Case: State Of Tamil Nadu, Etc Vs. Sitalakshmi Mills, Etc

1. Before the High Court of Madras, the respondents claimed that they were not liable to be tax at the higher rate prescribed in Section 8 (2) (b) of the Central Sales Tax Act, 1956 (hereinafter called the Act) on the turnover of their sales in the course of inter-State trade to Government or unregistered dealers even though they had not obtained C or D forms, as the case may be, for the reason that Section 8 (2) (b) is violative of Articles 301 ande 303 (1) of the Constitution and was, therefore, bad. The High Court accepted the claims by a common judgment. These appeals are preferred against the judgment on the basis of certificates granted by the High Court and they raise the common question, namely, whether Section 8 (2) (b) of the Act is bad for the reason that the provisions thereof offend Articles 301 and 303(1) of the Constitution.

Reasoning: 2. In Larsen and Toubro Ltd. v. Joint Commercial Tax Officer, 20 STC 150 = (AIR 1968 Mad 407), the High Court of Madras held that sub-sections (2), (2A) and (5) of Section 8 of the Act were bad for the reason that they violated the provisions of Articles 301 and 303 (1) of the Constitution. This was on the basis that the different rates of tax and exemptions in the sales tax law of the various States placed an unequal burden on the sale of same or similar goods which impeded their free flow and movement in inter-State trade and commerce. In the appeal, preferred from the decision, this Court set aside the decision of the High Court (see State of Madras v. N. K. Nataraja Mudaliar, (1968) 3 SCR 829  = (AIR 1969 SC 147 ). The question whether section 8 (2) (b) is violative of provisions of Article 301 or 303 (1) was not specifically considered in either the majority judgment delivered by Shah J. or in the concurring judgment of Bachawat. J. Hegde, J., however, made certain observations in his judgment that section 8 (2) (b) was enacted to check evasion of sales tax and the restriction imposed by it was in the public interest.scope of Article 286 was considered by this Court in the State of Bombay v. United Motors (India) Ltd., 1953 SCR 1069  = (AIR 1953 SC 252 ) in an appeal to this Court in which the validity of the provisions of the Bombay Sales Tax Act, 1952, was challenged. The majority of the Judges who heard the appeal held that Article 286 (1) (a) prohibited taxation of sales or purchases involving inter-State elements by all States except the State in which the goods were actually delivered for the purpose of consumption therein and that the effect of the Explanation thereto was to convert inter-State transactions into intra-State transactions and to remove them from the operation of Cl. 2. This interpretation of Article 286 was not accepted by a larger Bench of this Court which heard and decided the Bengal Immunity Co. Ltd. v. The State of Bihar, (1955) 2 SCR 603  = (AIR 1955 SC 661 ). That case held that the bans imposed by Article 286 of the Constitution on the taking powers of the States were independent and separate and each one of them had to be got over before a State legislature could impose tax on transactions of sale or purchase of goods. The case further held that the Explanations of Article 286 (1) (a) determined by the legal fiction created therein the situs of the sale in the case of transactions coming within that category and that once it is determined by the application of the Explanation that a transaction is outside the State, it followed that the State, with reference to which the transaction can thus be predicated to be outside it, can never tax the transaction. The Constitution was thereafter amended, Explanation 1 of Article 286 was deleted and clauses (2) and (3) thereto were altered by the amendments. Simultaneously, item 92-A was incorporated in List I of the Seventh Schedule authorising Parliament to legislate for levying tax on the sale or purchase of goods other than newspapers, where such sale or purchase took place in the course of inter-State trade or commerce and item 54 of List II was amended to exclude taxation of inter-State sales from the competence of the State legislatures.n Atibari Tea Co. Ltd. v. The State of Assam, (1961) 1 SCR 809  = (AIR 1961 SC 232 ), Gajendragadkar, J. speaking for himself, Wanchoo and Das Gupta, JJ., observed :.... we think it would be reasonable and proper to hold that restrictions, freedom from which is guaranteed by Article 301, would be such restrictions as directly and immediately restrict or impede the free flow or movement of trade.. In Automobile Transport (Rajasthan) Ltd. v. The State of Rajasthan, 1963 Supp 2 SCR 435 = (1963-1 SCR 491  = AIR 1962 SC 1406 ), the Court partically agreed with the view of the majority in Atiabari Tea Co. Ltd.s case (1961) 1 SCR 809  = (AIR 1961 SC 232 ) but added a clarification that a regulatory measure or a measure imposing a compensatory tax