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Sitalakshmi Mills Ltd. and ors. Vs. the Deputy Commercial Tax Officer and ors. - Court Judgment

LegalCrystal Citation
SubjectSales Tax;Constitution
CourtChennai High Court
Decided On
Case Number Writ Petition Nos. 84, 983 and 2356 of 1967 and Tax Case No. 228 of 1964
Judge
Reported in[1968]22STC436(Mad)
AppellantSitalakshmi Mills Ltd. and ors.
RespondentThe Deputy Commercial Tax Officer and ors.
Appellant Advocate V.K. Thiruvenkatachari, Adv. for ;A.R. Ramanathan, ;R. Kuppuswamy, ;T.T. Srinivasan, ;A.N. Rangaswamy, ;P.C. Kannan, ;D. Trilokchand Chopda and ; M. Ranganatha Sastry, Advs.
Respondent Advocate The Adv.-General for ;Special Government Pleader, for respondents 1 and 3 to 5 in W.P. No. 84 of 1967, respondents 1 to 3 in W.P. No. 983 of 1967 in T.C. No. 228 of 1964 and W.P. No. 2356 of 1967 and
DispositionPetition allowed
Cases ReferredRaja Jagannath Baksh Singh v. State of Uttar Pradesh
Excerpt:
- - 1,45,470.62 for the assessment year 1959-60 at the rate of 7 per cent, under section 8(2). it was unsuccessful in its appeals which were dismissed on the ground that the petitioner failed to produce c or d forms in respect of the turnover. it is registered as a dealer both in madras as well as in surat. the working of these constitutional provisions for over a period of five or six years immediately following the coming into force of the constitution disclosed that all was not well with the system of states' tax on inter-state, import and export sales or purchases of goods. the pivot of the act is section 8 which prescribing, as it did, the rates of tax on sales in the course of inter-state, trade or commerce as to conform to the freedom of trade, commerce and intercourse.....veeraswami, j.1. in this batch of cases the constitutional validity of clause (b) of sub-section (2) of section 8 of the central sales tax act, 1956, and of the opening words of sub-section (4) of that section, which make sub-section (1) inapplicable in certain contingencies is raised. in larsen and toubro ltd. v. joint commercial tax officer [1967] 20 s.t.c. 150 to which one of us was a party, this court struck down sub-sections (2), (2a) arid (5) of section 8 on the ground that they violated articles 301 and 303(1) of the constitution. this was on the view that the differential rates or exemptions in various states had an unequal burden on same or similar goods which affected their free movement or flow of inter-state trade and commerce. it was pointed out that the differential rates or.....
Judgment:

Veeraswami, J.

1. In this batch of cases the constitutional validity of Clause (b) of Sub-section (2) of Section 8 of the Central Sales Tax Act, 1956, and of the opening words of Sub-section (4) of that section, which make Sub-section (1) inapplicable in certain contingencies is raised. In Larsen and Toubro Ltd. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150 to which one of us was a party, this Court struck down Sub-sections (2), (2A) arid (5) of Section 8 on the ground that they violated Articles 301 and 303(1) of the Constitution. This was on the view that the differential rates or exemptions in various States had an unequal burden on same or similar goods which affected their free movement or flow of inter-State trade and commerce. It was pointed out that the differential rates or exemptions obtaining in the several States if automatically applied by virtue of Section 8(2) to Central taxation, they would certainly have the effect of discriminating between the goods of one State and the goods of another and might affect the free flow of trade in such goods as between the States and that further Sub-sections (2A) and (5) of Section 8 only aggravated the discrimination. Nevertheless that case is sought to be distinguished by stating that the assessees in these cases are not questioning the scheme of the Act on any argument that the Central sales tax rate should be single or uniform throughout India but contend that the amendment to Section 8(2)(b) by Act 31 of 1958 is void. The scope of the argument on their behalf is limited to the specific ground that Sub-section (2)(b) is void in so far as it provides for the inter-State tax at a rate higher than that of the State multi-point tax. They admit that Sub-section (1) prescribing the rate of two per cent, till 30th June, 1966, and three per cent, thereafter is valid as to the sales to the Government, and registered dealers subject to Sub-section (2A). They do not also object to Sub-section (4) but accept it as valid in so far as it prescribes declaration in Form C and certificate in Form D. But they contend that Sub-section (4) is invalid only in so far as it makes Sub-section (1) inapplicable if C and D Forms are not produced. This is so because, according to the assessees, the rate under Sub-section (1) being prescribed for particular types of transactions, it must be open to them to prove their character and show the sales to be to registered dealers and Government otherwise than by production of C or D Form. The effect of these contentions is that the State of Madras may validly levy under Sub-section (2)(b) tax on sales not shown to be to a registered dealer or Government or sales to consumers at the rate of 2 per cent, up to 30th June, 1966, at the rate of 2 1/2 . per cent, between 1st July, 1966, and 30th June, 1967, and at the rate of 3 per cent, from 1st July, 1967.

2. Before we proceed further, we shall notice the facts in these cases and refer to the salient statutory provisions at different stages which will enable a full and proper appreciation of the questions raised. In W.P. No. 983 of 1967 the petitioner is a limited liability company started with the collaboration of Messrs London Rubber Company, London, stated to be one of the biggest manufacturers of contraceptives and birth control appliances known all over the world under the name and style 'Durez' and 'Durapac'. We are told that they are used all over India in the family planning programme of various Governments. The sales made by the petitioner of its manufactured goods to various Government departments were on the basis of orders placed with it by the Directorates of Health of various States' Family Planning Units. For the year 1965-66, the petitioner returned under the provisions of the Central Sales Tax Act a turnover of Rs. 27,11,514.79 representing inter-State sales of contraceptives manufactured by it. Out of this amount, exemption was claimed for a sum of Rs. 1,15,147.50 on the ground that the relative sales were cancelled and did not in fact take place. But this claim was disallowed. A turnover of Rs. 9,45,802 was charged to tax at 2 per cent., as It was covered by C and D Forms which were produced. As for the remaining turnover of Rs. 17,65,712.79, the petitioner stated to the Assessing Authority that the relative sales were made to Governments which are respondents 5 to 7 and that the Governments had been addressed to expedite the release of C Forms, and wanted time for their production. In the alternative the petitioner offered to prove to the satisfaction of the Assessing Officer on the basis of the records relating to the sales that they were all made to the Government departments. The petitioner says that the 1st respondent, who was the Assessing Officer, without considering its reasonable request, finalised the assessment in haste and made an order on 31st December, 1966, which was actually served on 10th February, 1967. An appeal to the 2nd respondent filed against the order of assessment is said to be pending disposal. But on account of the fact that he is not competent to decide the constitutional validity of the provisions and the question cannot be raised by the assessees even in this Court in a tax case arising out of the order, the petitioner has invoked the jurisdiction of this Court under Article 226 of the Constitution. We may add, as alleged by it, the petitioner filed before the 1st respondent D Forms in respect of a turnover of Rs. 8,53,692.50 on 3rd February, 1967, which were received from respondents 5 to 7 after repeated reminders. But the 1st respondent ignored them and served upon the petitioner the assessment order as aforesaid on 10th February, 1967. In Tax Case No. 228 of 1964 with which W.P. No. 2356 of 1967 is connected, the assessee, Messrs Little's Oriental Balm and Pharmaceuticals Ltd., has been charged to inter-State sales tax on a turnover of Rs. 1,45,470.62 for the assessment year 1959-60 at the rate of 7 per cent, under Section 8(2). It was unsuccessful in its appeals which were dismissed on the ground that the petitioner failed to produce C or D Forms in respect of the turnover. The tax case arises from the order of the Tribunal and in the related writ petition the question of vires is raised. The assessee in W.P. No. 84 of 1967 is a staple fibre spinning mill and deals in sale of such yarn manufactured by it. Here, again the petitioner is a limited liability company. It says that in order to facilitate sales of yarn expeditiously, it has opened a sales depot at Surat and that in the normal course of its business, it despatches the goods to its Surat sales depot and they are sold at Surat. It is registered as a dealer both in Madras as well as in Surat. In its return it claimed exemption in relation to a turnover of Rs. 25,96,577.64 for the year 1965-66 as referable to the Surat depot sales in the State of Gujarat. It claimed to have paid Rs. 58,162.73 as tax to the Gujarat State in respect of the depot sales at Surat. Nevertheless, says the petitioner, the 1st respondent, the Deputy Commercial Tax Officer, Madurai, has in his notice dated 5th January, 1967, proposed to reject the claim and to call for objections. The petitioner prays that this Court should quash the notice on the ground that the disputed turnover consisted of outside sales but the 1st respondent attempted to illegally clutch at them as if they were inter-State sales within his power to tax.

