Civil Appeal No 3094 of 1979
Appeal by Special Leave from the Judgment and Order dated 24 8 1979 of the Karnataka High Court in WP No 703979
L N Sinha Attorney General of India and N Nettar for the Appellant
section T Desai N Srinivasan M Mudgal and Vineet Kumar for the Respondent
The Judgment of the Court was delivered by Desai J
Constitutional validity of Karnataka Tax on Entry of Goods Into Local Areas for Consumption Use or Sale Therein Act 1979  Act  for short and the Notification No FD 66 826 CSL 79 dated May 31 1979 issued by the State Government in exercise of the powers conferred by section 3 of the Act is involved in this appeal by special leave at the instance of the State of Karnataka and one other
Karnataka State enacted the Act to provide for the levy of tax on entry of goods into local areas for consumption use or sale therein being Karnataka Act No 27 of 1979
Section 3 empowers the State Government to levy and collect tax on entry of scheduled goods into a local area for consumption use or sale therein at such rate not exceeding 2 ad valorem as may be specified by the State Government
Armed with the power conferred by section 3 the State Government issued notification 1 No FD 66 CSL 79 dated May 31 1979 specifying the local areas and the rates of tax at which the tax shall be levied and collected under the Act on the entry of scheduled goods mentioned in col 2 of the table appended to the notification into local areas specified in the corresponding entries
Goods liable to levy of tax under the Act on entry in the specified local areas at the specified rates are those set out in the schedule annexed to the Act
They are i all varieties of textiles viz cotton woollen silk or artificial silk including rayon or nylon whether manufactured in mills powerlooms or handlooms and hosiery cloth in lengths ii tobacco and all its products iii sugar other than sugar candy confectionery and the like
In all 27 local areas were specified for the purpose of levy of tax on entry of scheduled goods in the respective local areas at varying rates specified in the notification
The Act received the assent of the President on May 17 1979 and it was published in the State Government Gazette on June 1 1979 and came into force from that very day
Numerous petitions were filed under Article 226 of the Constitution in the High Court of Karnataka contending that the Act and the Notification issued thereunder were unconstitutional on diverse grounds
As many as 24 different contentions were canvassed before the High Court
Of them two viz contention nos
13 and 19 found favour with the High Court with the result that the Act and the Notification issued thereunder were declared unconstitutional and a mandamus was issued directing the State Government and its officers to forebear from enforcing the provisions of the Act against the petitioners before the High Court
The contentions which found favour with the High Court are i section 3 of the Act does not empower the State Government to apply the provisions of the Act to certain local areas only and to exclude other local areas ii as the Act imposes the tax on dealers 827 irrespective of the value of scheduled goods brought by them into a local area and does not exempt petty dealers the Act imposes unreasonable restrictions on petty dealers
The remaining 22 contentions were rejected some of which were canvassed before us on behalf of the respondents to sustain the decision of the High Court
It is necessary at this stage to notice the broad features of the Act
The long title and the preamble of the Act demonstrate the purpose for which the Act was enacted it being to empower the State Government to levy tax on entry of goods specified in the schedule  scheduled goods  for short in local areas to be specified by the State Government in this behalf
Section 2 the dictionary clause of the Act defines dealer  in the Act to have the same meaning assigned to it in clause k of section 2 of the Karnataka Sales Tax Act 1957
Section 2 sub section 5 defines local area  as under 25 Local area  means the area within the limits of a City under the Karnataka Municipal Corporations Act 1976 Karnataka Act 14 of 1977 or a municipality under the Karnataka Municipalities Act 1964 Karnataka Act 22 of 1964
Section 2 sub section
7 defines scheduled goods  to mean goods specified in the schedule to the Act
Section 3 is the charging section
It reads as under 3
Levy of tax There shall be levied and collected a tax on entry of the scheduled goods into a local area for consumption use or sale therein at such rate not exceeding two percent ad valorem as may be specified by the State Government and different rates may be specified for different local areas
Section 4 provides for registration of dealers and makes it obligatory upon every dealer in scheduled goods to get himself registered under the Act in the prescribed manner
Rule 4 sub rule 3 of the Karnataka Tax on Entry of Goods into Local Areas for consumption Use or Sale therein Rules 1979  Rules  for short enacted under the Act has prescribed a fee of Rs 25 for registration as a dealer
Chapter III of the Act contains provisions for return assessment payment recovery and collection of tax
Chapter IV prescribes taxing authorities
Chapter V deals with appeals and revisions and Chapter VI contains miscellaneous provisions
Schedule annexed to the Act sets out the goods on the entry of which in the specified local areas tax can be levied
Entry 52 in State List read with Article 246 of the Constitution confers power on the State legislature to enact a law to levy tax 828 on the entry of goods into a local area for consumption use or sale therein
This tax in common parlance is known as octroi 
Octroi was leviable by the municipality under the power delegated to it under various laws providing for setting up of and administration of municipal corporations and municipalities
Octroi thus understood was being levied by various municipalities and municipal corporations in Karnataka State
Since some time a feeling had grown that octroi was obnoxious in character and impeded the development of trade and commerce and there was a clamour for its abolition
Taking note of the resentment of the business community Karnataka State abolished octroi with effect from April 1 1979
However no one was in doubt that octroi was a major source of revenue to municipalities and its abolition would cause such a dent on municipal finances that compensation for the loss would be inevitable
Accordingly the State Government undertook a policy of compensating the municipalities year by year
For generating funds for this compensation rates of sales tax were raised and in some cases a surcharge was levied
The amount so collected was not sufficient to bridge the gap in municipal budget
To further augment the finances for compensating the municipalities additional fund was sought to be generated by levy of tax under the impugned legislation
No doubt the tax levied was one on entry of scheduled goods in local areas meaning thereby it had all the broad features of octroi yet the manner of levy the method of collection and the persons liable to pay the same were so devised by the impugned Act as to remove the obnoxious features of octroi
As the charging section shows the tax was to be levied on entry of scheduled goods in a local area at a rate to be specified by the Government not exceeding 2 ad valorem
The taxing event would be the entry of scheduled goods in a local area
In fact octroi was being levied on almost all conceivable goods entering into a local area for consumption use or sale therein
