# STATE OF BIHAR v. BIHAR CHAMBER OF COMMERCE

- **Citation:** [1996] 2 S.C.R. 184
- **Court:** Supreme Court of India
- **Decided:** 1996-02-06
- **Case number:** Civil Appeal Nos. 28432851 of 1996
- **Bench:** B.P. Jeevan Reddy, Suhas C. Sen
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/state-of-bihar-v-bihar-chamber-of-commerce-13900
- **Pages:** 33

## Headnote

Bihar (Tax on Ent1y of Goods into Local Areas for Consumption, Use
or sale 171erein) Act, 1993:
C
Entire State divided into local areas-Several trading facilities
provided-Existence of some connection between the tax and trading
facilities-Held: Tax coinpensat01y in nature and not violative of Article 301
of the Constitution of India.
Tax was in public interest and imposed reasonable restnctwn on
D freedom of trade, commerce or intercourse-Hence saved by Article 304(b)
read with A1ticle 255 of the Constitution of India.
Section 3(1) proviso 6-Ent1y TQX---'-Different rates--For different commodities and different areas-Subject to ceiling of 5 percent-Conditions and
restrictions-As imposed by State-Power conferred on State Govemment to
E specify-Held : not unguided and hence not violative of Anicle u· of the
Constitution.
F
Constitution of India, 1950: A1ticles 245, 246, 249 to 253 and Schedule
VII List II Entry 52.
Legislative competence-Tax under State Act Covered by Entry 52 List
II Seventh Schedule-Not in the nature of sales t~Additional duties of i
e.xcise-Under Central Act-Proceeds-State agreeing to take a share '
of-Held: No ground to urge State Legislature lacked legislative competence.
G
Article 301-Nature of t~Regulatory or compensatory-Entry of
goods-/..,evy of tax on-State divided into local areas-Existence of some
connection between tax and trading facilities-Held : tax compensatory in
nature.
Altic/es 19, 304(b) and 25~Trade, commerce and intercourseH Tax-Imposing restrictions on-Proviso to Article 304(b }-Condition
184
STATE v. BIHAR CHAMBER OF COMMERCE
185
under-Bill-President's previous sanction-No recital to that effect in A
...,;>
Act-Could be established aliunde-Even in absence of recital-Tax imposed
for implementing welfare schemes-Indicated tax was in public interest-Restriction-Rasonableness of-Equally relevant under Article 304(b ).
Additional Duties of Excise (Goods of Special Imp01tance) Act, 1957: B
,..___
Provision-Falls under Entry 84 of List I-Dealt with scheduled commodities
only-Act neither made under Article 252 nor relatable to A1ticles 249 to
253-Constitution of India, Schedule VII List I Entry 84 and Articles 245,
246 and 249 to 253.
The Bihar (Tax on Entry of Goods into Local Areas for Consump- c
tion. Use or sale Therein) Act, 1993 which provided for levy of tax on entry
of scheduled goods into Local area for consumption, use or sale therein at
a rate not exceeding 5%. The respondents filed writ petition in the High
Court questioning the constitutional validity of the Act. The High Court
allowed the petition and struck down the Act. Aggrieved by the High D
Court's judgment the appellant preferred the present appeal.
On behalf of the appellants it was contended that the impugned tax
was both compensatory and regulatory; that the money raised under the
Act would be spent for the benefit of the local areas of the State; that the
E
challenge to the Act could not succeed because it had obtained the assent
of the President under Article 304(b) read with Article 255 of the Constitution; that the impugned levy constituted a reasonable restriction imposed
in public interest under Article 301 of the Constitution; and that where a
ceiling was prescribed and the executive was empowered to prescribe the
rate of tax subject to the said ceiling the confernment of power could not F
--
be characterised as unguided, particularly where the power was conferred
upon the Government.
On behalf of the respondent it was contended that the State was
sharing the revenue under the Additional Duties of Excise (Goods of G
Special Importance) Act, 1957 and, therein, the State could not levy any
entry tax under the impugned Act; and that the impugned Act did not
---
indicate in any manner that the revenues raised thereunder would be
passed on to the local authorities and the tax imposed could not be treated
as a tax contemplated by Entry 52 List II of the Seventh Schedule to the
Constitution.
H
186
SUPREME COURT REPORTS
A

## Text

_Characters 0–39,905 of 82,405. This is a partial read: ask again with offset=39905 for what follows._

A
B
STATE OF BIHAR
v.
BIHAR CHAMBER OF COMMERCE
FEBRUARY 6, 1996
[B.P. JEEVAN REDDY AND SUHAS C. SEN, JJ.]
Bihar (Tax on Ent1y of Goods into Local Areas for Consumption, Use
or sale 171erein) Act, 1993:
C
Entire State divided into local areas-Several trading facilities
provided-Existence of some connection between the tax and trading
facilities-Held: Tax coinpensat01y in nature and not violative of Article 301
of the Constitution of India.
Tax was in public interest and imposed reasonable restnctwn on
D freedom of trade, commerce or intercourse-Hence saved by Article 304(b)
read with A1ticle 255 of the Constitution of India.