3. In the case of London Rubber Co. (India) Ltd., there is no scope for controversy that the sales in question were inter-State in character and were all made to Government departments. In fact the Assessing Officer himself seems to proceed on that basis. They have, however, been charged to higher rate of tax either because D Forms were not furnished or they were furnished before the assessment order was made which were nevertheless not taken into account by the Assessing Officer. In the second class of cases, as in Tax Case No. 228 of 1964, C Forms have been rejected on various grounds and the higher rate applied. Time has been refused to correct the alleged defects and produce the forms. It appears the forms filed also were refused to be handed back for rectification. The assessees charge that this has been deliberately done with a view to mulct them with the higher rate of tax. The third class represented by W.P. No. 84 of 1967 consists of a case of registered dealers who in another State make contracts for local delivery there and are assessed to tax by that State but all the same the Madras authorities decide or propose to decide that the transactions are inter-State sales subject to higher rate of tax in the absence of C Forms. The assessees maintain that in the nature of things there may be no question of C Forms as the sales were all outside sales.

4. Larsen and Toubro Ltd. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150 has in detail narrated the scheme of taxation on sale of goods before and after the Constitution and under the Central Sales Tax Act, 1956. We do not think it necessary to reiterate and cover the entire field over again. Briefly the position was this. Prior to the Constitution, each State on the basis of local territorial nexus with one or more ingredients of an inter-State sale of goods sought to tax it as an inside sale. Taxation of income on the basis of nexus doctrine is a familiar proposition recognised in Raleigh Investment Company case [1944] F.C.R. 229, Wallace Bros. & Co. Ltd. v. Commissioner of Income-tax, Bombay State [1948] F.C.R. 1 and A.H. Wadia v. Commissioner of Income-tax, Bombay [1948] F.C.R. 121. Though at some time there was doubt whether the doctrine could be applied to sales tax legislation, it has since been resolved by Tata Iron & Steel Co. v. State of Bihar [1958] 9 S.T.C. 267. The Supreme Court pointed out in this case that the applicability of the doctrine to sales tax had been recognised by Poppatlal Shah v. The State of Madras [1953] 4 S.T.C. 188. As a consequence, an identical inter-State transaction suffered sales tax in different States with the concomitant multiple tax burden on the consumer and adverse effect on trade, both local and inter-State. Article 286 and Part XIII of the Constitution were designed to rectify the position. By Article 286, the State Legislature was prohibited from imposing a tax on the sale or purchase of goods outside that State or which took place in the course of the import of the goods into, or export of the goods out of, the territory of India. For the purpose of determining an outside sale, the article contained an explanation which defined an inside sale, that is to say, a sale or purchase directly resulting in the delivery of the goods for purposes of consumption in a State was regarded as having taken place in that State notwithstanding the fact that under the general law relating to sale of goods, the property in the goods had by reason of such sale or purchase passed in another State. The article also forbade the State from imposing a tax on a sale or purchase taking place in the course of inter-State trade or commerce but the ban was made subject to Parliamentary legislation to the contrary. Reservation was, however, made that the President could by his order keep the ban in abeyance until 31st March, 1951. The further safeguard made by Article 286 was that the State law to tax a sale or purchase of goods declared by Parliament by law to be essential for the life of the community should have effect only if it had been reserved for the consideration of the President and had received his assent. Article 301 forged a further limitation on the power of the States to tax sale or purchase of goods by declaring that subject to the other provisions of Part XIII, trade, commerce and intercourse throughout the territory of India shall be free. Parliament has, however, been given by Article 302 the authority to impose restrictions on the freedom of trade, commerce or intercourse if they are required in public interest. Nevertheless, the Parliament and the Legislature of a State have no power, as mentioned in Article 303(1), to make laws which make a preference or discrimination as between the States. But this limitation upon the power of the Parliament will not apply under Article 303(2) to a law made by it which makes any such preference or discrimination if it is declared by that law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India. By Article 304 the State Legislature is at liberty to impose non-discriminatory taxes on goods imported from other States and also to impose reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the, public interest, but this the Legislature can do only if the Bill has been introduced or moved in the Legislature of a State with the previous sanction of the President. The working of these constitutional provisions for over a period of five or six years immediately following the coming into force of the Constitution disclosed that all was not well with the system of States' tax on inter-State, import and export sales or purchases of goods. The State of Bombay v. United Motors (India) Ltd. [1953] 4 S.T.C. 133 held:

The effect of the Explanation [to Article 286(1)] in regard to inter-State dealings is, in our view, to invest what, in truth, is an inter-State transaction with an intra-State character in relation to the State of delivery, and Clause (2) can, therefore, have no application.

