# STATE OF MADRAS v. N. K. NATARAJA MUDALIAR

- **Citation:** [1968] 3 S.C.R. 829
- **Court:** Supreme Court of India
- **Decided:** 1968-04-18
- **Case number:** Civil Appeal No. 763 of 1967
- **Bench:** Shah, R. S. Bachawat, G. K. Mitter, C. A. Vaidialingam, K. S. Hegde
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/state-of-madras-v-n-k-nataraja-mudaliar-4348
- **Pages:** 28

## Headnote

Central Sales Tax Act, 1956--Different rates bf tax in different States
under s. 8 sub-els. (2), (2A) and (5)-These provisions whether void for
contravention Arts. 301 and 303 of the
Constitution-Computa'tion of
turnover under s. 9(3) of Act-Mlist be in the same manner as under
State law of sales tax-Excise Duty must be exclua•d if State law so
provides.
Constitution of India, Arts. 301, 302, 303 and 304-Differential rates
of Central Sales Ta::c in diff'erent States under s. 8, sub-els. (2), (2A) and
(5) of Central Safes Tax Act,
1956-Freedom of trade and commerce
whether hanzpered-Diw:rbnination between one State and another whether results.
The respondent claimed before the Commercial Tax Officer, Madras
that some of his goods had been sent from Madras to his depot in A.lldhra
Pradesh and that the sales of those goods were intra-State sales in Andhra
Pradesh where they had been taxed as such. The Commercial Tax Officer however held that the goods had been
moved
from
the State of
Madras under contracts of sale and were therefore taxable as inter-State
sales under the Central Sales Tax Act, 1956. The respondent fil~d a petition under Art. 226 of the Constitution.
The High Court did not determine the nature of the transactions, but held that sub-ss. (2), (2A) and
(5) df s. 8 of the Central Sales Tax Act as they stood at the relevant
time imposed or authorised the imposition of varying rates of tax in different States on similar inter-State transactions and the resultant inequality
in the burden of tax affected and impeded inter-State trade, commerce
and intercou'rse and thereby offended Arts. 301 and 303(1) of the Constitution. The application of s. 9(3) of the Act was
also
considered.
Against the High Court's jud!ll11ent the State appealed.
HELD: (i) Restrictions or impediments which
directly and immediately impede or hamper the free flow Of trade,
commerce and intercourse whether inter~State or intra~State fall within the prohibition imposed by Art. 301 ind subject to other provisions
may be regarded as
void. A tax may in certain cases direct1y and ·immediately restrict or
hamper the :flo'v of trade but every imposition of tax does not do so.
[840 DJ
Atiabari Tea Co. Ltd. v. State of A.rsam & Ors. [1961] I S.C.R. 809,
Auto1nobi/e. Transport (Rajasthan) Ltd. v. State of Rajas:han
& Ors ..
[1963] I S.C.R. 491 and Firm A.T.B. Mehtab Majid and Co. v. State of
Madm< & Anr. [1963] Supp. 2 S.C.R. 435, relied on.
(ii) 'fax. under the C·entral Sales Tax: Act on inter..State sales is in its
essence a tax: which encumbers. movement of trade and commerce, since
hy the definition in s. 3 of the Act a sale or purchase of the goods is
deemed lo take place in the course of inter-State trade. if it-(a) occasions the: movement of goods 'from one. State to another; (b) is effected
by a tr2 nsfer of documents of title to the goods during the movement
from one State to anothCT. But the tax: in the present case was saved by
the operation of Art. 302 of the Constitution whereby Parliament is,
notwithstanding the protection conferr~d by Art. 301 authorised to impose
I
830
SUPREME COURT REPORTS
(1968) 3 S.C.R.
restrictions on the freedom of trade, commerce or intercourse bet\veen one
A
Stale and another or within any part of the territory of India al.i may be
required in the public interest. [841 C--EJ
The expression 'between one State and another' _does not imply that
the power under Art. 302 can be exercised only in respect of trade between one State and another as two entities.
The Article expressly pro•
vides that restrictions may be imposed not only as between one State and
another but also within any part of the territory of India. There is also
B
no doubt that exercise of the power to tax may normally be presumed
to be in the public interest. [841 F-H]
(iii) The Central Sales Tax Act does not discriminate bet"'·een one
State and another within the meaning of Art. 303.
An Act which is merely enacted for the purpose df imposing tax which
is to

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STATE OF MADRAS
v.
N. K. NATARAJA MUDALIAR
April 18, 1968
[J. C, SHAH, R. S. BACHAWAT, G. K. MITTER,
C. A. VAIDIALINGAM AND K. S. HEGDE,.JJ.J
Central Sales Tax Act, 1956--Different rates bf tax in different States
under s. 8 sub-els. (2), (2A) and (5)-These provisions whether void for
contravention Arts. 301 and 303 of the
Constitution-Computa'tion of
turnover under s. 9(3) of Act-Mlist be in the same manner as under
State law of sales tax-Excise Duty must be exclua•d if State law so
provides.