Section 3(1) proviso 6-Ent1y TQX---'-Different rates--For different commodities and different areas-Subject to ceiling of 5 percent-Conditions and
restrictions-As imposed by State-Power conferred on State Govemment to
E specify-Held : not unguided and hence not violative of Anicle u· of the
Constitution.
F
Constitution of India, 1950: A1ticles 245, 246, 249 to 253 and Schedule
VII List II Entry 52.
Legislative competence-Tax under State Act Covered by Entry 52 List
II Seventh Schedule-Not in the nature of sales t~Additional duties of i
e.xcise-Under Central Act-Proceeds-State agreeing to take a share '
of-Held: No ground to urge State Legislature lacked legislative competence.
G
Article 301-Nature of t~Regulatory or compensatory-Entry of
goods-/..,evy of tax on-State divided into local areas-Existence of some
connection between tax and trading facilities-Held : tax compensatory in
nature.
Altic/es 19, 304(b) and 25~Trade, commerce and intercourseH Tax-Imposing restrictions on-Proviso to Article 304(b }-Condition
184
STATE v. BIHAR CHAMBER OF COMMERCE
185
under-Bill-President's previous sanction-No recital to that effect in A
...,;>
Act-Could be established aliunde-Even in absence of recital-Tax imposed
for implementing welfare schemes-Indicated tax was in public interest-Restriction-Rasonableness of-Equally relevant under Article 304(b ).
Additional Duties of Excise (Goods of Special Imp01tance) Act, 1957: B
,..___
Provision-Falls under Entry 84 of List I-Dealt with scheduled commodities
only-Act neither made under Article 252 nor relatable to A1ticles 249 to
253-Constitution of India, Schedule VII List I Entry 84 and Articles 245,
246 and 249 to 253.
The Bihar (Tax on Entry of Goods into Local Areas for Consump- c
tion. Use or sale Therein) Act, 1993 which provided for levy of tax on entry
of scheduled goods into Local area for consumption, use or sale therein at
a rate not exceeding 5%. The respondents filed writ petition in the High
Court questioning the constitutional validity of the Act. The High Court
allowed the petition and struck down the Act. Aggrieved by the High D
Court's judgment the appellant preferred the present appeal.
On behalf of the appellants it was contended that the impugned tax
was both compensatory and regulatory; that the money raised under the
Act would be spent for the benefit of the local areas of the State; that the
E
challenge to the Act could not succeed because it had obtained the assent
of the President under Article 304(b) read with Article 255 of the Constitution; that the impugned levy constituted a reasonable restriction imposed
in public interest under Article 301 of the Constitution; and that where a
ceiling was prescribed and the executive was empowered to prescribe the
rate of tax subject to the said ceiling the confernment of power could not F
--
be characterised as unguided, particularly where the power was conferred
upon the Government.
On behalf of the respondent it was contended that the State was
sharing the revenue under the Additional Duties of Excise (Goods of G
Special Importance) Act, 1957 and, therein, the State could not levy any
entry tax under the impugned Act; and that the impugned Act did not
---
indicate in any manner that the revenues raised thereunder would be
passed on to the local authorities and the tax imposed could not be treated
as a tax contemplated by Entry 52 List II of the Seventh Schedule to the
Constitution.
H
186
SUPREME COURT REPORTS
A
Allowing the appeal, this Court
[1996] 2 S.C.R. .
I
I
HELD : 1. The impugned tax is not a regulatory measure but a taxing
enactment and the tax was levied upon the entry of goods into a local area,
i.e., upon the movement of goods; where the local areas contemplated by
the Bihar (Tax on entry of Goods into Local Areas for Consumption. Use
B or Sale Therein) Act, 1993 cover the entire State, the distinction between
the State and the local areas practically disappears. The facilities provided
in the State are the facilities provided in the local areas as well. Interests
of the State and the interests of the local authorities are, in essence, no
different. It cannot be stipulated that for the purpose of establishing the
C compensatory character of the tax, it is necessary to establish that every
rupee collected on account of the entry tax should be shown to be spent on
providing trading facilities. It is enough if some connection is established
between the tax and the trading facilities provided. The connection can be
direct one or an indirect one. Judicial notice can be taken of the fact that
D the State does provide several facilities to the trade including laying and
maintenance of trade roads, water-ways and markets, etc. Since the levy is
by the State, Court also look to the facilities provided by the State for
ascertaining whether the State has established the compensatory character
of the tax. On this basis, it must be held that the State has estal,>lished that
the impugned tax is compensatory in nature. This finding is by itself
E sufficient to negative the attack based on Article 301. (196-A; 197-B-G]
Automobile Transport (Rajasthan) Limited v. State of Rajasthan,
(1963] 1 SCR 491, followed.
Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, Madhya
F Pradesh, (1995) 96 STC 6541 relied on.
India Cement Limited & Ors. v. State of Tamil Nadu & Ors., (1990) 1
sec 12, referred to.