5. Taking advantage of this view of the Supreme Court, the States immediately extended their jurisdiction to tax non-resident dealers and required them to get registered under the sales tax law of the importing State to file returns and books of accounts and pay tax. It became a common phenomenon for the Tax Officers of one State to pitch their tents in another State and enforce the provisions of their sales tax laws over the exporting non-residents. It has naturally led to a great deal of confusion, inconvenience, unreasonable tax burden and harassment by the Tax Officers of the consuming State demanding and collecting taxes from non-resident dealers belonging to the exporting States. The Bengal Immunity Co., Ltd. v. The State of Bihar [1955] 6 S.T.C. 446 decided by the Supreme Court on 6th September, 1955, however, came to the rescue of the non-resident dealers. It reversed the view earlier held and declared that even the Explanation-sales could not be subjected to tax by the importing States unless Parliament by law lifted the ban under Article 286(2). We are not concerned with the Sales Tax Laws Validation Ordinance of 1956 and the Sales Tax Laws Validation Act, 1956, which were meant to validate or regularise the levy and collection of taxes by different States made between 1st April, 1951, and 6th September, 1955. So far it maybe observed that under the Explanation to Article 286(1)(a) an inter-State sale was taxed by the State in which the delivery of the goods was made for consumption as a direct result of the sale, treating the same as an inside sale on the strength of The State of Bombay v. United Motors (India) Ltd. [1953] 4 S.T.C. 133 The Ordinance and the Validation Act were intended to relieve the States from the consequences of Bengal Immunity Co. Ltd. v. The State of Bihar [1955] 6 S.T.C. 446 on their respective finances and to avoid refund of taxes levied and collected between 1st April, 1951, and 6th September, 1955, on the basis of the Explanation as interpreted by the State of Bombay v. United Motors (India) Ltd. [1953] 4 S.T.C. 133.

6. The national aspects of sales tax, the exigencies of foreign trade, the disadvantage the exporting States suffered on account of the Explanation to Article 286(1), which linked sales tax with consumption, and the bewildering variety of problems of interpretation and their effects upon the budgets of the States made it obviously necessary to take measures to bring about uniformity in the enforcement and incidence of sales tax law relating to inter-State sales or purchases, particularly from the standpoint of the dealer and consumer placed in different States and to make it more equitable for the exporting States which, as the legal position then stood, had no share in the proceeds of inter-State taxation. The Taxation Enquiry Commission, 1953-54, went into the matter and made Suggestions in that regard. Eventually the Constitution (Sixth Amendment) Act, 1956, was enacted. ' By this Act, power was shifted from the State List to the Union List to tax the sale or purchase of goods other than newspapers, which takes place in the course of inter-State trade or commerce by inserting entry 92A in the Union List and the State's power to tax on the sale or purchase of goods other than newspapers was made subject to the power of the Union Legislature under entry 92A. Nevertheless the taxes levied and collected by the Union pursuant to the legislation under entry 92A of List I have been assigned to the States by introducing Sub-clause (g) to Article 269, Clause (1). Article 286 has been drastically recast by the Sixth Amendment. The Explanation to Clause (1) has been omitted. Clauses (2) and (3) have been substituted by new ones. Clause (2), as substituted, has authorised the Parliament to formulate by law the principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in Clause (1), that is to say, an outside sale or a sale or purchase that takes place in the course of the import of the goods into, or export of the goods out of, the territory of India. Clause (3), which is new, subjects the State's power to tax on the sale or purchase of goods declared by Parliament to be of special importance in inter-State trade or commerce to such restrictions and conditions with regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify. The other amendment, which is of significance and importance, is the addition of Clause (3) to Article 269 which enables Parliament to formulate by law principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce. The Sixth Amendment came into operation on 11th September, 1956. Its effect is to deprive the States of their power to tax inter-State sales or purchases and vest it in Parliament and to place restriction on their power to tax intra-State sales or purchases of goods declared by Parliament by law to be of special importance in the inter-State trade or commerce. The Central Sales Tax Act, 1956, then followed, which received the assent of President on 21st December, 1956. Though the Act came into force from 5th January, 1957, except Section 15, the actual levy and collection of taxes on inter-State sales or purchases began to be made only from 1st July, 1957. The scope of this Act has been elaborately dealt with by this Court in Larsen and Toubro Ltd. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150 and we do not propose to reiterate it. The major change-over is to locate the situs of an inter-State sale 05 purchase for purposes of Central tax in the exporting State which is the converse of the position under the Explanation to Article 286(1). We mentioned earlier that the Explanation fixed the situs in the importing State where the goods as the direct result of the sale were delivered for consumption. Larsen and Toubro Ltd. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150 observed :

An inside sale or an outside sale is related to its situs and if the situs of an inside sale is fixed on certain tests, what is not an inside sale will be an outside sale provided there is a completed contract of sale of goods...In our opinion, having regard to the definitions of 'appropriate State' and 'place of business' and the language employed by Sections 3 and 4, a sale or purchase inside a State as defined by Section 4(2) is the starting point and out of such sale or purchase is carved out and separated, a sale or purchase which occasions the movement of goods from one State to another or is effected by transfer of documents of title to the goods during their movement from one State to another and by this process such an inter-State sale or purchase is distinguished and excluded from an outside sale or purchase. At the same time, an inter-State sale or purchase while separated from an inside sale is also integrated with it for purposes of its situs and fiscal and territorial jurisdiction to tax it. Tests similar to these applicable to inter-State sale or purchase are applied by Section 5 to sale or purchase taking place in the course of import into or export out of the territory of India, only with this difference that the movement of goods in the case of import into or export out of the territory of India terminates or commences at the customs frontiers of India.

7. We are not at the moment concerned with the second and subsequent sales during inter-State movement of goods, the incidence of tax in respect of which is the subject of Section 6(2) read with Section 9(1) and its proviso. When the locus of a sale is determined by the tests mentioned in Section 4(2) to be in a particular State, it is an outside sale for all other States, But if the local sale as determined by Section 4(2) occasions the movement of the goods from one State to another or is effected by a transfer of documents of title to the goods during their movement from one State to another, the sale acquires the character of an inter-State sale. This result is achieved by the opening words of Section 4(1). The tests applicable to the determination of the character of an inter-State sale apply also to a sale that takes place in the course of export or import, the dividing line in the movement in respect of export or import being, after or before, as the case may be, the goods have crossed the customs frontiers of India. As the Act stood as enacted in 1956, all inter-State sales were made liable to tax subject to the other provisions. Every dealer liable to-pay tax should compulsorily get registered in the prescribed manner, but registration of a dealer not liable to tax was left to his option. The pivot of the Act is Section 8 which prescribing, as it did, the rates of tax on sales in the course of inter-State, trade or commerce as to conform to the freedom of trade, commerce and intercourse throughout the territory of India guaranteed by Article 301 and avoid unequal incidence or burden in inter-State taxation just as Sections 3, 4 and 6 have to keep in view Articles 286 and 269(3). The rate of tax prescribed by Section 8 is linked with registration of the dealer and the class of goods as declared or non-declared goods specified in the certificate of registration of a registered dealer as well as the specific purpose of the purchase of the goods by the dealer either as intended for resale by him or for use by him in the manufacture of goods for sale or in the execution of any contract. The original rate of tax applied to inter-State transactions between registered dealers in such goods was one per cent, but if the State rate for local transactions in similar goods was lower than one per cent, or nil, that should prevail. But if the inter-State transactions were between persons or dealers other than registered dealers, the State rate should apply to them as if they were inside sales. The scheme of Section 8 is, therefore, that the rate of one per cent, was a concession available to inter-State transactions as between registered dealers in the goods mentioned in the registration certificates. But the concession was withheld if the conditions for the concession were not complied with, and the State rate for local transactions was applied to them. If the State rate was lower than one per cent, there was no room for such differential treatment. What is even more important for present purposes is that the inter-State rate could never be in excess of State rate for corresponding intra-State sale or purchase. The Second Finance Commission has precisely crystallized the position under the Act as it stood in 1957 in the following words at page 60 of the Report:

The Central Sales Tax Act specifically provides that the rate of tax on inter-State sales cannot exceed that on intra-State sales, so that, for any inter-State tax to accrue, there should be an intra-State tax.