Constitution of India, Arts. 301, 302, 303 and 304-Differential rates
of Central Sales Ta::c in diff'erent States under s. 8, sub-els. (2), (2A) and
(5) of Central Safes Tax Act,
1956-Freedom of trade and commerce
whether hanzpered-Diw:rbnination between one State and another whether results.
The respondent claimed before the Commercial Tax Officer, Madras
that some of his goods had been sent from Madras to his depot in A.lldhra
Pradesh and that the sales of those goods were intra-State sales in Andhra
Pradesh where they had been taxed as such. The Commercial Tax Officer however held that the goods had been
moved
from
the State of
Madras under contracts of sale and were therefore taxable as inter-State
sales under the Central Sales Tax Act, 1956. The respondent fil~d a petition under Art. 226 of the Constitution.
The High Court did not determine the nature of the transactions, but held that sub-ss. (2), (2A) and
(5) df s. 8 of the Central Sales Tax Act as they stood at the relevant
time imposed or authorised the imposition of varying rates of tax in different States on similar inter-State transactions and the resultant inequality
in the burden of tax affected and impeded inter-State trade, commerce
and intercou'rse and thereby offended Arts. 301 and 303(1) of the Constitution. The application of s. 9(3) of the Act was
also
considered.
Against the High Court's jud!ll11ent the State appealed.
HELD: (i) Restrictions or impediments which
directly and immediately impede or hamper the free flow Of trade,
commerce and intercourse whether inter~State or intra~State fall within the prohibition imposed by Art. 301 ind subject to other provisions
may be regarded as
void. A tax may in certain cases direct1y and ·immediately restrict or
hamper the :flo'v of trade but every imposition of tax does not do so.
[840 DJ
Atiabari Tea Co. Ltd. v. State of A.rsam & Ors. [1961] I S.C.R. 809,
Auto1nobi/e. Transport (Rajasthan) Ltd. v. State of Rajas:han
& Ors ..
[1963] I S.C.R. 491 and Firm A.T.B. Mehtab Majid and Co. v. State of
Madm< & Anr. [1963] Supp. 2 S.C.R. 435, relied on.
(ii) 'fax. under the C·entral Sales Tax: Act on inter..State sales is in its
essence a tax: which encumbers. movement of trade and commerce, since
hy the definition in s. 3 of the Act a sale or purchase of the goods is
deemed lo take place in the course of inter-State trade. if it-(a) occasions the: movement of goods 'from one. State to another; (b) is effected
by a tr2 nsfer of documents of title to the goods during the movement
from one State to anothCT. But the tax: in the present case was saved by
the operation of Art. 302 of the Constitution whereby Parliament is,
notwithstanding the protection conferr~d by Art. 301 authorised to impose
I
830
SUPREME COURT REPORTS
(1968) 3 S.C.R.
restrictions on the freedom of trade, commerce or intercourse bet\veen one
A
Stale and another or within any part of the territory of India al.i may be
required in the public interest. [841 C--EJ
The expression 'between one State and another' _does not imply that
the power under Art. 302 can be exercised only in respect of trade between one State and another as two entities.
The Article expressly pro•
vides that restrictions may be imposed not only as between one State and
another but also within any part of the territory of India. There is also
B
no doubt that exercise of the power to tax may normally be presumed
to be in the public interest. [841 F-H]
(iii) The Central Sales Tax Act does not discriminate bet"'·een one
State and another within the meaning of Art. 303.
An Act which is merely enacted for the purpose df imposing tax which
is to be collected and to be retained by the State does not amount to law
giving or authorising the giving of any preference to one State over another, or making, or authorising the making of any discrimination bet·
ween one State and another merely because of varying rate$ of tax between different States.
By leaving it to the States to levy sales tax ia
respect of a commodity on intra..State transactions no
discrimination is
practised and by authorising the State from which the movement of goods
commences to levy on transactions dl sale Central Sales Tax, at rates prevailing in the State, subject to certain limitations, no discrimination can
be deemed to be practised. (843 C-D; 846 CJ
.The flow of trade does not necessarily depend upon the rates of sales
tax; it depends upon a variety of factors such llli the source of supply,
place of consumption, existence Of trade channels,
the rates of freight,
trading 1facilities, availability of efficient transport and other facilities for
carrying on trade. [843 G·Hl
The King v. Barger. [1908] 6 C.L.R. 41 and W. R. Moran Proprietar.v
Ltd. v. The Deputy Federal Comn1issioner of Taxation (N.S.W.) & Ors.,
[1940] 63 C.L.R. 338. referred to.
The rate which a State Legislature imposes in respect of inter-Stale
transactions in a particular commodity
must
depend on a variety of
factors-political and economic.
If the rate is so high as to drive away
prospective traders from purchasing a commodity and ·to resort to ,other
sources of supply, in its·-own interest
the State will adjust the rate
to
attract purchasers.
Again in a democratic constitution political forces
\\o'Ould operate against the levy o'f an unduly high rate of tax.