There appears to be a discernible policy in selecting the goods set out in the schedule the entry of which in a local area would provide the taxing event
The goods selected for levy are textiles tobacco and sugar
Way back in 1957 there was a demand for abolition of sales tax on the scheduled goods and at the instance of the Union Government the State Governments agreed to forego their right to levy sales tax on the aforementioned scheduled goods on the condition that the Union Government would levy additional excise duty on them and distribute the net proceeds of such duty amongst the consenting States
Parliament accordingly has enacted the Additional Duties on Goods Goods of Special Importance Act 1957
Therefore while raising rates of sales tax 829 and levying surcharge in respect of some other items the State Government could not have levied sales tax on the scheduled goods
They were therefore selected for the levy of the tax under the impugned Act on their entry into a local area
Having noticed the historical background leading to the enactment of the impugned legislation we may now examine the two contentions which found favour with the High Court and as a result of which the Act and the notification issued thereunder were struck down by the High Court
The respondents contend that upon a true construction section 3 permits the State Government only to specify different rates of tax not exceeding the maximum prescribed in the section to be levied on entry of scheduled goods into a local area but the State Government has no power to pick and choose local area
In other words the respondents say that the tax has to be levied on entry of scheduled goods in each and every local area as the word is understood in the Act
The submission is that the expression as may be specified by the State Government  qualifies the expression such rates  and not local area and this was sought to be reinforced by saying that Article a  precedes local area which would mean every local area and not any local area
It was further stated that if what is contended on behalf of the State is correct one will have to read the word and  between the words therein  and at such rate  which might imply on a grammatical construction that discretion was conferred upon the State Government not only to specify rate but also the local area
Legislative drafting will reach its peak of glory when perfection is attained in demonstrably manifesting the legislative intent by unequivocal language
But it is equally undeniable that language at its best is a very imperfect vehicle of conveying the intent of the speaker
Legislature speaks through legislation and tries its utmost to convey what it intends to do by the legislation but even best of draftsmen cannot claim to attain perfection
On a very superficial view one may be tempted to accept the construction canvassed for on behalf of the respondents but when the section is read more minutely with necessary pause and emphasis and the policy enacting the legislation is kept in view and also the inconceivable situation that may arise if the construction canvassed for or behalf of the respondents is kept in focus the contention will have to be repelled
There is a two fold answer to the contention that upon a literal grammatical construction of section 3 the State has no choice in the matter of selecting local areas and that choice is limited to specifying rates 830 but after choosing rates all local areas will have to be covered for the levy of tax
It is easy to read the section with a pause and punctuation after the word ad valorem  so that the expression as may be specified by the State Government  would qualify both the expressions local area  and such rate 
This would be clear from the fact that the last expression in the section different rates may be specified for different local areas  would be an adjectival clause to the word rate  so that the power to choose and specify different rates is not implicit in the words such rate  but in the expression different rates may be specified for different local areas 
Thus an express power of choosing and specifying different rates subject to maximum for different local areas is conferred on the State Government not by the expression such rate  but by the expression rates  with the adjectival clause different rates may be specified for different local areas 
It was therefore not necessary to qualify the expression such rate  again by the expression as may be specified by the State Government  because that is covered by the express power conferred by the expression different rates may be specified for different local areas 
In approaching the matter from this angle the expression as may be specified by the State Government  would qualify the expression local area  and this construction would be further reinforced by use of Article a  prefixing local area  meaning thereby not every local area but any local area
In this connection reference may be made with advantage to In re
Sankers ex parte Sergeant wherein the expression under the hand of the Judge of a county court  came up for construction
The construction canvassed for was that a county court would not mean any county court but the country court having jurisdiction in the matter
Repelling this construction the Court after ascertaining the object of the legislation held that a county court would mean any county court an approach dictated by strict grammatical construction
Similarly in The Queen vs Justices of Durham the expression a Court  was interpreted to mean any court and in accepting this construction the Court was guided by the bare letter of the statute which would be a proper guide unless there would be something in it to modify the ordinary meaning of the words used
The Privy Council in Coast Brick  Tile Works Ltd  Ors
vs Premchand Raichand  Anr observed that the expression the security  should be read as a security  a variation which in a poorly drawn section does not do great violence to the language used
Even if therefore a literal grammatical 831 construction were to be adopted on a proper reading of the section power is conferred on the State Government by section 3 not only to specify different rates for different areas but also to specify local areas entry into which of scheduled goods would provide the taxing event
There is thus a power to choose and specify local areas as well as choose and specify rate of taxation subject to maximum prescribed in the section
Assuming our reading of the section is not correct there is another way of approaching the matter
It cannot be gainsaid that the State Government is empowered to specify the different rates of tax not exceeding the maximum in respect of different scheduled goods for different local areas
This implies that even though the taking event is entry of scheduled goods in a local area nonetheless different rates may be prescribed for different local areas and express power in that behalf is conferred on the Government by providing in section 3 that different rates may be specified for different local areas
If at this stage the definition of local area is recalled which means an area in a city governed by the Karnataka Municipalities Act or a municipal corporation governed by the Karnataka Municipal Corporations Act it would immediately appear that local areas vary immensely both in dimension population industrial growth economic development and scale and kind of municipal service rendered
