

Yash Pal Garg (dead) by LRs & others etc.

M/s H.H. Exporters etc.

M/s Jai Mata Rolled Glass Ltd. & another etc.

DATE OF JUDGMENT: 30/04/2003

BENCH:

M.B. SHAH & ARUN KUMAR.

JUDGMENT:

J U D G M E N T

Shah, J.

The High Court of Himachal Pradesh by judgment and order

dated 10.12.1990 allowed Civil Writ Petitions No.58 of 1978 etc. filed

by the respondents challenging the validity of the provisions of the

H.P. Taxation (On certain Goods carried by Road) Act, 1976 (No. 34

of 1976) (hereinafter referred to as "the 1976 Act") and held that the

said provisions were unconstitutional and invalid. The Court held

thus:

"We have seen earlier that by the impugned

provision, there is a direct levy upon the carriage of

goods by road and water ways. It is not the case of the

respondent State that the levy was compensatory or

regulatory in character. In any case, we do not find any

mention in the reply filed by the State of any facts which

may bring the levy in either of the two categories.

On the averments made in the petition, noticed by

us earlier, which have not been effectively denied on

behalf of the State, there is hardly any scope for saying

that the levy does not amount to restriction within the

meaning of Article 301 of the Constitution of India.

The levy could only have been saved, in case the

restriction brought about by it purported to be in public

interest, and that too, if the assent of the President had

been obtained either by way of previous sanction or even

by obtaining his assent to the Act subsequently to bring it

within the four corners of Article 255. Admittedly, there

is no sanction of the President at any stage."

The High Court also directed that the amount deposited towards

the tax be refunded in terms of interim orders.

That judgment and order is challenged by the State of Himachal

Pradesh by filing Civil Appeal Nos.3545/91 and others.

It appears that being aggrieved by the said judgment and order

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and in order to avoid delay in recovering the road tax, apart from

filing appeals, the State enacted the Himachal Pradesh Taxation (On

Certain Goods carried by Road) Act, 1991 (Act No.10 of 1991)

(hereinafter referred to as "the 1991 Act"). The objects and reasons of

the 1991 Act read thus: -

"The Himachal Pradesh Taxation (On Certain

Goods Carried by Road) Act, 1976 was enacted under

Entry 56, List II of the Seventh Schedule to the

Constitution of India to levy a tax on certain goods

which are carried by road within the State of Himachal

Pradesh. The charging Section 3 of this Act

categorically declared the levy of tax to be in addition to

the tax levied or leviable under the Himachal Pradesh

Passengers and Goods Taxation Act, 1955. The

conspicuous distinction between the taxes imposed by

the Act of 1955 and Act of 1976 is that while under the

former Act the tax is calculation with reference to the

fare or freight charged or chargeable, whereas under

the Act of 1976, it is calculated with reference to weight

or volume of goods carried by road. Nevertheless in

both these enactments there exists identity of inextricable

nexus with the carriage of goods by road.

2. In various writ petitions, the Hon'ble High Court

of Himachal Pradesh has held that the tax levied under

the aforesaid Act is a direct levy upon the carriage of

goods by road and waterways and it is constitutionally

invalid being violative of Article 301 read with Article

304(b) of the Constitution of India. The High Court has

further ordered that the State Govt. shall refund, along

with interest, the amount of tax deposited towards tax by

the petitioners. This judgment, therefore, went against

the basic intention underlying the enactment of the H.P.

Taxation (On Certain Goods Carried by Road) Act, 1976,

namely, a compensation for the huge expenditure

incurred each year by the Govt. on construction,

development and maintenance of roads and bridges

within the State.

3. The Hon'ble Supreme Court in its various

judgments has held that measures imposing

compensatory taxes, do not come within the purview of

restrictions contemplated by Article 301 and such

measures need not comply with the requirements of the

proviso to Article 304(b) of the Constitution. The Court

has also clearly declared that the tax imposed under Entry

56, ibid, is of a regulatory and compensatory character.

The power to levy taxes on goods and passengers carried

by road or inland waterways belongs exclusively to the

State Legislature.