Attention
must also be directed to sub-s. (5) of s. 8 which authorises the State
Government, notwithstanding anything coritained in s. 8 in the pubJic interest to· waive tax or impose tax on sales at a lower rate on inter-State
trade ar commerce.
It is clear that the Legislature has contemplated that
elasticity of rates consistent with economic forces mai be maintained.
[845 B-El
(iv) Article 304 (a) had no application to the present case because
there was no imposition of rates of tax on imported goods different from
rates of tax on goods manufactured or produoed in the State. (847 F]
Finn A.T.B. Mehtab Majid and Corltpany_ v. State of Madras and Another, (1963] Supp. 2 S.C.R. 435 and State of Mysore v.
Lakshminarasimhiah Setty & Sons, 16 S.T.C. 231, distinguished.
(v) In the matter of determining the taxable turnover the same rules
namely the rules under the State law will apply by virtue of s. 9(1) of
the Central Sales Tax Act, whether the tax is to be
levied under the
Central Snles Tax Act or the Madras General Sales Tax Act. Therefore
in .calculating the turnover of inter-Stale transactions excise duty would
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STATE V. NATARAJA (Shah, /.)
831
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be excluded as provided in the
Rules made under the Madras Act,
although there was no such provision in the Central Act. [848 G-H]
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State of Mysore v. Lakshmil!llrasimhia/J Setty & Sons, 16 S.T.C. 231,
re'ferred to.
Per Bachawat J. (partly dissenting),-(i) It cannot be said that tax
under the Central Sales Tax Act on inter-State sales as defined in s. 3 of
the Act is in its essence a tax hampering movement of trade or commerce
within the meaning of Art. 301. That Article makes no distinction between movement from one part of the State to another part of the same
State and movement from one State to another. If a tax on iritra-State
sales does not offend Art. 301, logically a tax on inter-State sales also
cannot do so. Neither tax operates directly or immediately on tho frei>
flow o'f trade or the free movement or the transport of goods from one
part of the country to the other. The tax is on the sale.
The movement is incidental and a consequence of the sale. (851 F-1:{; 852 A]
Even assuming that the Central Sales Tax is within the mischief of
Art. 301, it is certainly a law made by Parliament in the public interest
-and is saved by Art. 302. There is nothing in its provisions which offends.
Art. 303 rs51 Fl
Per Hegde, J.-(i) A taxing statute is not outside the scope of Art.
301 of the. (',onstitution.
But before a taxing statute is held to be viola~
tive of that article it must be shown that it has a direct or immediete
impact on the freedom <if trade, _commerce
and intercourse within the
country. A mere remote or incidental impact is insufficient to hold that
Art. 301 has been contravened. f852 BJ
(ii) The power conferred on
Parliament by
Art. 302 is extremely
wide and the only limitation placed on that power is that the law in question must be required in the public interest. Primarily it is for Parliament
to determine the requirement as to public interest, and its decision is not
easy to challenge.
In addition there is the presumption of the constitutionality of a statute. [852' DJ
.. (iii) Mere difference in· rates is neither showing preference nor making disc·rimination within the meaning of Art. 303 ( 1). But other things
being equal the difference in rates would result in showing preference to
some States and making discrimination against others. Hence difference
in rates is a prima facie proo'f of the preference or discrimination complained of.
Once the difference in rates is shown it is for the State to
show that the same has not resulted in showing preference to one or more
States or making discrimination against one or more States over others
in the matter of inter..state trade.
No interpretation should be placed on
Art. 303(1). which would render that provision purposeless. The State
must place before the Court its reasons for making the enactment and
satisfy it that Art. 303(1) has not been contravened. [852 F-853 CJ
On an examination of the material placed
be'fore the Court in
the
present case it was clear that the differences in the rates were in public
intere5t and those differences did not materially affect the free flow oF·
trade in the. country. [853 Cl
[The impugned sections of the Act having been held to be \'·ali<l, the
case was remanded to. the High Court for determining the nature of the
transactions.]
CIVIL APPELLATE JURISDICTION:
Civil Appeal No. 763 of
1967.
:8:i2
SUPJUIMB COURT llBPO!lTS
(1968] 3 S.C.R.
Appeal from the judgment and order dated April 7, 1967 of
;the Madras High Court in Writ Petition No. 836 of 1966.
Bishan Narain and A. V. Rangam, for the appellant.
M. R. M. Abdul Karim, K. Rajendra Choudhury and K. R.
Choudhury, for the respOndents.
R. Thiagarajan, for intervener No. 1.
R. 6opalakrishnan, for intervener No. 2.
A. N. Singh and D. N. Gupta, for intervener No. 3.
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B. R. L. Iyengar, R. N .. Sachthey and S. P. Nayyar, for intervener No. 4.
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B. Sen, G. S. Chatterjee for P. K. Bose, for intervener No. 5.
C. B. Agarwala and 0. P. Rana, for intervener No. 6 .
. Lql Narain Sinha, Advocate-General for the State of Bihar,
R. K. Garg, S. C. Agarwala, Anil Kumar and S. P. Singh, for
intervener No. 7.