One has to keep in view a local area like Bangalore City a highly industrially advanced capital city of Karnataka and a small municipality having a population of 10000
Now if the expression a local area  in section 3 is interpreted to mean every local area  as contended on behalf of the respondents before any tax can be levied under section 3 it would be obligatory on State Government to levy tax on entry of scheduled goods in every local area in Karnataka State for consumption use or sale therein
The contention thus is that coverage of all local areas for levy of tax would provide outside maximum limit of power under section 3
The question is Is it a minimum condition for exercise of power  If it is the rates of tax will have to vary considerably in direct relation to the local area for which the rate is being prescribed
It would be unjust and inequitable to levy tax on entry of goods at the same rate for such local area as Bangalore Municipal Corporation and a small municipal area the two local areas being uncomparable with regard to area population industrial growth and consumption of such scheduled goods in the area
Now if the impact of the tax is to be equitable keeping in view cost of its collection a tax levied at such a small rate as one paise for goods worth Rs 100 ad valorem for a small local area and 2 ad valorem for such industrially developed local area like Bangalore Corporation 832 it would make nonsense of the levy apart from the uneconomic outcome keeping in view the administrative cost of collection
If the Government is obliged on the construction canvassed on behalf of the respondents to encompass all local areas for the purpose of levying tax under the statute the rates would have to be varied so much to avoid the evil of making the impost unjust and if the rates have to be varied from area to area the administrative cost in smaller areas with lower rates and negligible entry of scheduled goods in such area would make the tax wholly uneconomic
It must therefore logically follow that choice to select local area is a necessary concomitant of a choice to select rates which power is admittedly conferred on the State Government
Purpose underlying the statute namely to provide financial assistance to the municipalities would be better effectuated if the tax realised considerably outweighs the administrative cost involved in collecting the tax
And it is a well known canon of construction that the purpose underlying the statute would provide a reliable external aid for proper construction because the Court would adopt that construction which would effectuate the purpose
The High Court unfortunately approached the matter from the standpoint of literal grammatical construction of the section overlooking the object underlying the Act the historical background which the High Court itself had noticed and holding that unless the section is re written as understood by the High Court the State Government had no power to pick and choose local areas
Mr section T Desai learned counsel for the respondents after drawing our attention to the reasoning that appealed to the High Court for holding that section 3 does not permit choice of local areas urged that if the section is so read as to enable the State Government to pick and choose or select local areas the section would be violative of article 14 of the Constitution because while all municipalities need additional finances to recoup the loss suffered by them on abolition of octroi only some local areas are selected for the purpose of levy of tax leaving others out and there being no reasonable basis to sustain the classification section 3 would be unconstitutional
There is always a presumption of constitutionality of a statute
If the language is rather not clear and precise as it ought to be attempt of the Court is to ascertain the intention of the legislature and put that construction which would lean in favour of the constitutionality unless such construction is wholly untenable
However where one has to look at a section not very well drafted but the object behind the legislation and the purpose of enacting the same is clearly discernible the Court cannot hold its hand and blame the draftsman 833 and chart an easy course of striking down the statute
In such a situation the Court should be guided by a creative approach to ascertain what was intended to be done by the legislature in enacting the legislation and so construe it as to give force and life to the intention of the legislature
This is not charting any hazardous course but is amply borne out by an observation worth reproducing in extenso in Seaford Court Estates Ltd vs Asher
It reads as under Whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise and even if it were it is not possible to provide for them in terms free from all ambiguity
The English language is not an instrument of mathematical precision
Our literature would be much the poorer if it were
This is where the draftsmen of Acts of Parliament have often been unfairly criticised
A judge believing himself to be fettered by the supposed rule that he must look to the language and nothing else laments that the draftsmen have not provided for this or that or have been guilty of some or other ambiguity
It would certainly save the judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity
In the absence of it when a defect appears a judge cannot simply fold his hands and blame the draftsman
He must set to work on the constructive task of finding the intention of Parliament and he must do this not only from the language of the statute but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy and then he must supplement the written word so as to give force and life to the intention of the legislature
That was clearly laid down  by the resolution of the judges SIR ROGER MANWOOD CB and the other barons of the Exchequer in Heydon s case 1584 3 Co Rep 7a and it is the safest guide today
Good practical advice on the subject was given about the same time by PLOWDEN in his note to Eyston vs Studd 1574 2 Plowd
Put into homely metaphor it is this A judge should ask himself the question how if the makers of the Act had themselves come across this ruck in the texture of it they would have straightened it out  He must then do as they would have done
A judge must not alter the material of which the Act is woven but he can and should iron out the creases
834 This view was re affirmed in Norman vs Norman
Let it be remembered that the impugned measure is a taxing statute and in the matter of taxing statute the legislature enjoys a larger discretion in the matter of classification so long as it adheres to the fundamental principle underlying the doctrine of classification
The power of the legislature to classify is of wide range and flexibility so that it can adjust its taxation in all proper and reasonable ways
In Khyerbari Tea Co Ltd  Anr
vs The State of Assam this Court observed as under It is of course true that the validity of tax laws can be questioned in the light of the provisions of articles 14 19 and article 301 if the said tax directly and immediately imposes a restriction on the freedom of trade but the power conferred on this Court to strike down a taxing statute if it contravenes the provisions of articles 14 19 or 301 has to be exercised with circumspection bearing in mind that the power of the State to levy taxes for the purpose of governance and for carrying out its welfare activities is a necessary attribute of sovereignty and in that sense it is a power of paramount character