4. The invalidation of the Act is attributable

principally to the unclear statement of objectives

appended to its Bill and inadequate or feeble defence to

prove that it was, in fact, a compensatory taxation

measure. In the absence of effective reply the Hon'ble

Court did not have the occasion to go to the

compensatory character of this enactment. In the

proposed Bill, the levy has been rationalized by making

it chargeable on the slabs of mileage of roads actually

used for carrying of goods within the State and the

method or machinery of collection has also been

suitably modified to remove the defects existing in the

Himachal Pradesh Taxation (On Certain Goods Carried

by Road) Act, 1976.

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5. It is well known that the roads and bridges are

life line in the hilly terrain of Himachal Pradesh and

every year the State Government has to devote a

sizeable chunk of its budget exclusively to the

construction, development, repair, upkeep and

maintenance of roads and bridges, without which any

development is unthinkable. Besides loss of a recurring

income of revenue of nearly Rs.9 crores each year, to the

State Exchequer, the impending refund of tax will drain

out not less than Rs.42 crores from the State exchequer,

which will mean absolute halt to the construction,

maintenance and development of roads and bridges for

many years to come for want of funds. Hence, in order

to ensure availability of sufficient funds for construction,

development, upkeep and maintenance of roads and

bridges in the State, it has become necessary to levy the

tax on certain goods carried by road within the State. It

is also essential to validate the tax imposed and collected

by the State Govt. right from the date of commencement

of the aforesaid Act.

6. The Bill seeks to achieve the aforesaid objectives."

The aforesaid Act was also challenged by filing Civil Writ

Petition No.377/91 etc. before the High Court. By judgment and

order dated 13th December, 1994, the writ petitions were allowed and

the 1991 Act was also declared ultra vires and void ab initio. The

State Government was directed to refund the tax already collected.

The Court after considering various decisions rendered by this court

held that the impugned Act would attract application of Article 301

and require compliance of Article 304(b) of the Constitution of India.

The Court also observed that the Act under consideration merely

because it was referable to Entry 56 of State List in the Constitution

would by itself not be sufficient to hold that it is regulatory or

compensatory in nature and that the nature of the law is not what its

Preamble states it to be. The Court thereafter referred to the earlier

decision rendered by it in M/s Yashpal Garg's case and held that it

was not permissible to the State Legislature to overrule the said

decision pending appeal before the Supreme Court. The Court

observed that the effect of Court's judgment holding the 1976 Act

constitutionally invalid was to obliterate the same from the statute

book and hence, there was nothing to be repealed by the State

Legislature. Hence, the writ petitions were allowed.

SUBMISSIONS:

The learned counsel appearing for the appellant submitted that

the High Court materially erred in arriving at the conclusion that the

State has failed to prove that the impugned road tax was not

regulatory or compensatory in nature. It is his contention that the State

of Himachal Pradesh is entirely hilly State and the cost of construction

of roads and bridges is many times high as compared to other places

and that roads are the only mode of transport and, therefore, in order

to provide roads, bridges and repair thereof, the State Legislature had

levied the tax to mobilise additional sources for developmental

purposes. The said tax is by exercise of its power under Entry 56 of

List 11 of Seventh Schedule to the Constitution.

As against this, the learned counsel for the respondents

submitted that in the Writ Petition No.58/78 etc., the State of

Himachal Pradesh failed to contend and prove that the impugned tax

was compensatory or regulatory and as the assent of the President was

not obtained as contemplated under Article 304(b), the High Court

rightly arrived at the conclusion that 'the 1991 Act' was invalid. It

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was contended that validation by the State Legislature without having

assent of the President of India is also unconstitutional.

FINDINGS:

Before dealing with the contentions of the parties, we would

first refer to the objects and reasons of 1991 Act wherein it has been

specifically inter alia stated that:

(a) the roads and bridges are the lifeline in the hilly terrain of

Himachal Pradesh and the State is not connected by

railway;

(b) the State has to devote sizeable chunk of its budget

exclusively to the construction, development, repair,

upkeep and maintenance of roads and bridges without

which any development is unthinkable.