8. We think it is permissible in passing to note that this was in accord with the recommendation of the Taxation Enquiry Commission that the sales tax system of one State did not impose an arbitrary and unregulated burden on either consumer or dealer in another State or unduly interfere with the free flow of such trade and commerce. After stating that the sphere of power and responsibility of a State might be said to end and that of the Union to begin, when the sales tax of one State impinged administratively on the dealers and fiscally on the consumers of another State and that the inter-State rate to be levied by the exporting State should be strictly limited by the Union, the Commission had more specifically recommended at page 57 of the Report:

Since, in permitting the levy of sales tax on inter-State trade, the main intention is to ensure that some revenue accrues to the exporting States without raising unduly the burden on consumers in the importing State, it is necessary that the rate to be specified in the Central legislation should be comparatively low. It should, in our opinion, be one per cent. on all articles except on goods of special importance in inter-State trade. Inter-State trade comprises two types of transactions, viz., (i) transactions between registered dealers of one State and registered dealers of another and (ii) transactions between registered dealers of one State and unregistered dealers of another. The rate of one per cent, proposed above would apply only to the transactions between the registered dealers in one State and the registered dealers in another... Where tranasctions take place between registered dealers in one State and unregistered dealers or consumers in another, this low rate of levy will not be suitable as it is likely to encourage avoidance of tax on more or less the same scale as the present provisions of Article 286 have done. If this is to be prevented, it is necessary that transactions of this type should be taxable at the same rates which exporting States impose on similar transactions within their own territories. The unregistered dealers and consumers in the importing State will then find themselves unable to secure any advantage over the consumers of locally purchased articles; nor of course will they, under this system, be able to escape the taxation altogether, as many of them do at present.

9. We make reference to these observations from the Reports of the Taxation Enquiry Commission and the Second Finance Commission only to highlight the landmarks of the history of the origin for the Sixth Amendment of the Constitution and the enactment of the Central Sales Tax Act, 1956. To resume our narration of the position of that Act as enacted first, one of the conditions for the concessional inter-State rate to apply was that a registered dealer selling the goods should furnish a declaration in the prescribed form filled and signed by the registered dealer to whom the goods were sold containing the prescribed particulars. To the actual administration of the Central Act for purposes of levy and collection of tax, the procedure obtaining in the taxing State under the local law relating to sales tax was to apply and as the inter-State sales tax is intended to be a source of revenue for the States, the taxing State in view of Article 269(1)(g) has been authorised to retain for its purpose the inter-State tax levied and collected by it. Chapter IV of the Act is devoted to goods of special importance in inter-State trade or commerce. Section 14 declared the goods specified therein to be of special importance. Pursuant to Article 286(3), Section 15 placed restrictions on the State law relating to imposition of tax on sales or purchases of declared goods. The restrictions were on the rate of State tax and the incidence of it was restricted to a single point. The rate as restricted was two per cent, and it should not be levied at more than one stage in a State. So far we have referred to the provisions of the Act as it initially emerged in December, 1956.

10. There have been six amendments made to the Act by the end of 1966 but their effect is not to disturb the original scheme of the Act and is confined to the rates of inter-State taxation and to certain other aspects in the incidence etc., some of which we shall presently refer to. The Central Sales Tax (Amendment) Act, 1957, made three changes, addition of cotton yarn to the list of declared goods, fixation of the last sale or purchase of declared goods in the State as the point at which the tax is to be levied, subject, however, to the condition that no tax should be levied by the State at that stage if the goods are intended for sale .in the course of inter-State trade or commerce and power for the State to exempt any goods or class of goods from the inter-State sales tax. The next amendment was in 1958, Act No. 5 of that year, which extended the Act to the State of Jammu and Kashmir. The second amendment, Act No. 31 of 1958, was more extensive. The second or subsequent sale during the inter-State movement of goods following a sale of the description under Section 3(1) has been exempted from tax subject to certain conditions. Sub-sections (1), (2) and (4) of Section 8 have been substituted by fresh provisions but within the existing framework under Section 8 as it stood before the amendment. But the changes are of far-reaching importance. Sub-section (1) as amended brings within its scope also sales to Government of any goods, not merely of the goods referred to in the certificate of registration of the dealer. If an inter-State transaction is not as between a registered dealer and Government or a registered dealer, the rate of tax shall be the same in case it relates to declared goods as that applicable to the sale or purchase of such goods inside the exporting State. But the rate will be calculated at seven per cent, or the State rate whichever is higher in case it relates to other goods. The proviso to Section 8 was omitted but has been substantially re-enacted in the form of Sub-section (2A) with an explanation. The effect of the new provision is to extend the exemption or the rate lower than one per cent, obtaining in the local law of the taxing State to the inter-State transaction in corresponding goods declared or undeclared. This arrangement overrides Sub-sections (1) and (2) in view of the non obstante clause with which Sub-section (2A) commences. Section 9 as amended makes it clear that it is only the State from which the goods move in the course of inter-State trade or commerce that may levy and collect the tax. Tax shall, however, be levied on second or subsequent sale not covered by Section 6(2) by the State in which the registered dealer making the sale has his place of business. Section 15 also, as amended, provides that the State Governments may levy a tax on declared goods at any stage under local laws but only on condition that if the goods were sold in the course of inter-State trade or commerce the tax, if any, collected on the local sale of such goods has to be refunded. In that case only Central sales tax can be imposed. One per cent, in Sub-sections (1) and (2 A) of Section 8 was raised to two per cent, by the Central Sales Tax (Amendment) Act, 1963, and then to three percent, by the Finance Act, 1963. Two per cent, in Section 15 also has been raised to three per cent, by this Act which means that it is the ceiling rate for local taxation too. By the amending Act of 1963 seven per cent, in Sub-section (2) of Section 8 was raised to ten per cent, which has again been raised now to 11 per cent.

11. In that background it has been argued for the assessees (1) that the enhancement of inter-State rate by Section 8(2)(b) to seven per cent, and now to 11 per cent, is a penalty, (2) that the enhanced inter-State rate which is higher than the normal multi-point State rate acts in effect as a prohibition of inter-State sales to unregistered dealers or to consumers and a law which has that effect cannot be regarded as one with reference to taxation, and (3) that having regard to the importance of inter-State trade, it is ultra vires to authorise any State to levy on inter-State sale any tax at a higher rate than that it levies on inside sale. The Revenue takes the stand that the scheme of enhanced inter-State rate of taxation under Section 8(2)(b) is designed to effectively channellise all inter-State transactions through registered dealers and to avoid evasion. It is also stated that the higher rate is also supported as being reasonable and in public interest.