It was also observed that legislature which is competent to levy a tax must inevitably be given full freedom to determine which articles should be taxed in what manner and at what rate
It would therefore be idle to contend that a State must tax everything in order to tax something
In tax matters the State is allowed to pick and choose districts objects persons methods and even rates for taxation if it does so reasonably see Willis on Constitutional Law  p 587
This statement of law has been approved by this Court in the case of East India Tobacco Co vs State of Andhra Pradesh
The question therefore is whether a tax of a certain kind can be levied on entry of goods in certain local areas the classification of local areas if found to be reasonable the levy of tax would not be invalid on the ground that choosing certain areas only excluding some others would violate Article 14
Whether in this case the classification is reasonable would be presently examined but the contention that if the State Government is granted a choice in the matter of selection of local area ipso facto the statute would be unconstitutional as being violative of article 14 must be negatived
835 In order to ascertain whether the classification of local areas for the purposes of levy of tax is reasonable or not a reference may be made to the impugned notification
Table annexed to the notification shows in all 27 local areas selected for levy of tax
They are again divided into three groups A B and C for selecting rates to be levied on different scheduled goods
A mere glance at the local areas selected and those according to the petitioner excluded viz areas within the jurisdiction of various Gram Panchayats would bring in bold relief that population criterion appears to have been adopted in selecting local areas for levy of tax
Does population criterion provide a reasonable basis for classification vis a vis a tax levied on entry of goods in the area  It would be undeniable that population basis would provide a reasonable criterion for selecting local areas for the purpose of levy tax simultaneously excluding those which do not answer the population criterion
One unquestionable element scientifically established about a taxing statute is that the yield from the tax must be sufficiently in excess of cost of collection so that the tax which is levied for augmenting public finances to be utilised for public good would be productive
Where the cost of administrative machinery required to be set up for collecting tax is either marginally lower or equal or marginally higher than the yield from the tax the measure would be uneconomic if not counterproductive
Now if the tax in this case is levied on the entry of scheduled goods in local areas the yield would be directly proportionate to the consumption of the goods in local areas and the consumption of goods is directly related to the population within the local area
Viewed from this angle population criterion would provide a reasonable basis for classification for selectively levying the tax by choosing local area and by specifying different rates so as to make the tax productive
Therefore there is no substance in the contention that the classification in this case was unreasonable
The High Court was accordingly in error in holding that section 3 did not permit the State Government to pick and choose local areas for the levy of tax and that levy of tax under section 3 in all local areas within Karnataka State was a minimum condition for exercise of the power under section 3
The contention must accordingly be negatived
Another contention that found favour with the High Court was contention No 13 before the High Court which in the opinion of the High Court was a formidable one
The contention was that the Act in its application has not excluded petty dealers from its purview
Developing the contention it was said that the abolished octroi would have been less oppressive in its application than the tax under the impugned legislation falling on petty dealers
What appealed to the 836 High Court was that if a petty dealer brought within the local area scheduled goods of the value of Rs 5 for consumption use or sale therein he is to get himself registered after paying the registration fee maintain accounts for his dealings in such goods and submit monthly and annual returns and to appear before the assessing authority when called upon to do so
The High Court thereafter contrasted the position of a dealer under the Karnataka Sales Tax Act 1957 and observed that a dealer whose total turnover is less than Rs 25000 was not liable to pay sales tax and one whose turnover was less than Rs 10000 was not required to get registered to maintain accounts or to submit returns
The High Court also found the registration fee of Rs 25 prescribed under the rules the liability to maintain accounts in the manner prescribed and to submit monthly and yearly returns as constituting unreasonable restrictions on the fundamental right of the petty dealers to carry on their trade or business
Learned Attorney General urged that this contention was no where to be found in the petition filed by the petitioners in the High Court and therefore the High Court was in error in entertaining the contention
Unfortunately the judgment does not show that learned Advocate General who appeared for the State raised such an objection to the entertaining of the contention on behalf of the petitioners by the High Court
Not only has the High Court permitted the contention to be raised but accepted the same
In fairness to the petitioners it would be unjust to shut out the contention on this technical ground though we must note that Mr section T Desai learned counsel who appeared for the respondents found it difficult to pursue the contention
We however propose to deal with the contention on merits
The taxing event under the statute is entry of scheduled goods in a local area for consumption use or sale therein at the instance of a dealer
The expression dealer  has the same meaning as assigned to it in clause k of section 2 of Karnataka Sales Tax Act 1957 which defines dealer to mean any person who carries on the business of buying selling supplying or distributing goods directly or otherwise whether for cash or for deferred payment or for commission remuneration or other valuable consideration and includes amongst others a casual trader
Section 101 makes it obligatory upon every dealer whose total turnover in any year is not less than the specified sum to get himself registered under the Act
Sub section
2 carves out an exception to sub section
1 that notwithstanding anything contained in sub section
1 every casual trader dealing in goods mentioned in the 837 Third Schedule or the Fourth Schedule irrespective of the quantum of his total turnover in such goods shall get himself registered
And in passing it may be mentioned that Schedule Three includes 12 items and Schedule Four includes seven items
In other words casual trader who is included in the expression dealer  in respect of the goods mentioned in the Third or Fourth Schedule irrespective of his turnover has to get himself registered
Therefore it cannot be said that all petty dealers are excluded from the application of Karnataka Sales Tax Act
That apart the taxing event under the impugned Act being entry of scheduled goods in a local area at the instance of a dealer the volume or quantum of business of the dealer is not at all relevant
The situation now obtaining may be contrasted with the situation when octroi was levied