(c) in such activities the State is having recurring loss of

nearly nine crores.

For this purpose, learned counsel for the appellant has pointed

out the chart revealing revenue accruals under the Act and the

expenditure incurred on the trading facilities in the shape of roads and

bridges during the periods 1976-77 to 1990-91 which is as under: -

Year

1976-77

1977-78

1978-79

1979-80

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

Amount

Collected

50,11,226

66,12,664

1,21,49,137

1,37,31,528

1,03,64,058

1,81,22,000

1,16,12,100

1,48,51,000

1,24,00,000

2,65,89,000

4,52,26,000

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4,46,50,000

4,88,00,000

7,04,54,000

6,51,82,000

Amount spent on

Maintenance of

Roads and

Bridges

4,49,85,411

4,81,23,104

7,17,57,370

8,35,90,831

6,86,93,317

7,76,99,475

11,83,92,845

9,58,34,413

13,60,75,532

16,89,00,219

14,59,31,541

24,18,16,260

17,08,11,484

18,77,53,395

20,11,34,322

Amount spent on

The construction

of roads and

Bridges

10,22,94,116

14,66,00,276

17,72,06,696

19,87,61,550

22,00,60,880

23,38,17,971

21,77,13,747

23,72,85,634

30,45,65,517

33,03,42,790

34,28,37,240

43,49,07,583

41,61,11,873

41,51,33,999

40,87,80,510

After referring to above-stated figures and the objects and

reasons which clarified that the intention underlying 1976 Act was to

compensate the State for the huge expenditure incurred each year on

construction, development and maintenance of roads and bridges

within the State, the High Court observed thus:

"In para 5 thereof, it is mentioned that the State

spends a sizeable chunk of its budget exclusively to the

construction, development, repair, upkeep and

maintenance of road and bridges without which any

development is unthinkable. The learned Advocate

General has also filed additional affidavit in this court

indicating the amount spent by the respondent-State in

construction and maintenance of roads and bridges. It is

stated in the aforesaid affidavit that a sum of

Rs.20,11,34,322 was spent on the maintenance of roads

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and bridges and Rs.40,87,80,510 on construction of

roads and bridges during 1990-91 whereas only an

amount of Rs.6,51,81,000 was collected as levy under

the Act. It would, therefore, appear that though the

respondent-State had spent about 61 crores of rupees in

construction and maintenance of roads and bridges, it

recovered only a sum of Rs.6 crores from the levy

under the Act. Apparently, the levy is not

compensatory in the sense stated by the learned

Advocate General. It seeks to recover only a part of

the expenses incurred in construction and

maintenance of roads and bridges. This position has

been, more or less, the same from the year 1976

onwards. In the context of these figures, it is submitted

that the levy has been compensatory from 1976 and

hence it is wrong to hold that it is directly affecting free

flow of trade or commerce throughout the territory of

India, as guaranteed under Article 301 of the

Constitution."

The aforesaid reason recorded by the High Court that as the

State Government recovers only a part of the expenses incurred in

construction and maintenance of roads and bridges, the levy is not

compensatory is, on the face of it, erroneous and cannot be sustained.

For levy to be compensatory, it is not required that entire amount of

cost incurred should be recovered. The State can and may incur the

cost of construction and maintenance of roads and bridges from other

revenue but that would not justify in holding that levy of tax is not

compensatory. It is also settled that there can be no bar to inter-

mingling of the revenue realised from regulatory and compensatory

taxes and from other taxes of general nature, nor can there be any

objection to more or less expenditure being incurred in case of

compensatory and regulatory levy.

Further, in our view, the question involved in this appeal is

squarely covered by number of decisions rendered by this Court.

In M/s Sainik Motors, Jodhpur & Others v. The State of

Rajasthan [(1962) 1 SCR 517] the Court considered the provisions of

the Rajasthan Passengers and Goods Taxation Act which provided

that where passengers and goods were carried by motor vehicle from

any place outside the State to any place within the State or from any

place within the State to any place outside the State, tax was leviable

on the fare or freight at a rate proportionate to the distance covered in

the State when compared with the total distance of the journey. The

Constitution Bench of this Court in such a situation held that by levy

of such tax, no inter-State trade, commerce or intercourse is affected.