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Naunit Lal, for intervener No. 8.
K. Baldev Mehta, for intervener No. 9.
M'. R. K. Pillai, for intervener No. 10.
The Judgment of SHAH, MITTER and V AJDIALINGAM, JJ. w3s
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delivered by SHAH, J. BACHAWAT, J. pai:tly dissented.
HEGDE, J.
delivered a separate opinion.
Shah, J.-In a proceeding for assessment of tax for 1963-64
under the Central Sales Tax Act, 1956, the Deputy Commercial
Tax Officer rejected the contention of the assessee that a part of
the turnover of his business in matches arose out of intra-State
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l>ale transactions at the assessee's depot at Ongole (in the State
of Andhra Pradesh) to which depot the goods were despatched
by him from his place of business in the State of Madras.
The
Deputy Commercial Tax Officer held that the goods were moved
from "the godown stock" of the assessee in execution of contract>
of sale with merchants outside the State of Madras, and on that
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account the turnover from sales was liable to tax under the Central Sales Tax Act.
The assessee moved the High Court of Madras under Art. 226 of the Constitution seeking a writ of certiorari
quashinp; the order of assessment, on the grounds, that the provisions of the Central Sales Tax Act which permitted levy of taK
at varying rates in different States were invalid. and that the trar.-
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sactions brought to tax were not in truth inter-State transactions.
The High Court did not determine the nature of the transaction;
but held that sub-s. (2), (2A) and (5) of s. 8 of the Central
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STATE v. NATARAJA (Shah, J.)
833
Sales Tax Act, 1956, in operatioll at the relevant time imposed
or authorised the imposition of varying rates of tax in dilferent
States on similar inter-State transactions and the resultant inequality in the burden of tax affected and impeded jnter-State trade.
commerce and intercourse, and thereby offended Arts. 301 and
303 (1) of the Constitution. The High Court rejected the plea
of the assessee thats. 9(3) of the Act was ultra vires.
The State
has appealed to this Court with certificate granted by the High
Court against the order declaring sub-ss. (2), (2A) and (5) of
s. 8 of the Central Sales Tax Act, 1956, invalid.
A brief review of the developments in the law relating to imposition of tax on transactions of sale and its inter-relation with
the constitutional provisions leading to the enactment of the
Central Sales Tax Act, 1956, will facilitate appreciation of the
competing views put forward before us at the Bar.
The Government of India Act, 1935, by List II entry 48 of the Seventh Sche·
dule conferred power exclusively upon the Provinces to legislate
on the subject of "tax on the sale of goods and on advertisement". In exercise of that power the Provincial Legislatures enacted sales tax laws for their respective Provinces acting on the
principle of "territorial nexus", and picked out one or more ingre·
dients constituting a sale and made it or them the basis of imposing liability for tax.
This exercise of taxing power by the
Provinces led to multiple taxation of the same transaction by
many provinces, the burden of tax falling ultimately on the consuming public.
In order to remove this burden imposed upon the consumers.
Art. 286 was incorporated in the Constitution inter alia for the
regulation of inter-State sales transactions. This Court in The
State of Bombay v. United Motors (India) Ltd. (1)
held that
under the Bombay Sales Tax Act 24 of 1952 ·sales effected in
Bombay in respect of goods exported from the State were not taxable by the State of Bombay, but the importing State was competent to levy tax on transactions of sale in the oourse of inter-State
trade or commerce on persons who were resident outside its territory, provided that the goods were delivered in the importing State
for the purpose of consumption therein.
This decision made the
dealer carrying on business in the exporting State amenable to the
sales tax law of the importing State.
The quesiion was reconsidere<I by this Court in Bengal Immunity Company Ltd. v. State
of Bihar(2). The Court held that the sales or purchases made by
an assessee which actually took place in the course of inter-State
trade or commerce could not be taxed by any State until by law
it was otherwise provided by Parliament. The judgment in
Bengal Immunity Co.'s case(2) removed, by making inter-State
(l) [1953] S. C. R. 1069.
(2) [1955] 2 S. C. R. 603 .
•
834
SUPREME COURT REPORTS
(1968) 3 S.C.R.
sales immune from taxation, the difficulties till then experienced
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by the trading community but the importing States which had
imposed tax on inter-State sales by non-resident dealers, relying
on the principle of the judgment in United Motors case(') were
faced with innumerable claims for restitution of the tax reali?.ed.
The President then promulgated Ordinance No. IlI of 1956 which
was later replaced by the "Sales Tax Laws Validation Act VII of
B
1956" with the object of restoring for the period specified in the
Act the decision in United Motors case(').
The problem of tax on inter-State sales was, in the meanwhile,
•
examined by the Taxation Enquiry Commission.
The report of
the Commission led to the enactment of the Constitution (Sixth
Amendment) Act, 1956.