2. For the exception in Article 304(b) to come to ~he rescue of the
G State, three requirements have to be satisfied, viz., (a) that the Bill was
introduced or moved in the Legislature with the previous sanction of the
President of India or that the Bill has been assented to by the President
(as contemolated by Article 255), (b) that the levy of the impugned tax
constitutes ·a reasonable restriction and (c) that the said reasonable
H restriction is required in public interest. In the instant case, the Bill was
-
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STATE v. BIHAR CHAMBER OF COMMERCE
187
I
not introduced or moved in the Assembly with the previous sanction of the- A
President as required by Article 304(b) but the contention of the State is
that the Bill has been assented to by the President and hence, the requirement is satisfied, thoui;h the impugned Act does not recite the said fact.
Having regard to the material produced on behalf of the State and 'the
absence of any material to the contrary it must be held that the prior B
consent has been satisfied in the case of the impugned Act. [199-A-C; F]
3. As regards the question whether the interference with and the
restriction upon the freedom guaranteed by Article 301 in the form of the
impugned tax is a reasonable one and whether it is required in public
interest it was stated on behalf of the appellant-State that in view of the C
sudden loss of revenue from the cess upon minerals, public interest required the appellant- State to find alternative sources of revenue to keep
its various welfare programmes and other governmental functions going
and that the impugned tax was conceived as one of the alternative sources.
The fact that President has given assent to the Bill also raises a presumption that the President (Central Government) had applied his mind to the D
problem and had come to the conclusion that the proposed tax constitutes
a reasonable restriction and is required to be imposed in public interest. It
is true that these are only presumptions but taken together with other
materials available they do firmly establish the said requirement in Article
304(b). On the material brought to the notice of this Court and for the E
reasons recorded here in above, the requirements of Article 304(b) are
satisfied in this case. The attack upon the validity of the impugned Act on
the ground of violation of Article 301 accordingly fails.
[199-G-H; 200-A-B; 204-D; 205-B]
State of Karnataka v. Mis Hansa Corporation, [1981) 1 SCR 823;
Khyerbari Tea Company Ltd. v. State of Assam, [1964] 5 SCR 975; Bhagatram
Rajeev Kumar v. Commissioner of Sales Tax, Madhya Pradesh, (1995) 96 STC
654 and Shakti Kumar M. Sancheti v. State of Maharashtra, (1995) 96 STC
659, relied on.
F
India Cement Limited & Ors. v. State of Tamil Nadu & Ors., [1990) 1 G
sec 12, referred to.
4.1. Entry tax is a tax levied at the point of entry of goods into a local
area for the purpose of consumption, use or sale therein. It is not a tax on
sale. It is a tax on the en.try of goods into a local area. It is a tax on entry
and not a tax in the nature of a tax on sale. Tax on sale and purchase of H
188
SUPREME COURT REPORTS
[1996) 2 S.C.R.
A goods are provided by Entry 52 in List II. Neither mere entry of goods is
enough to attract the levy nor the mere sale thereof within the local area.
What attracts the levy under Entry 52 (and under the impugned enactment)
is the entry of goods into a local area for consumption or for use or sale
within that local area for the purpose of consumption or use within that
B
c
local area. It is abundantly clear that the Additional Duties of Excise
(Goods of Special Importance) Act, 1957 was meant as a substitute for the
taxes on the sale or purchase of scheduled commodities alone and not for
all kinds of taxes, cesses and fees which the States are entitled to impose
by virtue of the entries in List-II or for that matter List-III of the Seventh
Schedule to the Constitution. [207-A-H]
4.2. The Additional Duties of Excise (Goods of Special Importance)
Act, 1957 (A.D.E. Act) is enacted by Parliament with reference to Entry 84
in List-I of the Seventh Schedule to the Constitution whereas the impugned
enactment is made by the State with reference to entry 52 in List-II. The
D power to levy taxes on sale or purchase of goods is conferred upon the
States and the purchase of goods is conferred upon the States and the
States alone by Entry 52 in List-II. Parliament cannot make a law either
with reference to Entry 52 or for that matter with reference to Entry 54.
The A.D.E. Act is also not a law made under and with refernece to Article
252 of the Constitution which article empowers the Parliament to make a
E law with respect to any matter mentioned in List-II, if two or more States
pass resolutions requesting the Parliament to make a law in that behalf.
The impugned Act is also not relatable to any of the Articles 249 to 253
which are in the nature of exceptions to the normal rule that Parliament
can make no law with respect to the entries in List- II. If so, it follows that
F
the State Legislatures are not denuded or deprived of their power to make
a law with reference to Entry 52 or with reference to Entry 54 in List-II.
That power remains untouched and unaffected. All that the Parliament
has said by enacting the A.D.E. Act ~s that it will levy additional duties of
excise and distribute a part of the proceeds among the States provided the
States do not levy taxes on sale or purchase of the scheduled commodities.