The tax was for purpose of State, and falls upon passengers and goods

carried by motor vehicles within the State. Such levy of tax cannot be

said to offend Articles 301 and 304 of the Constitution.

It appears that the High Court solely relied upon the decision

render by this Court in Atiabari Tea Co. Ltd. v. The State of Assam &

others [(1961) 1 SCR 809] without considering the ratio laid down by

a larger Bench of Seven Judges in The Automobile Transport

(Rajasthan) Ltd. v. The State of Rajasthan and others [(1963)1 SCR

491]. In Automobile Transport case, this Court exhaustively

considered the decision rendered in Atiabari Tea Co.'s case and held

as under (as per majority) (page 522): -

"Nobody doubts that the application of rules like

the above does not really affect the freedom of trade and

commerce; on the contrary they facilitate the free flow of

trade and commerce. The reason is that these rules

cannot fairly be said to impose a burden on a trader or

deter him from trading: it would be absurd, for example,

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to suggest that freedom of trade is impaired or hindered

by laws which require a motor vehicle to keep to the left

of the road and not drive in a manner dangerous to the

pubic. If the word 'free' in Art. 301 means 'freedom to

do whatever one wants to do, then chaos may be the

result; for example, one owner of a motor vehicle may

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

wish to drive on the right of the road. If they come from

opposite directions, there will be an inevitable clash.

Another class of examples relates to making a charge for

the use of trading facilities, such as, roads, bridges and

aerodromes etc. The collection of a toll or a tax for the

use of a road or for the use of a bridge or for the use of

an aerodrome is no barrier or burden or deterrent to

traders who, in their absence, may have to take a longer

or less convenient or more expensive route. Such

compensatory taxes are no hindrance to anybody's

freedom so long as they remain reasonable; but they

could of course be converted into a hindrance to the

freedom of trade. If the authorities concerned really

wanted to hamper anybody's trade, they could easily raise

the amount of tax or toll to an amount which would be

prohibitive or deterrent or create other impediments

which instead of facilitating trade and commerce would

hamper them. It is here that the contrast, between

'freedom' (Art. 301) and 'restrictions' (Arts. 302 and

304) clearly appears: that which in reality facilitates trade

and commerce is not a restriction, and that which in

reality hampers or burdens trade and commerce is a

restriction. It is the reality or substance of the matter

that has to be determined. It is not possible a priori to

draw a dividing line between that which would really be

a charge for a facility provided and that which would

really be a deterrent to a trade; but the distinction if it has

to be drawn, is real and clear. For the tax to become a

prohibited tax it has to be a direct tax the effect of which

is to hinder the movement part of trade. So long as a tax

remains compensatory or regulatory it cannot operate

as a hindrance."

The Court further held that the interpretation which was

accepted by the majority in Atiabari Tea Co.'s case, subject to the

following clarification, was correct:

"Regulatory measures or measures imposing

compensatory taxes for the use of trading facilities do not

come within the purview of the restrictions contemplated

by Art. 301 and such measures need not comply with the

requirements of the proviso to Art. 304(b) of the

Constitution."

Even the view of minority rendered in the said case by

Hidaytullah, J. (as he then was), it has been specifically held that

"freedom in Article 301 does not mean anarchy. Similarly a demand

for a tax from the traders in common with others is not a restriction of

the right to carry on trade and commerce".

This aspect is highlighted in Khyerbari Tea Co. Ltd. &

Another v. The State of Assam [(1964) 5 SCR 975], wherein the

Court held thus:

"It would immediately be noticed that though the

majority view in the Automobile Transport (Rajasthan)

case substantially agreed with the majority decision in

the case of Atiabari Tea Co., there would be a clear

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difference between the said two views in relation to the

scope and effect of the provisions of Article 304(b).