12. The original structure of inter-State rate of taxation as it was first enacted does show that the inter-State rate in relation to transactions between registered dealers in any goods was lower than the State rate on local transactions in such goods and in case of other inter-State transactions, inter-State rate should be the same as intra-State rate applicable if they were local transactions. The rate prescribed for inter-State transactions between registered dealers could, therefore, be regarded as a concessional rate. But the concession was made available subject to the condition that the inter-State sale was by a registered dealer to a registered dealer of goods described in the registration certificate of the seller and intended for the use or purpose mentioned therein. But when the concessional rate was raised to two per cent, and later to three per cent., it is said, it ceases to be a concession because it found its level with the intra-State rate. That being the case, it is argued (1) that there is no longer any justification for the requirement that inter-State transactions to qualify for the so-called concessional rates should be as between registered dealers and that the goods should be of specific description and (2) that in any case when the inter-State sales are admittedly made by the registered dealers to Governments, it is unreasonable to insist upon production of declarations and certificates in the prescribed D Forms. Government Departments, we are told, take their own time to furnish D Forms and on account of the delay in securing them, the assessees concerned are charged to tax at a higher rate of seven per cent, or ten per cent, or even eleven per cent., as the case may be, on the ground of failure to produce those forms. According to them, such imposition of higher rate amounts to a penalty.

13. In our opinion, the argument cannot prevail to invalidate the consequence resulting from failure to comply with the conditions required by Section 8(1). As we stated earlier, the scheme of Section 8 is to route inter-State transactions through registered dealers in order to keep track of not only such transactions but also of the goods in the exporting and importing States for the purpose of Central taxation. In order to effectuate such a scheme, it is usual in fiscal laws to provide that the concessional rate will be subject to certain conditions and that non-compliance with them will entail a higher rate. Where the rate under Section 8(1) and the State rate are equal, no doubt the conditions may appear to be superfluous and unreasonable if the matter is approached from the standpoint of a concessional rate which justifies conditions for its application. But in our view, the insistence on registration, and on inter-State transactions passing through registered dealers and on production of declarations and certificates in the prescribed forms as part of the scheme is not a reason or basis for the concessional rate. That the inter-State rate should be lower than the State rate has been conceived, as it appears to us, in the interests of inter-State trade, commerce and intercourse. The purpose of the conditions qualifying for such lower rate is not merely to avoid evasion and this will be apparent from an examination of the requirement of the particulars to be given, as seen from the forms prescribed for declaration and certificate under Section 8(1). Some of those particulars are intended to see whether the goods involved in the inter-State transactions are of the description mentioned in the registration certificates, and the purchase of the goods is for the specific purpose or use. Where the inter-State sales are admittedly by registered dealers to Governments, it may appear to be unreasonable to subject such dealers to a higher rate for non-production of the certificates in Form D because of delays on the part of the Governments and for no fault of theirs. But this situation arises not because of any inherent defect in Section 8(1) and (4) requiring production of certificates in Form D but because of extraneous causes like delays on the part of Governments. We are, therefore, unable to regard the higher rate even in such cases as unreasonable or as a penalty. We decline to hold the opening words of Sub-section (4) of Section 8 to the effect that unless the conditions are satisfied Sub-section (1) shall not apply to be invalid on that ground. We, however, observe that the Union Government may consider, where inter-State sales are made by registered dealers to Governments and there is clear proof otherwise than by production of the required certificates in Form D, of that fact, that of the required particulars, whether the higher rate should nevertheless and necessarily be applied to them and a modification of the law in that regard is not reasonably called for.

14. The next question is whether Section 8(2)(b) being in its effect prohibitive of inter-State transactions as between registered dealers in one State and unregistered dealers and consumers in another State, it is within the competency of Parliament under entry 92-A of the Union List. We think it cannot be denied that the scheme of Section 8 does not take into account its effect on the flow of inter-State trade, commerce and intercourse as between the dealers in one State and consumers in another State who make purchases on their own account for consumption by themselves. Though perhaps the Legislature did not design it, the effect of the higher rate under Section 8(2)(b) is that unregistered dealers and consumers in a State will not purchase in another State because of the higher rate and would perfer local purchase in the State where the goods are found which would be less costly for them. If the object of Section 8(1) read with Sub-section (4) is to prevent evasion of tax, one of its consequences strangely is to prevent the very transactions which yield tax. On this view, it is argued that Section 8(2)(b) is not a measure of revenue by checking evasion; the Legislature has checked tax and not evasion. So, it is said that Section 8(2)(b) which has that effect is not a law on inter-State' sales tax or is ancillary to it. Attractive as the argument may seem, we are satisfied that it is not correct. It is truly said that the object of the Act is to raise money. Sales tax is no doubt a law levied on the occasion of the sale, the taxable event being the sale: In re C. P. Motor Spirit Taxation Act, [1938] 1 S.T.C. 1 and Province of Madras v. Boddu Paidanna & Sons [1942] 1 S.T.C. 104. But we are unable to agree that Section 8(2) (b) by its own force inhibits or prohibits the taxable event or the free activity which is the basis of the taxation. It is, however, pressed upon us that that is the effect or the probable effect of the provision. To find whether a statutory measure is a colourable device, that is to say, the Legislature says one thing while it means another, the Court is entitled to and will undoubtedly look into its effect: Attorney-General for Alberta v. Attorney-General for Canada [1939] A.C. 117 and Canadian Federation of Agriculture v. Attorney-General for Quebec and Ors. [1951] A.C. 179. But when the pith and substance of the law is within the legislative head or power, its incidental effect, in our opinion, will not take it out of the scope of such power. Section 8(2)(b) is in its pith and substance a provision prescribing a higher rate of inter-State sales tax in certain events and is, therefore, a law on taxes on the sale or purchase of goods that takes place in the course of inter-State trade or commerce. We think that merely because the rate of tax is such that it may possibly discourage the taxable event, it will not per se cease to be a law with respect to taxation. Supposing the rate of tax on income is so high that it retards or brings to a standstill the incentive to make or earn income, can it be said that because of that effect, the law is not one relating to income-tax but one which prohibits or inhibits the taxable event? We think not, and likewise in the present instance relating to sales tax. Further, such effect does not directly flow, as it seems to us, from Section 8(2)(b). Also its object is to be in aid of effectuating the scheme of inter-State taxation under Section 8(1) read with Sub-sections (3) and (4). In our view, therefore, Section 8(2)(b) is within the competence of Parliament under entry 92-A.