By that amendment entry 92A was
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added in Union List in the Seventh Schedule to the Constitution
conferring power upon the Union to legislate in respect of "taxes
on the sale or purchase of goods other than newspapers, where
such sale or purchase takes place in the course of inter-State trade
or commerce"; and for entry 54 in the State List, the follo1,Ving
entry was substituted :
D
''Taxes on the sale or purchase of goods other than
newsf.apers, subject to the provisions of entry 92A of
List ."
Explanation to cl. (1°) of Art. 286 was omitted, and els. (2) &
( 3) were substituted by fresh clauses: by the newly enacted cl.
(2) the Parliament was authorised by law to formulate principles
for determining when a sale or purchase of goods takes place
in any of the ways mentioned in cl. (1), and by cl. (3)
it was enacted that any Iaw of a State shall, in so far as it
imposes or authorises the imposition of, a tax on the sale or purchase of goods declared by Parliament by law to be of special
importance in inter-State trade or commerce, be subject to such
restrictions and conditions. in regard to the system of levy, rates
and other incidents of the tax as Parliament may by law specify.
In Art. 269(1) clause (g) was added authorising the Government
of India to collecJ tax on the sale or purchase of goods other than
newspapers, where such sale or purchase takes place in the course
of inter-State trade or commerce and making it obligatory upon
the Government of India fo assign the tax to the States in the
manner provided in cl. (2). By cl. (3) it was enacted that:
"Parliament may by law formulate principles for
determining when a sale or purchase of goods takes place
in the course of inter-State trade or commerce."
Jn exercise of authority conferred by the Constitution (Sixth
Amendment)
Act,
1956,
the
Parliament
enacted
on
(l) (1951) S.C.R. 1069.
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STATE v. NATARAJA (Shah, /.)
835
December
21, 1956, the Central Sales Tax. Act, 1956, with
a view to fonnulate principles (a) for detennining when a sale
or purchase of goods takes place in the course of inter-State trade
or commerce or outside a State or in the course of import into or
export from India; (b) providing for the levy, collection and distribution of taxes on sales of goods in the course of inter-State
trade or commerce; (c) declaring certain goods to be of special
importance in inter-State trade or commerce and specifying the
restrictions and conditions to which State laws imposing taxes on
the sale or purchase of such goods of special importance shall be
subject.
By s. 3 of the Act a definition of sale or purchase of
goods said to take place in the course of inter-State trade or commerce was devised.
By s. 4 conditions in which a sale or purchase of goods was to be deemed to have taken place outside a
State were specified.
By s. 5 the conditions in which a sale or
purchase of goods taking place in the course of import or export
were specified. By Ch. III ( ss. 6 to 13) provisions were enacted
for declaring a charge of tax on inter-State sales and for setting
up machinery for levy of tax and incidental matters. Section 6
imposed a charge on all sales effected by a dealer in the course of
inter-State trade or commerce during any year.
By s. 7 provision
was made for registration of dealers.
Section 8, insofar as it is
material, and as amended by Act 31 of 1958, read as follows:
"( 1) Every dealer, who in the course of inter-State
trade or commerce--
(a) sells to the Government any goods; or
(b) sells to a registered dealer other than the Government goods of the description referred to in
sub-section ( 3) :
shall be liable to pay tax under this Act, which shall be
two per cent. of his turnover.
(2) The tax payable by any dealer on his
turnover in so far as the turnover or any part thereof relates
to the sale of goods in the course of inter-State trade or
commerce not falling within sub-section (1 )-
(a) in the case of declared goods, shall be calculated at the rate applicable to the sale or purchase of
such goods inside the appropriate State; and
( b) in the case of goods other than declared goods
shall be calculated at the rate of seven per cent., or at
!he. rate applicable .to the sale or purchase of such goods
.ms1de the appropnate State, whichever is higher;
and for the purpose of making any such calculation any
such dealer shall be deemed to be a dealer liable to pay
$36
SUPllEME COURT REPORTS
(!968 j 3 s.c.R.
tax under the. sales tax Jaw of ¢he appropriate State,
A
notwithstan\ling that he, in fact, may not be so liable
under that. law.
(2A) Notwithstanding anything Contained in subsection (1) or sub-section (2)', if under the sales tax
law of the appropriate State the sale or purchase, as
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the case may be, of any goods by a dealer is exempt
from tax generally or is subject to tax generally at a
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rate which is 1ower than two per cent. (whether called
a tax or fee or by any other name), the tax payable
under this Act on his turnover in so far as the turnover
or any part thereof relates to the sale of such goods shall
be nil, or, as the case may be, shall be calculated at the
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lower rate.
·
Explanation.-For the purpose of this sub-section
a sale or purchase of goods shall not be deemed to be
exempt from tax generally under the sales tax law of
the appropriate State if under that law it is exempt only
in specified circumstances or under specified conditions
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or in relation to which the tax is levied at specified
stages or otherwise than with reference to the turnover
of the goods.