Octroi was payable by anyone irrespective of the fact whether he was a dealer in the goods or not on goods which were liable to octroi when they were brought within the octroi limits
It was payable at the octroi limits where there used to be an office called octroi naka 
This was found to be cumbersome and the present Act seeks to replace to some extent that infamous octroi
The noteworthy departure made by the Act is that now unlike every importer only a dealer dealing in the scheduled goods will have to pay the tax and that too not at the octroi limit but afterwards while submitting returns
It would be a case of wild imagination that a dealer in scheduled goods would bring within the local area scheduled goods in such a small quantity as to make maintenance of accounts a very difficult task as also a registration fee of Rs 25 so heavy as to dub it an unreasonable restriction on his right to carry on trade or commerce
Only three items are included in scheduled goods and it is legitimate to believe that a dealer not dealing in either of the scheduled goods would not be required to get himself registered
And if he is going to deal in the goods his turnover would not be so small in scheduled goods as to make maintenance of accounts and payment of registration fee of Rs 25 so disproportionately heavy as to render it as an unreasonable restriction on his right to carry on trade
Looking at the matter from a slightly different angle it must be confessed that if the contention of the respondents were to be upheld it would provide a fruitful source for evasion of tax
If petty dealers are to be excluded some criterion will have to be provided relatable to his turnover in scheduled goods for classifying who are petty dealers
That turnover will have to be kept reasonably high to make it rational but in that event the big registered dealer can always conveniently defeat the tax by bringing into the local area scheduled goods in the name of such petty dealer
It would be an incentive to 838 a big registered dealer to set up a number of petty dealers and import scheduled goods into local area in the name of those petty dealers
To avoid any such contingency if the tax is levied on the entry of scheduled goods in the local area at the hands of a dealer irrespective of his turnover a potential source of evasion can be checkmated
Viewed from either angle non exemption of petty dealers from the operation of the Act does not lead to the conclusion that the impugned legislation constitutes unreasonable restrictions on the fundamental right of the petty dealers to carry on their trade or business
The High Court was therefore in our opinion in error in striking down the impugned legislation on the ground that the Act imposes unreasonable restrictions on the fundamental right of the petty dealers to carry on their trade
The two contentions which found favour with the High Court for striking down the impugned Act and the notification issued thereunder in our opinion are not sustainable and therefore the Act and the notification issued thereunder would have to be upheld
Mr section T Desai learned counsel for the respondents however wanted us to affirm the judgment of the High Court on some of the contentions which the High Court negatived
It would therefore be necessary to examine some of those contentions which were repeated before us
The contention which was put into forefront was that the impugned Act violates the constitutional guarantee of freedom of trade commerce and intercourse throughout India as enshrined in Part XIII of the Constitution and is not saved by article 304
At one stage there was some controversy whether a tax law was within the inhibition of Part XIII of the Constitution but this controversy is no more res integra and it has been set at rest by the majority view in Atiabari Tea Co Ltd vs The State of Assam  Ors
 Gajendragadkar J speaking for the majority observed that the intrinsic evidence furnished by some of the Articles of Part XIII shows that taxing laws are not excluded from the operation of article 301 which means that tax laws can and do amount to restrictions freedom from which is guaranteed to trade under the said Part
He then posed a question whether all tax laws attract the provisions of Part XIII irrespective of the fact whether their impact on trade or its movement is direct and immediate or indirect and remote and proceeded to answer it observing that if any Act imposes any direct restrictions on the very movement of such goods it attracts the provisions of article 301 and 839 its validity can be sustained only if it satisfies the requirements of article 302 or article 304 of Part XIII
Accordingly the contention that all taxes should be governed by article 301 whether or not their impact on trade is immediate or mediate direct or remote was negatived
The majority view in Atiabari Tea Co Ltd case Supra was re examined and affirmed in The Automobile Transport Rajasthan Ltd vs The State of Rajasthan  Ors
Das J speaking for the majority in this context observed as under After carefully considering the arguments advanced before us we have come to the conclusion that the narrow interpretation canvassed for on behalf of the majority of the State cannot be accepted namely that the relevant articles in Part XIII apply only to legislation in respect of the entries relating to trade and commerce in any of the lists of the Seventh Schedule
But we must advert here to one exception which we have already indicated in an earlier part of this judgment
Such regulatory measures as do not impede the freedom of trade commerce and intercourse and compensatory taxes for the use of trading facilities are not hit by the freedom declared by article 301
They are excluded from the purview of the provisions of Part XIII of the Constitution for the simple reason that they do not hamper trade commerce and intercourse but rather facilitate them
The law was thus further clarified by pointing out that all taxes should and could not be prohibited by article 301 and must of necessity for their sustenance seek the coverage of article 304
If a measure is shown to be regulatory or the tax imposed is compensatory in character meaning the tax instead of hampering trade or commerce would facilitate the same it would be immune from a challenge under Art 301
In other words if the tax is shown to be compensatory in character irrespective of the fact whether it is saved by article 304 or not it does not come within the inhibition of article 301
Accordingly if validity of a tax law is challenged on the ground that it violates freedom of inter State commerce trade and intercourse guaranteed by article 301 the contention may be repelled by showing i that the tax is compensatory in character as explained in The Automobile Transport Rajasthan Ltd case Supra or ii that it satisfies the requirements of article 304
This very question came up for further examination in Khyerbari Tea Co Ltd case Supra wherein constitutional validity 840 of Assam Taxation On Goods carried by Road or on Inland Water ways Act 1961 was challenged on the ground that it was violative of article 301 and was not saved by article 304
This Court analysed the majority view in Atiabari Tea Co Ltd case Supra and The Automobile Transport Rajasthan Ltd case Supra and observed as under 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 difference between the said two views in relation to the scope and effect of the provisions of article 304b