15. The last point of Mr. Thiruvenkatachari for some of the assessees which is based on Article 301 of the Constitution is, however, of substance and will, in our opinion, have to be upheld. He says that the dealer within a State who does inter-State trade is discriminated against and placed at a disadvantage compared with the dealer who carries on local trade. This, in our opinion, is undoubtedly so in regard to inter-State transactions as between unregistered dealers or between registered and unregistered dealers or consumers. In such cases, due to the application of the rate under Section 8(2)(b), the goods become costlier in the importing State because of the higher rate applied by the exporting State which retards or impedes inter-State movement of the goods and, therefore, the free flow of inter-State trade, commerce and intercourse. We have already set out the scheme of inter-State rate of taxation envisaged by Section 8. To start with the Act provided for inter-State rate in respect of non-declared goods which was lower than the local rate on similar goods. But a higher inter-State rate, however, but not exceeding the local multi-point rate, was enforced on transactions otherwise than through registered dealers. This structure of rates intended to keep effective the scheme of inter-State transactions through registered dealers with the object of regulating or controlling evasion did not in the least adversely affect free flow of inter-State trade. In fact in a sense it facilitated it. When the Act was amended by the Central Sales Tax (Amendment) Act, 1958, the principle of such a structure of rates has been borne in mind by the Legislature by inserting Sub-section (2A) to Section 8. But the application of the principle has been subjected by that provision to a ceiling lower than one per cent, local rate which has now been raised to three per cent, by stages. If the local rate is three per cent, or higher, the principle is reversed by Section 8(2)(b) in respect of transactions outside the purview of Section 8(1), with the result the rate of seven per cent, or ten per cent, or eleven per cent, or the State rate whichever is higher is applied to such transactions. The effect of this on the freedom of inter-State trade, commerce and intercourse is writ large; such a higher discriminatory rate definitely and without a doubt will seriously impede, if not altogether stop, the inter-State sales or purchases as between a local dealer and out of State unregistered dealer or consumer in respect of all goods other than declared goods.

16. The scope and intendment of Articles 301 to 304 of the Constitution were recently examined by this Court in Larsen and Toubro Ltd. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150 in the light of Atiabari Tea Co. Ltd. v. State of Assam : [1961]1SCR809 , Automobile Transport Ltd. v. State of Rajasthan : [1963]1SCR491 and State of Madhya Pradesh v. Bhailal Bhai : [1964]6SCR261 and the conclusions were summed up thus:

It must be taken to have been well-settled by the two majority opinions of the Supreme Court referred to : (1) that the freedom guaranteed by Article 301 is not to be interpreted as to its scope and ambit in the light of the other provisions of Part XIII but the freedom is wide and absolute except for such restrictions subject to specified conditions as are to be found in the provisions other than Article 301 in Part XIII; (2) that the fiscal laws clearly fall within the ambit of Article 301; (3) that the restrictions contemplated in Part XIII do not, however, include regulatory or compensatory measures ; and (4) that the last words in Article 303(1) are not restricted as to the topic of law under particular heads but any law made by Parliament by virtue of any entry imposing discriminatory restrictions contemplated by'Article 303(1) would be bad under it.

17. In James v. Commonwealth of Australia [1936] A.C. 578 the Judicial Committee in interpreting Section 92 of the Australian Constitution pointed out that the section envisaged that trade and commerce should be conducted as if the borders were not there and that trade could pass as freely between adjacent States as between adjacent countries in England and observed :

The words 'freedom of trade' in Section 92 mean freedom from financial impost by whomsoever imposed, and those words are meant not only to be a limitation on any legislative authority, but also upon any executive act... The proviso to Section 92 equalizes taxation : it is a limitation on the generality of Section 92.

18. Larsen and Toubro Ltd. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150 while noting that Section 92 of the Australian Constitution has been worded differently from Article 301 of the Constitution considered that the essence of the observation of the Privy Council underlined Article 301 and stated :

Article 301 of our Constitution for its purposes recognises no State borders and trade, commerce and intercourse should flow as if the State barries were not there; and the entire territory of India is one integral unit from economic, social and political points of view.

19. On that view this Court held in Larsen and Toubro Ltd. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150 that unequal State rates when applied to inter-State taxation in respect of similar goods placed an unequal burden on inter-State trade or commerce affecting the free flow of trade, commerce and intercourse as between the States, and struck down on that ground Sub-sections (2), (2A) and (5) of Section 8 as violating Articles 301 and 303 of the Constitution. In doing so, this Court also kept in view Firm A.T.B. Mehtab Majid & Co. v. State of Madras [1963] 14 S.T.C. 355 and Hajee Abdul Shukoor & Co. v. State of Madras [1964] 15 S.T.C. 719. Though the decided cases we have referred to related in each case to a particular and peculiar aspect of differential or unequal burden on inter-State trade, commerce and intercourse as between the States, one basic principle, which runs through them, is that different and varying State rates extended to inter-State taxation on similar goods resulted deliberately or not in placing one State in an advantageous or disadvantageous position over another or rest of the States in inter-State trade, commerce and intercourse, which necessarily and inevitably impedes or destroys the freedom guaranteed by Article 301. In the instant case, the unequal burden on intra-State and inter-State dealings as between unregistered dealers or between unregistered dealers and consumers results from imposition of floor rate on such inter-State transactions which is higher than the local or State multi-point rate on intra-State transactions in non-declared goods. As regards dealings in declared goods, no such question arises. Where the inter-State rate is lower than the State single or multi-point rate in respect of inside sales, notwithstanding the differential or unequal rates they do not or are not likely to impede the free flow of inter-State trade, commerce and intercourse. On the other hand, they may help freer inter-State movement of goods. But when the inter-State rate is higher than the local single or multi-point rate, its effect obviously is to impede, prevent or discourage, if not, stop inter-State movement of non-declared goods. Larsen and Toubro Lid. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150 held that imposition of varying local rates of tax in different States on same or similar inter-State transactions resulted in inequality in the tax burden affecting the freedom of inter-State trade, commerce and intercourse. This implied that there should be uniformity in the inter-State rates and they should not be automatically linked with varying State rates. The problem in the cases before us is the application of inter-State rate under Section 8(2)(b) higher than the local single or multi-point rate for similar goods and further a higher inter-State rate than that applied to identical non-declared goods covered by inter-State transactions of sale or purchase through registered dealers or between registered dealers and Governments. The second part of the problem may present no difficulty in the context of Article 301 so long as the difference in rates does not make the inter-State rate higher than the local single or multi-point rate, on similar non-declared goods, for, in that case, as we are inclined to think, the free movement of inter-State trade is not adversely affected. But where the difference in rates is such that the inter-State rate is higher than the local or multi-point rate, the permissible limit, in our opinion, is exceeded, its effect being to directly impede or retard the free flow of inter-State trade, commerce and intercourse. On this view too, apart from the grounds in Larsen and Toubro Ltd. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150 Clause (b) of Sub-section (2) of Section 8 is unconstitutional and void, but only to the extent of the difference in the inter-State rate provided by it by which such rate exceeds the intra-State single or multi-point rate of tax for similar non-declared goods. The higher rate in Section 8(2)(b) is nowhere, as far as we know, near to the much lower multi-point intra-State rate, but may be approximately nearer to or even in some cases higher than the single point intra-State rate on similar goods. That may mean levy of tax on two single points, one under the Central Act and the other under the State Act which will be in conflict with the scheme of single point taxation envisaged by the Central Act, especially Section 9(3) as interpreted by State of Mysore v. Lakshminarasimhiah Setty and Sons [1965] 16 S.T.C. 231. But on the view we have expressed on the constitutional validity of Section 8(2)(b), we do not think it necessary to express our final opinion on this aspect.