G The Parliament has also provided the consequence that follows if any State
levies tax on sale or purchase of scheduled commoditites; all that happens
is that the State will be deprived of its share in the proceeds of additional
duties of excise for that financial year. Even this is subject to the power of
the Central Government to direct otherwise. Parliament could not, and did
H not, prohibit any State from making any law or levying any tax which a
--
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STATE v. BIHAR CHAMBER OF COMMERCE
189
State can levy by virtue of the entries in List-II. [209-B-G]
A
4.3. The scope of the A.D.E. Act cannot be extended by reference to
anterior reports or correspodence between the Centre and the States, as the
case may be, so long as the language of the enactment is clear and unambiguous. Therefore, it cannot be said that by agreeing to take a share in the
proceeds of the additional duties of excise, the State has deprived itself of B
its power to levy entry tax under and by virtue of Entry 52 in List- II in the
Seventh Schedule to the Constitution. Indeed, it has not even forsaken its
power to levy taxes on sale or purchase of tobacco or any other scheduled
commodity; if it does so, all that would happen is that the consequence
provided in the provision to Rule (2) in the Schedule to the A.D.E. Act does c
not affect the legislative competence of the State Legislature to make a law
with reference to any of the entries in List-II. [210-E; 211-C-E]
Entry Tax Officer, Bangalore v. Chandanmal Champalal, [1994] 4 SCC
463 and State of Kerala v.M/s. Attesee (Agro) Industrial Corporation), [1989]
Supp. 1 SCC 733, relied on.
Nemichand Parasmal & Co. v. Deputy Commercial Tax Officer, Evening Bazaar Assessment Circle, Madras, (1984) 55 S.T.C. 47, approved.
D
A.B. Abdul Quadir & Ors. v. State of Kerala, [1976] 2 SCR 690, E
referred to.
5.1. Entry 52 of List II of the Constitution speaks of "local areas" and
not "local authodties". The tax, by whatever name called, is levied upon the
entry of goods into a local area for consumption, use or sale therein. Entry
52 empowers the State Legislature to levy this tax. The local authorities F
cannot themselves levy this tax. The power is that of the State Legislature
and of none else. So long as the tax is levied upon the entry of goods into a
local area for the purpose of consumption, use or sale therein, the requirement of Entry 52 is satisfied. The charactor of the tax so levied is that of the
entry tax-by whatever name it is called. At the most it can not be said that
the tax is meant for and must be utilised for the purpose of the local areas. G
It cannot further be stipulated that this utilisation should be through or by
the concerned local authorities. The entire State is divided into local areas.
From the point of view of the entry tax, one may say that the State is a
compendium of local areas. Spending for the purposes of the State is thus
spending for the purposes of local areas. Where the local areas span the· H
190
SUPREME COURT REPORTS
[1996] 2 S.C.R.
A entire State, it cannot be argued that money spent for welfare schemes for
improvement of roads, rivers, and other means of transport and communic~tion is not spent for the purpose of local areas. The purposes and
needs of local areas are no different from the purposes and needs of the
State-not at any rate to any appreciable degree. [213-F-H; 214-A-D]
B
Central India Spining & Weaving & Manufacturing Co. Ltd~ v. The
Municipal Committee, Wardha, [1958) SCR 1102; Diamond Sugar Mills Ltd.
& Anr. v. State of Uttar Pradesh & Am:, [1961) 3 SCR 242; Bunna Shell Oil
Storage & Distributing Company Ltd. v. the Belgaum Borough Municipality,
[1963) Suppl. 2 SCR 216 and Shakti Kumar M. Sancheti v. State of
C Maharashtra, [1995) 96 STC 659, referred to.
5.2. The proviso to Section 3(1) of the Act empowers the State
Government to specify different rates subject to the ceiling of five percent
specified in Section 3(1). The State Government must be _deemed to be
aware of the needs of the State and interest of its people. It is the State
D Government that prepares the budget for every year. The very provisi~ns
of the Act and its scheme coupled with the above factors provided sufficient
guidance to the Government in the matter of specification of the rates. It
cannot, therefore, be held thatthe proviso confers an unguided power upon
the State Government. [215-E, ·G-H; 216-A]
E
Muncipal Corporation of Delhi v. Birla Cotton ~pinning & Weaving
Mills, Delhi &Anr., [1968} 3 S.C.R. 251, relied on.
5.3. The power to grant exemption to any cl~ss of persons from the
operation of the Act has been conferred under Section 6 of the Act. In fact,
F
such a provision is a common feature in all the taxing enactments and
many other enactments. The High Court was in· error in declaring Section
6 to be void and thus violative of Article 14. [216-A-B]
G
P.J. Irani v. Stat~ of Madras, [1962] 2 S.CR. 169, relied on.
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 28432851 of 1996 etc.
From the Judgment and Order dated 2.3.95 of the Patna High Court
in C.W.J.C. No. 3224, 5420, 5512, 5651, 6515, 8010, 8600, 10084, 10644 of
H 1993.
,_
I
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STATE v. BIHAR CHAMBER OF COM. [B.P. JEEV AN REDDY, J.]