According to the majority view in the case of Atiabari Tea Co if an Act is passed under article 304b 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 304b 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 State did not attempt in the High Court to sustain the validity of the impugned tax law on the submission that it was compensatory in character
No attempt was made to establish that the dealers in scheduled goods in a local area would be availing of municipal services and municipal services can be efficiently rendered if the municipality charged with a duty to render services has enough and adequate funds and that the impugned tax was a measure for compensating the municipalities for the loss of revenue or for augmenting its finances
As such a stand was not taken it is not necessary for us to examine whether the tax is compensatory in character
It was however strenuously contended that the tax was not discriminatory in character inasmuch as the impugned tax was levied both on scheduled goods manufactured within the State of Karnataka and similar goods brought into Karnataka State from outside and accordingly article 304a has been complied with
It was further urged 841 that the requirements of article 304b are fully satisfied
The High Court was of the opinion that the impugned tax was non discriminatory in character inasmuch as scheduled goods imported from other States and scheduled goods produced or manufactured within the State but outside the local area were treated alike by the impugned Act
In the opinion of the High Court the discrimination if at all was between goods produced or manufactured within a local area and those brought from outside the local area into it but article 304a has no relevance to such differential treatment
Article 304 lifts the embargo placed on the legislative power of State to enact law which may infringe the freedom of inter State trade and commerce if its requirements are fulfilled
Article 304a imposes a restriction on the power of legislature of a State to levy tax which may be discriminatory in character by according discriminatory treatment to goods manufactured in the State and identical goods imported from outside the State
The effect of article 304a 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 304a would be complied with
There is an underlying assumption in article 304a that such a tax when levied within the constraints of article 304a would not be violative of article 301 and State legislature has the power to levy such tax
Tax under the impugned legislation would be levied on scheduled goods either manufactured or produced within Karnataka State or imported from outside on their entry in a local area
Thus this tax is non discriminatory in that it does not discriminate between scheduled goods manufactured or produced within Karnataka State or those imported from outside
And the microscopic discrimination relied upon by the respondents that there is differential treatment accorded to goods produced within a local area and those imported from outside the local area is hardly relevant for the purpose of article 304a
The High Court was accordingly right in concluding that the impugned tax satisfies the requirements of article 304a
The next limb of the contention is that the impugned tax being leviable on the entry of goods into a local area will have a direct and immediate impact on the movement of goods and consequently would infringe freedom of inter State trade guaranteed by article 301
It must for its validity also satisfy the requirements of article 304b
In order 842 to satisfy the requirements of article 304b it must be shown that the restrictions imposed by the tax law on inter State freedom of trade and commerce are reasonable and are in public interest as also the bill for the purpose of levy of such tax has been introduced or moved in the State legislature with the previous sanction of the President
To the extent the impugned tax is levied on the entry of goods in a local area it cannot be gainsaid that its immediate impact would be on movement of goods and the measure would fall within the inhibition of article 301
Can it however be said that this tax imposes restrictions which in the facts and circumstances of the case could not be said to be reasonable It was contended on behalf of the respondents that the tax not being single point tax it would impose a heavy burden and a very burden of tax would certainly constitute unreasonable restriction on the freedom of trade and commerce
To substantiate the contention that the Act places unreasonable restrictions on the freedom of trade it was submitted that it is a multi point tax and in final analysis the burden would be disproportionately heavy
It was said that whenever goods are taken from one local area to another local area to third local area at every point of entry the tax would be levied and therefore in ultimate result the burden would be very heavy so as to make it thoroughly unreasonable
Undoubtedly the tax would have to be paid every time when scheduled goods enter a local area
In other words it is not a single point tax and therefore if some scheduled goods successively enter different local areas for consumption use or sale therein there would be multiple levy
But no attempt was made to substantiate this charge by showing as to how goods are taken from one local area to another local area to third local area for successive sales because if they are taken for consumption or use there is no question of taking the scheduled goods from one local area to another local area
It is therefore difficult to conceive a situation realistically that the impost would be very heavy so as to make it unreasonable
The High Court negatived the contention and in our opinion rightly observing that the petitioners have not been able to show that the burden of the tax was so heavy as to constitute unreasonable restriction on the freedom of trade and commerce
In this connection however reliance was placed on the decision of this Court in Kalyani Stores vs State of Orissa  Ors
In that case the State enhanced the duty in respect of foreign liquors from Rs 40 to Rs 70 per LP gallon and this levy was challenged on the ground that it infringed the guarantee of article 301
The State attempted to save the levy by contending that it was saved by article 304b
843 The Court struck down the levy as being violative of article 301 observing as under Article 301 has declared freedom of trade commerce and intercourse throughout the territory of India and restriction on that freedom may only be justified if it falls within article 304
Reasonableness of the restriction would have to be adjudged in the light of the purpose for which the restriction is imposed that is as may be required in the public interest
Without entering upon an exhaustive categorization of what may be deemed required in the public interest it may be said that restrictions which may validly be imposed under article 304b are those which seek to protect public health safety morals and property within the territory
The later decision has shown that the observation in Kalyani Stores case is confined to the facts of that case
This would be evident from the decision of this Court in State of Kerala vs AB Abdul Khadir  Ors
wherein it is observed that in Kalyani Stores case Supra the Court did not intend to lay down a proposition of universal applicability that the imposition of a duty or tax in every case would tantamount per se to an infringement of article 301 and that only such restrictions or impediments which directly or immediately impede free flow of trade commerce and intercourse would fall within the prohibition contained in article 301