(3)
(4)
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( 5) Notwithstanding anything contained in this section, the State Government may, if it is satisfied that
it is necessary so to do in the public interest, by notification in the Official Gazette, direct that in respect of such
goods or classes of goods as may be mentioned in the
notification and subject to such conditions as it may think
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fit to impose, no tax under this Act shall be payable by
any dealer having his place of business in the State in
respect of the sale by him from any such place of business of any such goods in the course of inter-State trade
or commerce or that the tax on such sales shall be
calculated at such lower rates than those specified in
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sub-section ( 1) or sub-section, (2) as may be mentioned
in the notification."
By s. 9 machinery was set up for levy and collection of tax and
penalties.
Insofar as it is material, it provided:
· " ( 1 ) The tax payable by any dealer under this Act
H
,
on sales of goods effected by him in the course of. interState trade or commerce whether such sales fall within
clause (a) or clause (b) of section 3 shall be levied and
STATE V. NATARAJA (Shah, /.)
837
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collected by the Government of India in the manner
provided in sub-section ( 3) in the State from which the
movement of the goods commenced :
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Provided
(2)
( 3) Tue authorities for the time being empowered to
assess, collect and enforce payment of any tax under
the general sales tax law of the appropriate State shall,
on behalf of the Government of India and subject to any
r11les made under this Act, assess, collect and enforce
payment of any tax, including any penalty, payable by
a dealer under this Act in the same manner as the tax
on the sale or purchase of goods under the general
sales tax law of the State is assessed, paid and collected;
and for tbis purpose they may exercise all or any of the
powers tbey have under the general sales tax law of the
State, and the provisions of such law, including provisions relating to returns, appeals, reviews,
revisions,
references, penalties and compounding of offences, shall
apply accordini:Iy :
Provided
( 4) The proceeds in any financial year of any tax,
including any penalty, levied and collected under this
Act in any State (other than a Union territory) on behalf
of the Government of India shall be assigned to that
State and shall be retained by it; and the proceeds attributable to Union territories shall form part of the
Consolidated Fund of India."
By Ch. IV ( ss. 14 & 15) provision was made for levy of tax at
specially low rates on goods of special importance in inter-state
trade or commerce.
By s. 14 certain goods were declared to be
of special importance in inter-State trade or commerce, and by
s. 15, as amended by Act 31 of 1958, it was proVided: .
"Every sales tax law of a State shall, in so far as-it
imp0ses or authorises the imposition of a tax on the sale
or purchase of declared goods, be subject to the following restrictions and conditions, namely :-
(a) the tax payable under that law in respect of any
sale or purchase of such. goods inside the State shall not
exceed two per cent. of the sale or purchase price
thereof, and such tax shall· not be levied at more than
one sta~e;
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SUPREME COURT REPORTS
(1968] 3 S.C.R.
(b) where a tax has been levied under that ·Jaw in
respect of the sale or purchase inside the State of any
declared goods and such goods are sold in the course
of inter-State trade or commerce, the tax so levied shall
not exceed two per cent of the sal.e or purchase subject
to such conditions as may be provided in any Jaw in
force in that State."
The scheme of the Act was first to devise definitions of 'interState sales' and 'sales outside the State', and then to declare interState sales subject to tax, and to set up machinery for levying and
collecting tax on those sales. Transactions in goods which were
made subject to tax in the course of inter-State trade or c01mnerce
were classified into three broad categories-( 1) transactions falling within s. 8 (I) i.e. all sales .to Government, and sales to a
registered dealer other than the Government of goods referred to
in ~ub'-s. (3) of s. 8; (2) transactions fallin~ withins. 8(2)((l)
i.e., sales in respect of declared goods; and (3) transactions falling within s. 8(2)(b) i.e. sales [not falling within (1)) in respect of goods other than declared goods.
Sales of goods in category ( 1) were declared liable at the relevant time to pay a tax of
two per cent. on the turnover.
On sales of declared goods tax
was to be calculated at the rate applicable to the sale or purchase
of such goods inside the appropriate State. But by s. 15 the tax
payable under a State·law in respect of any sale or purchase •)f
dedared goods inside the State was not to exceed two per cent.
of the sale or purchase price thereof, and was not Jeviable at more
than one stage. On turnover from sale of goods not falling within categories (1) & (2) the rate was seven per cent. or the rate
applicable to the sale or purchase of such goods i11side the appropriate State, whichever was higher. But by sub-s. (2A) of s. 2 it
was prqvided thal notwithstanding anything c.ontained in sub-s.
(1) or sub-s. (2), if under the sales tax law of the approprkte
State the sale or purchase, as the case may be, of any goods by a
dealer is exempt from tax generally or is subject to tax generally
at a rate which is lower than two per cent. the tax payable under
the Act on the turnover insofar as the turnover or any part thereof
relates to the sale of such goods shall be nil, or as the case may be
shall be calculated at the lower rate.
There is a slight inconsistency betweens. 8(2) ands. 8(2A). If the rate of tax under the
State law is less than two per cent. by virtue of s. 8(2A), even in
respect of turnover falling withins. 8(2)(b), the ra~ of tax will
not exceed the State rate : if the State rate exceeds two per cent.
tax at the rate of seven per cent.- or of the State,. whicheYer is
higher, shall prevail.