191
M. Chandrasekharan, Additional Solicitor General, Pawan Kumar, A
Rameshwar Prasad, B.B. Singh, Kumar Rajesh Singh, V.K. Verma, C.V.
Subba Rao, S. Ganesh, Ravinder Narain, Ashok Sagar, Ms. P. Singh, Ms.
Sonu Bhatnagar, Rajan Narain for JBD & Co., M.P. Jha, N.K. Jha,
Rudreshwar Singh, R.P. Wadliwani and Ajit Kumar Sinha for the appearing parties.
B
The Judgment of the Court was delivered by
B.P. JEEVAN REDDY, J. Leave granted.
The Bihar Legislature enacted the Bihar Tax on entry of Goods into C
Local Areas for consumption, use or sale therein Act, 1993 providing for
levy of tax on entry of scheduled goods into a local area for consumption,
use or sale therein at a tate, not exceeding five percent, as may be specified
by the State Government. The goods mentioned in the Schedule are (i)
motor vehicles, (ii) tobacco products [excluding beeris], (iii) India- made
foreign liquor, (iv) vegetable and pydrogenated oils, (v) cements and (vi) D
crude oil. The Act replaces Bihar Ordinance No. 19 of 1993. [Indeed, the
said Ordinance was preceded by yet another Ordinance.] The expression
"Local Areas" is defined in clause (t) of Section 2 to mean the areas within
the limits of a (i) Municipal Corporation, (ii) Municipality, (iii) ·Notified
Area Committee, (iv) Cantonment Board, (v) Town Board, (vi) Mines E
Board, (vii) Municipal Board, (viii) Gram Panchayat and (ix) any other
local authority by whatever nomenclature called constituted or continued
under any law for the time being in force.
Section 3 is the charging section. The levy is upon the entry of
scheduled goods into a local area for" consumption, use or sale therein. The F
proviso to sub-section 3 . empowers the Government to specify different
rates of tax for different goods mentioned in the Schedule. Sub-section (2)
of Section 3 says that the tax under the Act shall be paid by every dealer
liable to pay tax under the Bihar Finance Act, 1981 (Sales Tax Act). Section
5 provides for registration of dealers under the Act while Section 6 empowers the State Government to exempt from levy of tax any class of G
dealers, persons or importers, subject to such conditions and restrictions
as may be imposed in that behalf. Section 7 provides for punishment in
case of contravention of the provisions of the Act. Section 8 says that the
machinery under the Bihar Finance Act, 1981 shall be the machinery for
assessment and collection of this tax. Section 9 confers the rule-making H
192
SUPREME COURT REPORTS
[1996] 2 S.C.R.
A power upon the State Government.
·A number of writ petitions were filed by dealers in the Patna High
Court questioning the constitutional validity of the Ordinance/Act. Several
grounds were urged in support of the said challenge. The High Court has,
however, struck down the Aet on the following grounds : the State has
B failed to place any material before the Court to show that the impugned
tax is either compensatory or r~gulatory in nature; the levy must, therefore,
be held to be impeding the freedom of trade, commerce or intercourse
guaranteed by Article 301 of the Constitution; the State cannot also invoke
the protection of clause (b) of Article 304 for the reason that it has not
C established that the said tax constitutes a reasonable restriction imposed in
public interest within the meaning of the said clause though it is true that
the President has assented to the Bill; the entire Act is void and inoperative
on this score. The High Court has also held that the proviso to Section 3(1)
and Section 6 of the Act are void being violative of Article 14 of the
Constitution. It has held that both the said provisions confer. an unguided
D and uncanalised power upon the Government. The.High Court declined to
consider the submission made by the petitioners based upon the Additional
Duties of Excise (Goods of Special Importance) Act, 1957 [hereinafter
referred to as "A.D .E. Act"] in view of the fact that it had already declared
the Act void for violation of Article 301.
E
F
G
The State of Bihar has filed Special Leave Petition (C) Nos. 1463614644 of 1995 against the said judgment. The l.T.C. Limited, one of the
writ petitioners before the High Court, has filed Special Leave Petition (C)
No. 23172 of 1995 challenging.the correctness of the judgment of the High
Court insofar as it has negatived its contentions concerning the validity of ·
the Act. Special Leave Petition (C) No. 23303 of 1995 is preferred by VaZir
Sultan Tabacco Industries Limited and another.
Sri M. Chandrasekharan, learned Additional Solicitor General, appearing for the State of Bihar urged the following contentions :
1. The High Court was in error in holding that the impugned tax is
not established either to be compensatory or regulatory. In fact, it is both.
The Act was enacted by the Bihar Legislature to off-set, atleast partly, the
loss of revenue to the State resulting from the decision of this Court in
India Cement Limited & Ors. v. State of Tamil Nadu & Ors., [1990] 1 SCC
H 12. The finances of the State will be spent on public welfare and to carry
\
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STATE v. BIHAR CHAMBER OF COM. [B.P. JEEV AN REDDY, J.]
193
out the welfare schemes meant for the people of Bihar. The entire State A
of Bihar is divided into local areas of one or the other category. The money
raised under the Act will naturally be spent for the welfare of the State
which necessarily means for the benefit of the local areas.