Even apart from this a levy which appears to be quite reasonable in its impact on the movement of goods and is imposed for the purpose of augmenting municipal finances which suffered a dent on account of abolition of octroi cannot be said to impose an unreasonable restriction on the freedom of inter State trade commerce and intercourse
In this connection it would be useful to recall the observations of this Court in Khyerbari Tea Co Ltd case that the power conferred on this Court to strike down a taxing statute if it contravenes the provisions of articles 14 19 or 301 has to be exercised with circumspection bearing in mind that the power of the State to levy taxes for the purpose of governance and for carrying out its welfare activities is a necessary attribute of sovereignty and in that sense it is a power of paramount character
It is therefore idle to contend that the levy imposed an unreasonable restriction on the freedom of trade and commerce
The next question is whether this levy is in public interest
As has been pointed out earlier the levy was to compensate the loss suffered by abolition of octroi
844 without a demur
After removing the obnoxious features of octroi a very modest impost is levied on entry of goods in a local area and that too not for further augmenting finances of the municipalities but for compensating the loss suffered by the abolition of octroi is certainly a levy in public interest
As has been repeatedly observed by this Court the taxes generally are imposed for raising public revenue for better governance of the country and for carrying out welfare activities of our welfare State envisaged in the constitution and therefore even if a tax to some extent imposes an economic impediment to the activity taxed that by itself is not sufficient either to stigmatise the levy as unreasonable or not in public interest
The last limb of the argument is whether the proviso to article 304b is satisfied or not
The proviso imposes an obligation to obtain the Presidential sanction before introducing the bill or amendment for the purpose of clause b of article 304 in the legislature of a State
It cannot be gainsaid that Presidential sanction was not obtained before introducing the bill which was ultimately enacted into the impugned Act but after the bill was enacted into an Act the same was submitted to the President for his assent and it is common ground that the President has accorded his assent
If prior presidential sanction is a sine qua non the requirement of the proviso is not satisfied but in this context it would be advantageous to refer to article 255 which provides that no Act of Parliament or of the Legislature of a State and no provision in any such Act shall be invalid by reason only that some recommendation or previous sanction required by the Constitution was not given if assent to that Act was given by the President
Now in this case it is common ground that the President did accord his sanction to the impugned Act
Therefore the requirement of the proviso is satisfied
To sum up the impugned tax is not discriminatory in character as envisaged by article 304a and it does impose restrictions but the restrictions imposed are reasonable and in public interest and the Act subsequently having received the assent of the President the proviso to article 304b is complied with and therefore the impugned Act is saved by article 304 and could not be struck down on the ground that it was violative of article 301
The contention must accordingly be negatived
Two minor subsidiary points were sought to be made en passant by Mr section T Desai and a brief mention of them would be in order
It was urged that there is a certain amount of vagueness in section 3 inasmuch as no light is thrown by the words of the section or the other provisions of the Act on the question as to computation of tax to be 845 made at specified percentage ad valorem without specifying which price is to be taken into consideration for levy of tax namely the sale price or the purchase price of the concerned scheduled goods
It was said that sale price and purchase price of a dealer would be different and in the absence of any guideline in the charging section or any other provision in the Act it would lead to arbitrary determination or computation of tax by taking in one case sale price of the scheduled goods and in another case purchase price
The contention overlooks the specific guideline to be found in the charging section itself
The taxing event is the entry of scheduled goods into a local area
The tax becomes payable on the entry of scheduled goods in a local area
Therefore the price of the scheduled goods at the time of entry paid by the dealer who is the importer of goods within the scheduled area would be the ad valorem price on the basis of which tax would be computed
No subsequent rise or fall in price has any relevance to the computation of the tax
The charging section says that the tax shall be levied and collected on the entry of scheduled goods in a local area at specified percentage not exceeding two per cent ad valorem
Therefore the price of the scheduled goods at the time when the tax becomes chargeable irrespective of the fact that it would be computed at a later date when the dealer submits his return as required by the other provisions of the Act would be the price for computation of tax
And there is no ambiguity or any vagueness in this behalf
There is thus specific guideline in the charging section itself for taking into account the price according to which tax would be computed
The Hight Court negatived this contention by observing that it would be open to the dealer to choose either the sale price or the purchase price whichever is favourable to him for computation of his liability to tax
This approach overlooks the specific language of section 3 which clearly indicates what price is to be taken into account for computing the tax
When the goods are brought within the local area they have a certain price
The price may be the price which the importer of goods has paid before bringing the goods within the local area
Even if the dealer is the manufacturer of goods at a place outside the local area and brings the goods within the local area he must have determined the price of the goods
Therefore the dealer has some specific price of the scheduled goods which are being brought within the local area at the time of entry in the local area and the entry being the taxing event that would be the price which alone can be taken into account for computing the tax ad valorem
Therefore we find it difficult to agree with the reasoning adopted by the High Court in rejecting the contention but for the reasons hereinabove mentioned the contention is devoid of merits and accordingly it must be negatived
846 As we are not able to uphold the contentions which found favour with the High Court in striking down the impugned Act and the notification issued thereunder and as we find no merit in other contentions canvassed on behalf of the respondents for sustaining the judgment of the High Court this appeal must succeed
Accordingly this appeal is allowed and the judgment of the High Court is quashed and set aside and the petition filed by the Respondent in the High Court is dismissed with costs throughout
PBR Appeal allowed


Summary:
The Karnataka Tax on Entry of Goods Into Local Areas for Consumption Use or Sale therein Act 1979 was enacted by the State Legislature to levy tax on certain select goods at the time of their entry into a local area