But that has no bearing on the question
under discussion.
Tax under the Act is payable by the seller.
The State from
which the movement of goods commences in the course of )nterA
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839
State sale collects the tax as agent of the Central Government, and
in the manner provic?ed in sub-s. (3) of s. 9. Jly sub-s. ( 4) of
s. 9 the proceeds in any-financial year of any tax, including any
penalty, levied and collected under the Act in any State (other
than a Union territory) on behalf of the Government of India are
to be assigned to that State and are to be retained by it, and the
proceeds attributable to Union territories are to form part of the
Consolidated Fund of Jncf4i.
The Act and the constitutional provisions were intended to
restrict the imposition of multiple taxation on a single inter-State
transaction by different States, each State relying upon some teritorial nexus between the State and the sale. The tax though collected by the State under the Central Sales Tax Act was as an
agent of the Central Government, it was, by sub-s. ( 4) of ~. '
enacted in implementation of the principle of assignment of tax
set out in cl. (2) of Art. 269, assigned to the State which collected
it.
This somewhat tortuous scheme of levying tax on inter-State
transactions and making it available to the State which levied it,
in effect countenances levy of different rates of tax on inter-State
transactions in similar goods. It is upon the prevalence of different rates of tax which, subject to adjustments, and incorporated
in the Central Sales Tax Act, that the argument of the assessee is
largely founded.
He contends-and his contention has found
favour with the High Court-that the liability to pay tax on interState transactions, depending upon the rate of tax prevailing in the
exporting. State, hampers trade and commerce, by giving or
authorising the giving of preference to one State over another or
by making or authorising the making of discrimination between
one State and another, and thereby violates the guarantee of freedom of trade, commerce and intercourse declared by Part XIII
of the Constitution. The assessee primarily relies upon Arts. 301
and 303 (1) of the Constitution in support of his contention.
Article 301 provides :
"Subject to the other provisions of this Part, trade;
commerce and intercourse throughout the territory of
India shall be free."
This Article is couched in terms of the widest amplitude, trade,
commerce and intercourse are thereby declared free and unham-,
pered throughout the territory of India. The freedom of trade so
deolared is against the imposition of barriers or obstructions within the State as well as inter-State : all restrictions which directly
"if
and immediately affect the movement of trade are declared by
Art. 301 to be ineffective. The extent to which Art. 301 ope-
. rates to make trade and commerce free has been considered by
this Court in several cases. In Atiabari Tea Co. Ltd. v. The Stste
8 Sup. c. 1./68-14
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SUPREME COURT REPORTS
(1968] 3 S.C.R.
of Assam and others('), Gajendragadkar, J., speaking for himself
A
and Wanchoo & Das Gupta, JJ., observed at p. 860 :
" ..... we think -it would be reasonable and proper
to hold that restrictiqns, freedom from which is guaranteed by Art. 301, would be such restrictions as directly
and immediately restrict or impede the free flow or
8
movement of trade.''
In Automobile Transport (Rajasthan) Ltd. v. The State of Rajasthan and others('), the view expressed by Gajendragadkar, J., in
Atiabari Tea Co.'s case(') was accepted by the majority. Subba
Rao, J., who agreed with the majority observed that the freedom
declared under Art. 301 of the Constitution of India referred to
C
the right of free movement of trade without any obstructions by
way of barriers, inter-State or intra-State, or other impediments
operating as such barriers. The same view "{as expressed in
Firm A. T. B. Mehtab Majid and Company v. State of Madras
and Another(') by a unanimous Court. It must be taken as
settled law that the restrictions or impediments which directly and
))
immediately impede or hamper the free flow of trade, commerce
and intercourse fall within the prohibition imposed by Art. 301
and subject to the other provisions of the Constitution they may
be regarded as void.
.
But it is said that by imposing tax on sales, no restriction
hampering trade is imposed. In the Atiabari Tea
Company's
E
case ('), Gajendragadkar, J., observed :
·
"Taxes may and do amount to restrictions; but it
is only such taxes as directly and immediately restrict
trade that would fall within the purview of Art. 301.
The argument that all taxes should be governed by Art.
301 whether or not their impact on trade is immediate
or mediate, direct or remote, adopts, in our opinion, an
extreme approach which cannot be upheld."
In a recent judgment of this Court in The Andhra Sugars Ltd. and
Another v. The State of Andhra Pradesh and others('), Bachawat, J., speaking for the Court, after referring to the observattons
made by Gajendragadkar, J., in Atiabari Tea Company's case(')
observed:
"This interpretation of Article 301 was not dissented
from in Automobile Transport
(Rajasthan)
Ltd, v.
State of Rajasthan-[1963] 1 S.C.R. 491. Normally,
a taX on sale of goods does not directly impede the free
(I) [1961]18.C.R.809.
(3) [1963) I S. C. R. 491.
(2) [1963] Supp. 2 S.C.R. 435.