2. Even if it is held, for some reason that the levy is not established
to be compensatory or regulatory in nature, even then the challenge to the
Act cannot succeed because it has obtained the assent of the President as
contemplated by clause (b) of Article 304 read with Article 255 of the
Constitution. The impugned levy constitutes a reasonable restriction upon
the freedom of trade, commerce and intercourse guaranteed by Article 301
imposed in public interest. It satisfies all the requirements of clause (b ).
Every tax imposed must be presumed to be in the interest of the public.
Further, the very fact of grant of assent by the President as contemplated
by Article 304(b) read with Article 255 gives rise to the presumption that
the tax constitutes a reasonable restriction conceived in public interest. The
High Court was in error in holding otherwise.
B
c
D
3. The impugned judgment insofar as it invalidates Section 3(1) and·
Section 6 is contrary to several decisions of this Court which have sustained
similar provisions. Where a ceiling is prescribed and the executive is
empowered to prescribe the rate of tax subject to the said ceiling, the
conferment of the power cannot be characterised as unguided, particularly E
where the power is conferred upon the Government. Conferment of power
· of exemption, as is conferred by Section 6, has also been upheld by this
Court on the ground that the Act itself provides the requisite guidance.
Sri S. Ganesh and Sri Pawan Kumar, learned counsel for respondents-writ petitioners, while disputing the correctness of the contentions F
urged by the learned Additional Solicitor General, urged the following
further contentions in support of their challenge to the validity of the
impugned Act :
(a) The A.D.E. Act was enacted by the Parliament to replace the
levy of sales tax and all other taxes by the States on the commodities G
mentioned in the First Schedule to that Act. Tobacco is included in the
First Schedule. The State of Bihar has been provided an appropriate share
in the revenues raised under the AD .E. Act. It1 therefore, follows that so
far as tobacco is concerned, the. State cannot levy any impost thereon
including entry tax. If it does, it will be deprived of its share in the revenues H
194
SUPREME COURT REPORTS
[1996] 2 S.C.R.
A raised under the A.D.E. Act. By sharing the revenues under the A.D.E.
B
c
D
E
F
G
H
Act, the State of Bihar must be presumed to have agreed not to levy any
type of tax or impost on tobacco. The levy of entry tax under the impugned
Act, therefore, is incompetent and void. The report of the Taxation Enquiry Commission on the basis of which the said Act was enacted and the
practice and understanding of the various States at the Centre since the
enactment of the said Act clearly establish that while sharing the revenue
under the A.D.E. Act, the States have agreed not to impose any tax, cess
or fee on tobacco under whatever name. As a matter of fact, entry tax is a
tax similar to the sales tax.
(b) The impugned Act does not indicate either expressly or by
necessary implication that the· revenues raised thereunder will be utilised
for the purposes of local areas. Entry 52 in List-II of the Seventh Schedule
to the Constitution, has been understood in a particular manner right from
1920. The entry tax is a substitute for octroi. Octroi 'Yas levied by the local
authorities on consumption, use or sale of goods within their areas. The
revenues so raised were meant for the purpose of such local authorities.
The character of entry tax is no different. Even though levied by the State,
it is levied (a) on the entry of goods into a local area for consumption, use
or sale therein and (b) for the purposes of such local area. Since the
impugned Act does not indicate in any manner that the revenues raised
thereunder will be passed on to the local authorities for being used for
their own purposes, the tax imposed cannot be treated as a tax contemplated by Entry 52. For this reason too, the impugned Act is beyond·
the legislative competence of the Bihar Legislature.
Needless to add that the learned Additional Solicitor General disputed the correctness of the above contentions.
From the contentions urged before us, the following questions arise
for consideration :
(1) Whether the impugned tax has been established to be compensatory in nature or whether it can be called a regulatory measure?
(2) In case the impugned tax is not established to be compensatory
or as a measure of regulation - whether it is saved by virtue of the
provision contained in Article 304(b) read with Article 255 of the Constitution. In other words, (a) whether the Act has received the assent of the
' l
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STATE v. BIHAR CHAMBER OF COM. [B.P. JEEV AN REDDY, J.]
195
President as alleged by the State, (b) whether the levy of the said tax A
constitutes a reasonable restriction and (c) whether the said levy is conceived in public interest?
(3) Whether the Bihar Legislature is deprived of its legislative competence to enact the impugned Act on account of the enactment of AD.E.
Act and/or because the State of B~har is getting a portion of the taxes levied B
and collected under the A.D .E. Act.
( 4) Whether the impugned enactment is outside the purview of Entry
52 in List-II of the Seventh Schedule to the Constitution and, therefore,
beyond the legislative competence of the Bihar Legislature for the reason C
that it does not provide for the revenues raised thereunder to be passed
on to the local authorities for being used for the purposes of the respective
local areas?
(5) Whether the proviso to Section 3(1) and Section 6 are void for
the reasons assigned by the High Court?