for the using of trading facilities would not come within the purview of restrictions contemplated by Article 301. Normally, a tax on sale of goods does not directly interfere with the free flow or movement of trade. But a tax can be such that because of its rate or other features, it might operate to impede the free movement of goods. The majority judgment delivered by Shah, J. in (1968) 3 SCR 829  = (AIR 1969 SC 147 ) proceeds all the basis that tax under the Central Sales Tax Act is in its essence a tax which encumbers movement of trade and commerce, but the tax imposed in the case in question was saved by the other provisions of Part XIII, The Court then said that the exercise of the power to tax would normally be presumed to be in the public interest and as Parliament is competent under Article 302 to impose restrictions on the freedom of trade, commerce, and intercourse between one State and another or within any part of the territory of India as may be required in the public interest, the tax was saved8. Bachawat, J. in his judgment in the case said that if a tax on intra-State sales does not offend Article 301, logically, a tax on inter-State sales also cannot do so, that a tax does not operate directly or immediately on the free flow of trade or the free movement or transport of goods from one part of the country to the other, that the tax is on the sale, and that the movement is incidental and a consequence of the sale. He observed further that even assuming that the Central Sales Tax is within the mischief of Article 301, it is certainly a law made by Parliament in the public interest and is saved by Article 302.10. If prevention of evasion of tax is a measure in the public interest, there can be no doubt that Parliament is competent to make a provision for that purpose under Article 302, even if the provision would impose restrictions on the inter-State trade or commerce11. But quite apart from this, the majority judgment in (1968) 3 SCR 829  = (AIR 1969 SC 147 ) has categorically stated that the exercise of the power to tax may normally be presumed to be in the public interest. We do not think it necessary to go into the question whether it is open to the Court to conduct an enquiry whether the levy of a tax is the imposition of a restriction on the freedom of trade and commerce in the public interest. It cannot be presumed, because the rate of tax was 10 per cent at the material time on this class of transaction or the rate fixed by the appropriate State in respect of intra-State sales, whichever was higher, the imposition of this rate was not in the public interest. Therefore, in any view of the matter, Parliament was competent to enact Section 8 (2) (b) of the Act. In other words, even if it be assumed that the tax at the higher rate imposed under Section 8 (2) (b) places restrictions on the freedom of trade and commerce throughout the territory of India, as Parliament is competent to impose restrictions on that freedom in the public interest and as the imposition of a tax is normally to be presumed in the public interest, we see no reason to hold that Section 8 (2) (b) is bad for the reason that it violates Article 30112. As regards the contention that section 8 (2) (b) is violative of Article 303(1) in that there will be varying rates of tax on inter-State sales in different States depending upon their rates of sales tax for intra-State sales and that will lead to the imposition of dissimilar tax on the sale of same or similar commodities, it is enough to state that this question has been considered by this Court in (1968) 3 SCR 829  = (AIR 1969 SC 147 ) and the Court said that the existence of different rates of tax on the sale of the same or similar commodity in different States by itself would not be discriminatory as the flow of trade does not necessarily depend upon the rates of sales tax; it depends, according to the Court, upon a variety of factors such as the source of supply, place of consumption, existence of trade channels, the rates of freight, trading facilities, availability of efficient transport and other facilities for carrying on the trade. The Court referred to the observations of Isaacs, J. inKing v. Barger, (1908) 6 CLR 41  at p. 108and said :..... The Central sales tax though leived for and collected in the name of the Central Government is a part of the sales tax levy imposed for the benefit of the States. By leaving it to the States to levy sales tax in respect of a commodity on intra-State transactions no discrimination is practised; and by authorising the State from which the movement of goods commences to levy on transactions of sale Central sales tax, at rates prevailing in the State, subject to the limitation already set out, in our judgment, no discrimination can be deemed to be practised.. We think there is no merit in the contention that Section 8 (2) (b) of the Act offends the provision of Article 303(1).