This tax was devised to off set the short fall in the funds of municipal and other local bodies by reason of the abolition of octroi which by experience was found to impede the development of trade and commerce
Section 3 of the impugned Act provides that the tax shall be levied on entry of the scheduled goods into a local area for consumption use or sale therein at such rate as may be specified by the State Government and different rates may be specified for different local areas
By a notification issued under section 3 of the Act the State Government specified 27 local areas in the State which could levy the tax on scheduled goods and specified the rate of tax for each such local area therein
The Scheduled goods are all varieties of textile tobacco sugar and the like
Upholding the two principal contentions among others raised by the appellants in their writ petitions before the High Court that i section 3 does not empower the State Government to apply the provisions of the Act to such local areas only and to exclude other local areas and ii the levy of tax on all dealers irrespective of the value of scheduled goods brought by them into a local area without exempting petty dealers imposes an unreasonable restriction on the right to carry articles the High Court struck down the Act as invalid
Allowing the appeal  HELD The express power of choosing and specifying different rates subject to maximum for different local areas is conferred on the State Government not by the expression such rate  but by the expression rates  with the adjectival clause different rates may be specified for different local areas 
It was therefore not necessary to qualify the expression such rate  again by the expression as may be specified by the State Government  because that 824 is covered by the express power conferred by the expression different rates may be specified for different local areas 
The use of article a  before local area  signifies not every local area but any local area
831C D In re
Sanders ex parte Serqueant Law Journal  The Queen vs Justices of Durham 1895 1 QB 801 Coast Brick  Tile Works Ltd  Ors
vs Prem Chand Raichand  Anr
1967 1 Appeal Cases 192 referred to
Although the taxing event is entry of scheduled goods in a local area section 3 empowers the State Government to specify different rates of tax in respect of different scheduled goods for different local areas
A local area means an area in a city governed by the Karnataka Municipalities Act or a municipal corporation governed by the Karnataka Municipal Corporation Act
The local areas vary immensely both in dimension population industrial growth and the scale and kind of municipal services rendered by them
If the argument that a local area  should be interpreted to mean every local area  is accepted it would be obligatory on the State Government to levy tax on entry of scheduled goods in every local area
It would be unjust and inequitable to levy tax on entry of goods at the same rates for a big municipal corporation and a small municipal area each of which does not stand comparison with the other
The choice to select local areas is a necessary concomitant of a choice to select the rates which is a power conferred on the State Government
The purpose underlying the statute namely to provide financial assistance to the municipalities would be better effectuated if the tax realised considerably outweighs the administrative cost in collection
The High Court fell into an error because it adopted a literal grammatical construction and overlooked the underlying object of the Act and the historical background in levying the tax
831C G 832C E There is no force in the contention that if the State Government is granted a choice in the matter of selection of local areas ipso facto the statute would be unconstitutional as being violative of Article 14
It is a well accepted principle of constitutional law that there is always a presumption of constitutionality of a statute
In the matter of taxing statutes the legislature which is competent to levy a tax has full freedom to determine the articles the manner and the rate of tax
832G H 834E Khyerbari Tea Co Ltd  Anr
vs The State of Assam  and East India Tobacco Co vs State of Andhra Pradesh   409 referred to
The High Court was wrong in its view that section 3 did not permit the State Government to pick and choose the local areas for the levy of tax
In selecting the local areas and the rates of tax to be levied on different scheduled goods the State has adopted the criterion of population of a local area which undeniably is a reasonable criterion because the yield of the tax would be directly proportionate to the consumption of the goods in the local areas and the consumption of goods is directly related to the population within the local area
835F G Non exemption of petty dealers from the operation of the Act does not lead to the conclusion that the impugned legislation constituted an unreasonable restriction on the fundamental right of the petty dealers to carry on their trade or business
If petty dealers were to be exempt the criterion of turnover in the scheduled goods for classifying the petty dealers will have to be kept high in which event the big registered dealers could conveniently bring the scheduled goods into local areas in the name of petty dealers
The taxing 825 event being entry of scheduled goods in a local area at the instance of a dealer the volume or quantum of business of the dealer is not at all relevant
Unlike under the old system of octroi where every importer was taxed under the Act only a dealer dealing in scheduled goods is required to pay the tax
838B C If a State tax law accords identical treatment in the matter of levy and collection of taxes on the goods manufactured within the State and identical goods imported from outside the State article 304a would be complied with
There is an underlying assumption in Article 304a that such a tax when levied within the constraints of Article 304a would not be violative of Article 301 and the State Legislature has the power to levy such tax
841E In the instant case the tax is non discriminatory in that it does not discriminate between scheduled goods manufactured within the State and those imported from outside the State
A minor discrimination between two types of goods if any is hardly relevant for the purposes of Article 304a
Therefore the impugned tax satisfies the requirements of Article 304a
841F G There is no evidence to show that the burden of tax would be so heavy as to constitute an unreasonable restriction on the freedom of trade and commerce
Although in theory the tax leviable is not a single point tax and becomes leviable at every point whenever the goods are taken from one local area to another and then on to yet another no attempt was made to substantiate how the goods are so successively moved because if they are taken for consumption or use in one place there is no question of taking them from that local area to another local area and so on
842D G Even if the tax to some extent imposes an economic impediment to the activity taxed that by itself is not sufficient to stigmatise the levy as unreasonable or not in public interest
What is sought to be done is to impose a modest levy on certain goods at the time of their entry into a local area by removing the obnoxious features of octroi
The tax is not intended to augment the finance of the local bodies but to compensate them for loss suffered by the abolition of the octroi
844A B The requirements of the proviso to Article 304b are satisfied because the President accorded sanction to the impugned Act
844F