D
Question No. 1: Whether the impugned tax has been established to be
compensatory or whether it can be treated as a regulatory measure?
Article 301 declares that subject to the other provisions in Part XIII, E
trade, commerce and intercourse throughout the territory of India shall be
free. Certain exceptions are provided to the said Rule by Part XIII itself,
one of them being clause (b) of Article 304.
This Court has held that tax laws are not outside the purview of
Article 301 and that taxes which directly and immediately restrict trade and F
interfere with the flow of trade and commerce do offend Article 301.
Similarly, non-fiscal measures which have the above effect are equally hit
by Article 301. It has, however, been held by a seven-Judge Constitution
Bench of this Court in Automobile Transport (Rajasthan) Limited v. State
of Rajasthan, [1963] 1 SCR 491 that "regulatory measures or measures
imposing compensatory taxes for the use of trading facilities do not come G
within the purview of the restrictions contemplated by Article 301 and such
measures need not comply with the requirements of the proviso to Article
304(b) of the Constitution." It is held that regulatory measures do not really
impede the trade, commerce or intercourse but rather facilitate it. Similarly, it is held that compensatory taxes for the use of trading facilities are H
196
SUPREME COURT REPORTS
[1996] 2 S.C.R.
A
outside the purview of Article 301. Since the impugned Act is not a
regulatory measure but a taxing enactment and the tax is levied upon the
.entry of goods into a local area, i.e., upon the movement of goods, the
question is whether the impugned tax is compensatory in nature for the use
. of trading facilities provided by the State. The High Court has observed
B
that the State has failed to adduce any material to establish the compensatory nature of the tax. The only averment in the counter-affidavit filed in
the High Court is the following one [counter-affidavit filed by Sri Binoy
Krishan, Deputy Commissioner, Commercial Taxes, Bihar]: "the Entry Tax
Ordinance was thought to be promulgated in view of the loss of revenue
on cess due to the decision rendered by the Hon'ble Supreme Court in the
C case of India Cement Ltd. repo~ted in A.LR. (1990) S.C. 85 as well as
several decisions of the Hon'ble Patna High Court following the decision".
The learned Additional Solicitor General, however, contended that the
following indisputable facts do establish the compensatory nature of the
tax, viz., the entire State of Bihar is divided into local areas of one or the
D other kind and that the Government and the local authorities do provide
several trading facilities to promote trade and commerce with and within
the State in the form of laying and maintenance of roads, establishment
and maintenance of markets, establishment and operation of market yards
for agricultural commodities and a host of other facilities. He submitted
that the impugned tax will naturally help in providing the above ·facilities
E and, therefore, it must be· held to be compensatory. He requested us to
take notice of these undeniable facts and to hold, on that basis, that the
impugned tax is compensatory. The learned Additional Solicitor General
further submitted that when the entire State is divided into local areas -
when no part of the State is left uncovered by a local area - and when the
F
impugned tax is levied for the purposes of the State including the welfare
schemes being undertaken by it, the tax cannot but be compensatory in
nature. The impugned tax will help the State in providing and improving
the trading facilities since the interest of the State lies in promoting trade
and ~ommerce in goods and commodities with and within the State of
Bihar. Reliance is placed upon the following observations at Page 549 of
G Automobile Transporl (Rajasthan) Limited, which read:
"Licensing system with. compensatory fees would not be restrictions
but regulatory provisions; for without it, the necessary lines of
communication, such. as roads, water-ways and air-ways cannot
H
effectively be maintained and the freedom declared may in practice
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STATE v. BIHAR CHAMBER OF COM. [B.P. JEEV AN REDDY, J.]
197
turn out to be an empty one. So too, regulations providing for A
necessary services to enable the free movement of traffic, whether
charged or not, cannot also be described as restrictions impeding
the freedom."
It is not possible to deny the force of this submission. Wher.e the local
areas contemplated by the Act cover the entire State, the distinction
between the State and the local areas practically disappears. (The situation
would, no doubt, be different if the local areas are confined to a few cities
or towns in the State and the levy is upon the entry of goods into those
local areas alone. This is an important distinction which should be kept in
mind while appreciating this aspect and also while examining the decisions
of this Court rendered in 'fifties and sixties'.] The facilities provided in the
State are the facilities provided in the local areas as well. Interests of the
State and the interests of the local authorities are, in essence, no different.
B
c
It is not and it cannot be stipulated that for the purpose of establishing the
compensatory character of the tax, it is necessary to establish that every D
rupee collected on account of the entry tax should be shown to be spent
on providing the trading facilities. It is enough if some connection is
established between the tax and the trading facilities provided. The connection can be a direct one or an indirect one, as held by this Court in
Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, Madhya Pradesh,
(1995) 96 STC 654. "The concept of compensatory nature of tax has been E
widened and if there is substantial or even some link between the tax and
the facilities extended to such dealers, directly or indirectly, the levy cannot
be impugned as invalid". Though not stated in the counter-affidavit, we can
take notice of the fact that the State does provide several facilities to the
trade including laying and maintenance of roads, water-ways and markets,
etc. As a matter of fact, since the levy is by the State, we must also look to
the facilities provided by the State for aswtaining whether the State has
established the compensatory character of the tax. On this basis, it must be
held that the State has established that the impugned tax is compensatory
F
in nature. This finding is by itself sufficient to negative the attack based on
article 301 but even if we assume that the State has not established the said G
fact, even so the result is no different. We proceed to elaborate.