According to the majority view in the case of Atiabari

Tea Co., if an Act is passed under Article 304(b) and its

validity is impeached, then the State may seek to justify

the Act on the ground that the restrictions imposed by it

are reasonable and in the public interest, and in doing so,

it may, for instance, rely on the fact that the taxes levied

by the impugned Act are compensatory in character. On

the other hand, according to the majority decision in

the Automobile Transport (Rajasthan) case,

compensatory taxation would be outside Article 301 and

cannot, therefore, fall under Article 304 (b)."

The aforesaid case is relied upon in State of Karnataka and

another v. M/s Hansa Corporation [(1980) 4 SCC 697], wherein the

Court observed thus:

"27. On a conspectus of these decisions it appears

well settled that if a tax is compensatory in character it

would be immune from the challenge under Article 301.

If on the other hand the tax is not shown to be

compensatory in character it would be necessary for the

party seeking to sustain the validity of the tax law to

show that the requirements of Article 304 have been

satisfied.

The Court also observed:

30. . The effect of Article 304(a) is to treat

imported goods on the same basis as goods manufactured

or produced in a State. This Article further enables the

State to levy tax on such imported goods in the same

manner and to the same extent as may be levied on the

goods manufactured or produced inside the State. If a

State tax law accords identical treatment in the matter of

levy and collection of tax on the goods manufactured

within the State and identical goods imported from

outside the State, Article 304(a) would be complied with.

There is an underlying assumption in Article 304(a)

that such a tax when levied within the constraints of

Article 304(a) would not be violative of Article 301 and

State legislature has the power to levy such tax."

Similarly, in International Tourist Corporation etc. v. State of

Haryana and Others [(1981) 2 SCR 364] the Court negatived the

contention that levy of tax on passengers and goods passing through

the State of Haryana, from a place outside the State to a place outside

the State interfered with the freedom of trade, commerce and

intercourse throughout the territory of India and so it was violative of

Article 301 of the Constitution. The Court considered the objection

that no expenditure was incurred in connection with the development,

construction, improvement and maintenance of National Highway in

the State of Haryana and observed thus:

"We have pointed out in our judgment that the

State Government incurs expenditure in connection with

National Highways not by directly constructing or

maintaining National Highways but by facilitating the

transport of goods and passengers along the National

Highways in various other ways such as lighting, traffic

control, amenities for passengers, halting places for

buses and trucks etc.etc.

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And not by eastern windows only,

When daylight comes, comes in the light;

In front the sun climbs slow, how slowly!

But westward, look, the land is bright!

The petition is, therefore, dismissed."

Thereafter, in Maharaja Tourist Service etc. v. State of

Gujarat [(1991) 2 SCR 524], the Court upheld the validity of the

Punjab Motor Vehicle Taxation Rules and similar rules framed by the

States of Gujarat, Rajasthan and Madhya Pradesh and held that the

working test for deciding whether a tax is compensatory or not is to

inquire whether the trades people are having the use of certain

facilities for the better conduct of their business and paying not

patently much more than what is required for providing the

facilities.

The aforesaid decisions and others were considered and

followed by this Court in Sharma Transport v. Government of A.P.

and Others [(2002) 2 SCC 188] and similar contentions were

negatived by observing: -

"For the tax to become a prohibited tax it has to

be a direct tax the effect of which is to hinder the

movement part of trade. So long as a tax remains

compensatory it cannot operate as a hindrance."

From the judgments as discussed above, it can be held:

(a) A demand for tax from the traders in common with

others is not a restriction on the right to carry on trade,

commerce and intercourse.

(b) Such tax would not come within the purview of the

restrictions contemplated under Article 301 unless it is

established that in reality, it hampers or burdens the trade

and commerce.

(c) So long as the tax remains compensatory or regulatory, it

cannot operate as a hindrance.

(d) If a State tax law accords identical treatment in the matter

of levy and collection of tax on the goods manufactured

within the State and identical goods imported from

outside the State, Article 304(a) would be complied with.

There is an underlying assumption in Article 304(a) that

such a tax when levied within the constraints of Article

304(a) would not be violative of Article 301 and State

legislature has the power to levy such tax.