20. The learned Advocate-General defended the validity of the higher inter-State rate in Section 8(2)(b) on the ground that it is designed to avoid or check evasion which is in the public interest. It is true, as he says, that taxing power is an attribute of sovereignty and is necessarily exercised to find the wherewithal in support of Government and that the rate of tax is a matter of policy entirely within the scope of the taxing power. But there are constitutional limitations subject to which alone the Legislature can exercise the taxing power. We need not reiterate that fiscal laws should be consistent with the freedom under Article 301 except to the extent the freedom itself is qualified by the other provisions of Part XIII of the Constitution. Parliament may by law impose such restrictions on the freedom as may be required in the public interest. But any law imposing such restrictions, if it contravenes the fundamental rights, shall to the extent of the contravention, be void. That, in our opinion, may necessarily also involve an examination whether the restriction is a reasonable restriction in the interest of the general public. Although Article 302 in contrast with Article 304(b) speaks of only restrictions and not reasonable restrictions, the reference in Article 303 to the law imposing restrictions would naturally bring it within the purview of Article 13(2). The further qualification that the restriction made by law should be such as is required in the public interest needs elucidation. While the freedom under Article 301 is a limitation on the scope of the legislative power, the limitation itself is qualified by Article 302 so that where the qualification applies, the limitation will have no operation and in such a case the law though in contravention of Article 301 will nevertheless be valid. Viewed in this manner, the public interest in Article 302, in our opinion, does not confer an independent head of power upon Parliament or is not by itself a separate topic of legislation but is related to the object of the law and the quality and effect of the restriction imposed by the law. The public interest in Article 302 is not an abstraction and by itself has no defined connotation, but acquires a meaning only if connected with the object of the law on any particular subject-matter and is linked with the objectivity of the law made by Parliament, its existence and extent being conditional upon or being controlled by it. There are articles as for instance Articles 269(3), 286(2), (3), 366(1) and 274 which give authority to Parliament to make a law which would not ordinarily be a matter appropriate to the relative legislative list and there are also articles dealing with a particular matter which is in the legislative list : see Article 33-Seventh Schedule-List I-Entry 2-Armed forces; Article 105-Seventh Schedule-List I-Entry-Privilges; Article 133(3)-Seventh Schedule-List I-Entry 77; Article 134(2)-Seventh Schedule-List I-Entry 77; and Article 253-Seventh Schedule-List I-Entry 14 -International agreements. There is a third class of articles like Article 19(2) to (6) and Article 302 in which there is reference to restrictions in the public interest. 'Public interest' is also referred to in entry 33 of List III in contrast with entries 26 and 27 in List II, and in entries 52, 54 and 56 in List I. A study of the expression 'public interest' as found in the various articles and legislative entries leads us to the conclusion that its scope, extent and quality should be fixed and appreciated in the particular context. In Article 302 the 'public interest' is annexed to the legislative subject-matter, that is the law made by Parliament under particular heads of its powers and lies in the effects of the regulation or restriction made by such law : Canadian Federation of Agriculture v. Attorney-General for Quebec and Ors. [1951] A.C. 179.

21. The subject of legislation is to tax inter-State sales and purchases and to make provision therefor. The object obviously is to raise money for the purpose of the State Governments by means of the Central Act. It has been stated for the State that the provisions of Section 8 have been made with the object of enforcing the levy of tax due in respect of inter-State transactions and preventing clandestine transactions between individuals and traders which would have the effect of defeating the provisions of the Central tax levy by such turnovers being evaded or not brought to tax and that the imposition of higher rate of ten per cent, has been made with the specific object of discouraging transactions of inter-State character except through regular trade channels and dealers registered under the Act. From the standpoint of Article 19(1)(f) the view urged by the State is that there is no restriction placed upon the individual in respect of his trading activity in inter-State trade and that even if the imposition of higher rate of tax is viewed as a restriction, it is a reasonable restriction which Parliament is competent to make in the interests of avoidance of evasion of tax due to the various States and of discouraging unauthorised transactions between unregistered dealers in the various States which would lead to the evasion of tax. The Central Government, however, has not joined with the States and has preferred to say nothing on the subject in view of Larsen and Toubro Ltd. v. Joint Commercial Tax Officer [1967] 20 S.T.C. 150. That the higher rate of tax provided by Section 8(2)(b) looked at from the basic rate of tax under Section 8(1) read with Section 8(2A) does impede freedom of inter-State trade, commerce and intercourse has been already held by us in the earlier part of this judgment. The restriction can be justified only if it is shown that it is in the public interest. A system of licensing or registration of dealers with a view to avoid evasion in sales tax legislation is undoubtedly related to and follows the fiscal object of the legislation and can well be said to be in the public interest. Guruviah Naidu v. State of Madras : AIR1958Mad249 was of the view that the term public interest in Article 19(6) could not be given a narrow meaning and that as the taxation was the supreme intention of the State and the law imposing a tax on sale was valid, a system of licensing or regulation of trade with a view to enforce and administer the tax law efficiently would be in the interests of the public within the meaning of that article. Though the matter was approached with reference to the fundamental right of a citizen to carry on trade or business, in essence the principle of the decision should, in our opinion, apply to the scope and effect of the public interest in Article 302. While, as held in that decision, public interest contemplated by Article 19(6) in order to justify restrictions on the rights guaranteed by Article 19(1)(g) need not arise from the inherent nature of the particular trade such as dangerous or unhealthy trade, the public interest in Article 302, in order to justify the restriction on the freedom of trade need not directly spring from considerations based on the freedom of trade itself guaranteed by Article 301. Also the law in order that the restriction placed by it on the system of trade may be justified as being required in the public interest need not necessarily be a law on the subject of trade itself but may well be under any entry in any of the Lists of the Seventh Schedule. Article 303(1) seems to support this view. If, therefore, as we think, the public interest in Article 302 is bound up with the subject-matter and follows the object of the law made under a particular topic or head of legislative power, any restriction imposed by such law on the freedom of trade to be valid should have a nexus with such public interest. That means the public interest in the restriction will lie in its effect on the subject or purpose of the legislation.

22. It has been stated that nowhere has it been said, not even in the statement of objects and reasons of various amendments raising the rate under Section 8(2)(b), that it was intended to avoid evasion, but, on the other hand, what has been stated as the object for raising the rate at every stage was to raise more money for State Governments. But that is not designed if the object is discernible from the provisions of the Act. We are prepared to take it that the object of the Central Act as it originally stood, in providing a higher rate but not exceeding the State multipoint local rate was to avoid evasion by effectively channellising inter-State sales and purchases through registered dealers at both ends or between registered dealers and Governments. That, as we have already observed, in its effect, did not impede the free flow of inter-State trade, notwithstanding the differential higher rate but subject to the limit of the State's normal multi-point rate. But when the rate is raised by Section 8(2)(b) higher than the multi-point local rate for non-declared goods, we have to see whether its effect as a restriction on freedom of trade is related to and subserves, if not, promotes the subject and object of the Central law relating to inter-State taxation. If, in providing for avoidance of evasion, the Legislature deliberately or inadvertently exceeded the limit drawn by the subject and object of the law and authorised a restriction which, in its effect, far from avoiding evasion, checks or prevents or prohibits, in the working, the very transactions chargeable to tax, it ceases to serve the purpose of the law. Such a restriction, in our opinion, cannot therefore be said to be required in the public interest in the context of the object of the Act and the effect of the restriction in relation to it.