Question No. 2 : In case the impugned tax is not established to be
compensatory - or as a measure of regulation - whether it is saved by virtue
of the provision contained in Article 304(b) read with Article 255 of the H
198
SUPREME COURT REPORTS
(1996) 2 S.C.R.
A
Constitution. In other words, (a) whether the Act has received the assent
of the President as alleged by the State, (b) whether the levy of the said
tax constitutes a reasonable restriction and ( c) whether the said levy .is.
conceived in public inte.rest?
The impugned tax is a tax on entry - on movement of goods into a
B local area. If it is assumed to be neither compensatory, nor regulatory, [as
mentioned above] it may be said to be offending Article 301, unless, of
course, it is saved by virtue of the provision contained in Article 304(b)
read with Article 255 of the Constitution, as contended by the learned
Additional Solicitor General. Article 304 and Article 255 read as follows :
c
D
E
F
G
"304. Restrictions on trade, commerce and intercourse among
States.-Notwithstanding anything in Article 301 or Article 303,
the Legislature of a State may by law-
(a) Omitted as unnecessary.
(b) impose such reasonable restrictions on the freedom of trade,
commerce or intercourse with or within the State as may be
required in the public interest.
Provided that no Bill or amendment for the purposes of clause
(b) shall be introduced or moved in the Legislature of a State
without the previous sanction of the President.
255. Requirements as to recommendations and previous sanctions
to be regarded as matters of procedure only.-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 -
(a) where the recommendation required was that of the Governor,
either by the Governor or by the President;
(b) where the recommendation required was that of theRajpramukh, either by the Rajpramukh or by the President;
/
(c) where the recommendation or previous sanction required was
H
that of the President, by the President."
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STATEv. BIHAR CHAMBER OF COM. [B.P.JEEVAN REDDY,J.]
199
For, the exception in Article 304(b) to come to the rescue of the A
State, three requirements have to be satisfied, viz., (a) that the Bill was
introduced or moved in the Legislature with the previous sanction of the
President of India or that the Bill has been assented to by the President
[as contemplated by Article 255], (b) that the levy of the impugned tax
constitutes a reasonable restriction and ( c) that the said reasonable restriction is required in public interest?
In this case, the Bill was not introduced or moved in the Assembly
with the previous sanction of the President as required by Article 304(b)
B
but the contention of the State is that the Bill has been assented to by the
President and hence, the requirement is satisfied. The writ petitioners deny C
the same. They point out that the impugned Act does not recite the said
fact. It cannot, however, be said th.at in the absence of such recital, the said
fact cannot be established aliunde. In support of its contention, the State
relies upon Para 11 of the supplementary counter-affidavit filed in the High
Court and upon the telegram sent from Sri M.L. Gupta, Director (Home), D
New Delhi bearing No. 17/36/93-JUDL. dated 22.8.1993 addressed to Sri
P.S. Cheema, Commissioner and Secretary to the Governor, Bihar, Raj
Bhawan, Patna. Para 11 of the counter-affidavit reads: "11. That thereafter
the Bill was introduced in the Assembly and it was passed on getting assent
communication on 22nd August, 1993 and same was published in Bihar
Gazette on 22nd August, 1993". The telegram reads thus: "REF. YOUR E
LETTER NO. 1414/GS(I) DATED 18.1.1993(.) PRESIDENT ASSENTED TO THE BIHAR TAXES ON ENTRY OF GOODS INTO
LOCAL AREAS CONSUMPTION, USE OR SALE THEREIN BILL,
1993 ON 21.8.1993(.) LETTER WITHOUT COMMENTS FOLLOWS(.)"
In the absence of any material to the contrary, we accept the averment of F
the State and hold that the requirement of prior consent has been satisfied
in the case of the impugned Act.
The next question is whether the impugned tax constitutes a
reasonable restriction and whether it is imposed in public interest? In other
words, the question is whether the interference with and the restriction G
upon the freedom guaranteed by Article 301 in the form of the impugned
tax is a reasonable one and whether it is required in public interest. The
learned Additional Solicitor. General says that both the requirements are
satisfied in this case. He says that in view of the sudden loss of revenue
from the cess upon minerals as a result of the judgment of this Court in H
200
SUPREME COURT REPORTS
[1996) 2 S.C.R.
A India Cement Limited and other judgments of the Patna High Court .
following it, public interest required the State to find alternative sources of
revenue to keep its various welfare programmes and other governmental
functions going and that the impugned tax was conceived as one of the
alternate sources. He relies upon the statement in the counter-affidavit of
B
c
D
E
Sri Binoy Krishan, filed on behalf of the State, referred to hereinbefore, in
support of his submissions.