In the present case, after the judgment rendered by the High

Court in Writ Petition No.58/1978, the State Legislature enacted the

1991 Act wherein in Preamble, it is specifically stated that it was

incurring much more expenditure than the revenue from the road tax.

Necessary affidavit stating the expenditure incurred for construction

and maintenance of roads and bridges as well as the total amount

collected on the basis of tax was filed before the High Court.

Undisputedly, most part of the State of Himachal Pradesh is not

connected by railway. For a hilly area having heavy downpour every

year, the roads require more expenditure for maintenance. For trade,

commerce and intercourse, lying down of additional roads is also the

necessity. The aforesaid facts were pointed out to the High Court, but

the Court surprisingly arrived at the conclusion that as the State

Government recovers only a part of the expenses incurred in

construction and maintenance of roads and bridges, levy is not

compensatory. As stated above, this reasoning cannot be sustained. In

the present case, it is required to be held that the tax is compensatory

in nature for giving better facilities to the passengers and traders,

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therefore, it would not come within the purview of restrictions

contemplated under Article 301. Hence, there is no question of

complying with the requirement of proviso to Article 304(b) of the

Constitution of obtaining previous sanction of the President.

REVALIDATING ACT:

The High Court also held that 1991 Act was ultra vires the

power of the legislature as it has over-ruled the decision rendered in

earlier writ petition in case of M/s Yash Pal Garg. This reason also

cannot be sustained as it is settled law that the Legislature can change

the basis on which a decision is rendered invalidating the Act and

thereby validating the legislation which has been declared to be null

and void. The cause for invalidating the Act can be removed and if

such cause is removed, it cannot be said that the Legislature had acted

beyond its competence.

The Legislature under the Constitution has within the

prescribed limits powers to make laws prospectively as well as

retrospectively. By exercise of its powers, the Legislature can remove

the basis of a decision rendered by a competent Court thereby

rendering that decision ineffective. {Re. The Municipal Corporation

of the City of Ahmedabad and Another etc. etc. v. The New Shrock

Spg. And Wvg. Co. Ltd. etc. etc. [(1970) 2 SCC 280]}. In Re.

Cauvery Water Disputes Tribunal [(1993) Supp 1 SCC 96 (II)], same

view is taken.

Further, while deciding the first case, i.e. Writ Petition No 58 of

1978 and others, the Court arrived at the conclusion that such a tax

amounts to restriction of trade, commerce and intercourse among the

States without considering its effect. The Court was required to

determine whether the impugned provisions amounted to a restriction

directly or indirectly on the movement of trade and commerce.

Therefore, the said decision is also against the settled legal position

and requires to be set aside.

However, pending appeals before this Court as the State

Legislature has passed 'the 1991 Act', 'the 1976 Act' would not

survive. The 1991 Act as discussed above was held to be ultra vires

mainly on the ground that the State Legislature was not competent to

enact a law so as to overrule the decision rendered by the High Court.

The State Legislature enacted a new law by specifically stating that

levy of tax was compensatory and that the revenue recovered from the

tax was much less than the expenditure incurred by it for construction,

maintenance and repair of roads and bridges is a hilly area. By

pointing out these facts, it cannot be said that the Legislature was

overruling the decision rendered in M/s Yashpal Garg's case. This

only makes it clear that levy of road tax was compensatory.

Competence of legislature to pass such law is not at all challenged and

cannot be challenged.

Hence, these appeals are allowed and the impugned judgment

and order passed by the High Court holding the H.P. Taxation (On

Certain Goods Carried by Road) Act, 1991 (Act No.10 of 1991) as

ultra vires is quashed and set aside. It is also held that as the 1976

Act does not survive because of its repeal and by enactment of the

Himachal Pradesh Taxation (On Certain Goods carried by Road) Act,

1991 (Act No.10 of 1991), no further declaration is required to be

granted. Ordered accordingly. There shall be no order as to costs.

IA No.28 of 2001 in CA NOs.3545-3562 of 1991.

In view of the order passed above, the intervention application

is rejected.

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