23. There remains for consideration as to whether the restriction in the form of the higher rate in Section 8(2)(b) offends Article 19(1)(f) and is not saved by Clause (5) of Article 19. The argument is that, where the inter-State sales were admittedly by the registered dealers to Government departments, the denial of the benefit of Section 8(1) rate and the imposition of the higher rate on them under Section 8(2)(b) for no fault of theirs but on account of .long delays and failure on the part of Governments to furnish declarations in. the appropriate forms, is violation of their fundamental rights to acquire, hold and dispose of property. Realising that some of the assessees are limited companies and not citizens who alone can invoke Article 19(1) in their favour, it is urged that once the argument as to the violation of Article 19(1)(f) is accepted in respect of an assessee who is a citizen, it will be arbitrary to deprive companies of equal protection of the laws. It has been authoritatively held in Balaji v. Income-tax Officer : [1961]43ITR393(SC) that an attempt to prevent by legislation an evasion of just tax liability and the necessary classification to give effect to that object cannot be termed unreasonable. So too it should be regarded as beyond controversy that as no tax shall be levied except by the authority of law as provided by Article 265, the law must stand the test laid down by Article 13 of the Constitution. A tax law to be valid must not only pass the test of legislative competence but if it violates Article 19(1), it should be within the corresponding specific saving provisions contained in that article. There are numerous decisions which establish this proposition which do not need to be cited. The mere fact that the power of taxation is the sovereign right of the State does not conclude the validity of a taxing statute. Essential, as taxation is, to the very existence of Government, it may be exercised to the utmost extent as Government may think it necessary. As pointed out by the Supreme Court in Raja Jagannath Baksh Singh v. State of Uttar Pradesh : [1962]46ITR169(SC) :

In that sense, it is not the function of the Court to enquire whether the power of taxation has been reasonably exercised either in respect of the amount taxed or in respect of the property which is made the object of the tax.

24. Nevertheless, a tax law is not immune from the tests of legislative competency and constitutional limitations. As again observed in Raja Jagannath Baksh Singh v. State of Uttar Pradesh : [1962]46ITR169(SC) :.for deciding whether a tax has been validly levied or not, it would be necessary first to enquire whether the Legislature which passes the Act was competent to pass it or not. But that is not the only enquiry which is relevant in deciding the validity of a taxing statute. Since a taxing statute is a law, it is a law for the purpose of Article 13 and so its validity can be challenged on the ground that it contravenes one or the other of the fundamental rights guaranteed by Part III. It is thus clear that a citizen can challenge the validity of a taxing statute on the ground that it offends against Article 19 or Article 14 of the Constitution.

25. If a taxing statute therefore violates Article 19(1)(f), its validity cannot be sustained unless it is shown to be saved by Clause (5) of Article 19, that is to say, that the law imposed a reasonable restriction in the interests of the general public on a citizen's fundamental right to acquire, hold and dispose of property. Any tax we suppose may be a restriction and so is the Central Sales Tax Act on the right of a citizen under Article 19(1)(f). But as the object of the Act is to raise revenue to support Government, broadly speaking it will be, in the interests of the general public arid may well be regarded as a reasonable restriction. But for the assessees, the argument is marshalled thus: Under Section 8(2)(b) you are penalising me for no fault of mine. The higher fate in such cases is a penalty and in effect contravenes or destroys Certain types of inter-State sales and purchases which may be a source of inter-State taxation with the object to raise money for Government ; actually there was no evasion after the rate under Section 8(1) was raised to two percent, or later on to three per cent., which was the same as the State multi-point rate on inside sales. Section 8(2A) contains the general principle that the inter-State rate should be lower than the State multi-point rate which shows that by enacting Section 8(2)(b), Parliament had not made a law regarding evasion and in fact no material has been placed before the Court to show that it was enacted to avoid evasion. On these grounds it is pressed upon us that the higher rate imposed by Section 8(2)(b) is neither a reasonable restriction nor in the interests of the general public.

26. We have already held that as the Act originally stood, the higher rate not exceeding the State multi-point rate for inside sales and purchases was designed to check evasion and to effectuate the scheme to channellise the inter-State transactions as between registered dealers or between registered dealers and Governments. We have no doubt that it was a reasonable restriction in the interests of the general public. In fact, the validity of the higher rate not exceeding the State local multi-point rate has not been challenged in these cases before us. When, however, the rate in Section 8(2)(b), which is higher than the rate under Section 8(1), was raised still higher than the multi-point local rate for inside sales at two or three stages by later amendments, there is no indication anywhere except the assertion of certain officers in the counter-affidavits filed on behalf of the State Government to attribute the progressive rise in the rate under Section 8(2)(b) to the present level to checking evasion. The Central Government has not stated that it was the purpose in raising and further raising the rate. As a matter of fact, the statement of objects and reasons for each of the amendments substituting higher and still higher rates only mentioned the need to raise more and still more money for the purpose of the Government. We have also held earlier that the effect of higher rate in Section 8(2)(b) is not a levy of penalty and that the higher rate is attracted because of failure to conform to the conditions required to be fulfilled for obtaining the benefit of the normal inter-State rate provided by Section 8(1). We cannot possibly say that the higher rate under Section 8(2)(b) is, in its effect on the right to acquire, hold and dispose of property, an unreasonable restriction. When the rate of tax will become an unreasonable restriction is a question of degree. If the effect of the rate is such as it destroys totally, though indirectly the right to hold property, it may, in our opinion, be said to be an unreasonable restriction, but if, on the other hand, that is not the case, where to draw the line at a lower level beyond which tax-effect on account of the rate ceases to be a reasonable restriction, is a difficult question which has to be decided in each case in the particular context and on the facts. For the purpose of these cases, it suffices to say that we are not satisfied that the higher rate in Section 8(2)(b) is an unreasonable restriction. If the object of the higher rate is to raise more money for the Government, it should obviously be in the interests of the general public. We reject, therefore, the ground of the assessees based on Article 19(1)(f).

27. On our view as expressed earlier of the constitutional invalidity of Section 8(2)(b) in so far as it provides for a rate higher than the single or multi-point State rate on inside sales, the writ petitions and tax case are allowed. We may reiterate, however, that Mr. Thiruvenkatachari in his leading argument on behalf of the assessees for whom he appears admitted liability to the rate provided by Section 8(1). The assessees in each of these cases will be entitled to costs with counsel's fee fixed at Rs. 100.


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