(4) 21 S. T. C. 212.
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movement or transport of goods.
Section 21 is no
exception. It does not impede the free movement or
transport of goods and is not violative of Artilce 301."
841
Section 21 of the Andhra Pradesh Sugar Cane (Regulation of
Supply and Purchase) Act which was referred to in the judgment
authorised the State Government to levy a tax at such rate not
exceeding five· rupees per metric tonne as may be prescribe<l on .
the purchase of cane required for use, consumption or sale in a
factory. It must, therefore, be regarded as settled law that a tax
may in certain cases directly and immediately restrict or hamper
the flow of trade, but every imposition of tax does not do so.
Tax under the Central Sales Tax Act on inter-State sales, it
must be noticed, is in its essence a tax which encumbers movement of trade or commerce, since by the definition in s. 3 of the
Act a sale or purchase of goods is deemed to take place in the
course of inter-State trade or commerce, if it-(a) occasions the
movement of goods from one State to another; (b) is effected by
a transfer of documents of title to the goods during their movement from one State to another.
The question which then falls
to be determined is whether the tax imposed in the present case is
saved by the operation of the other provisions of Part XIlI.
Article 302 of the Constitution provides that Parliament may by
law impose such restrictions on the freedom of trade, commerce
or intercourse between one State and another or within any part
of the territory of India as may be required in the public interest.
Thereby the Parliament is, notwithstanding the protection conferred by Art. 301, authorised to impose restrictions on the freedom
of trade, commerce or intercourse in the public interest. The
expression "between one State and another" does not imply that
it is only intended to confer upon the Union Parliament the power
to remove the fetter upon legislative authority only so as to keep
trade, commerce or intercourse free between one State Government and another.
It is intended to declare trade commerce and
intercourse free between residents in one State and residents in
another State. That is clear because Art. 302 expressly provides
that on the freedom of trade restrictions may be imposed not only
as between one State and another, but also within any part of the
territory of India. As we have already observed, Art. 301 does
not !lJerely protect inter-State trade or operate against inter-State
barriers : all trade is protected whether it is intra-State or inter-
~tate by the prohibition imposed by Art. 301, and there is nothing
m the language or the context for restricting the power of the
Parliament which it otherwise possesses in the public interest to
impose restric~ions on the freedom of trade, commerce or interco~~e, operative only as between one State and another as two
enttttes. There is also no doubt tliat exercise of the power to
tax may normally be presumed to be in the public interest.
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SUPREME COURT REPORTS
(1968] 3 S.C.R.
Article 303 provides, by the first ~lause :
•·Notwithstanding anything in article 3Q2, . neither
Parliament nor the Legislature of a State, shall have
power to make any law giving, or authorising the giving
of, any preference to one State over another, or making,
or authorising the making of, any discrimination between
one State and another, by virtue of an entry relating
to trade and commerce in any of the Lists in the Seventh
Schedule.•
Having conferred by Art 302 power upon the Parliament to
impose restrictions upon freedom of trade, commerce or intercourse, the Constitution proceeds to impose certain restrictions
upon the power so conferred. Referenee to the power of the
State Legislatures in Art. 303 ( 1) creates a complication which we
are not called upon in the present case to resolve. It is expressly
declared that the Parliament shall not have the power to make
any Jaw giving preference to one State over another, authorising
the giving of any preference to one State over another, making
any discrimination between one State and another, and authorising
the making of any discrimination between one State and another,
in exercise of or by virtue of any entry relating to trade and
commerce in any of the Lists in the Seventh Schedule.
It was contended on behalf of the State that the power under
Art. 303 could only be exercised so as to restrict the authority
of the Parliament which.arises by virtue of an entry relating to
trade and commerce in the legislative lists and it was urged that
an entry with respect to the levy of tax on trade and commerce and
is not an en~ relating to trade and commerce and therefore there
is no prohibition against the Parliament exercising power or authorising the giving of any preference to one State over another or
malting or authorising the making of any discrimination between
one Stat£> and another by the exercise of taxing power. Reliance
in support of that contention was placed upon the judgment in
Sundararamier and Company v. State of Andhra Pradesh(') in
which Venkatarama Aiyar, J., pointed out that under he scheme
of entries in List I & II of the Seventh Schedule the power of taxation exercisable in respect of any matter is a power distinct from
the power to legislate in respect of that matter. It was also urged
that the expression "an entry relating to trade and. commerce
in any of the Lists in the Seventh Schedule" was restricted to the
entries which expressly deal with the power to legislate in. respect
of trade and commerce i.e. entries 41 & 42 of List I, entries 26 &
27 of List II and entry 33 of List m in the Seventh Schedule, and
(!) (19S8] s. c. R. 1422.
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extended to no others. On the other hand it was contended that
all legislative entries which directly affect trade and commerce are
also within the expression "entry relating to trade and commerce".
We need express no opinion on the two questions argued
before us.
The question whether entries relating to trade and
commerce in the Lists in the Seventh Schedule are restricted to
entries 41 & 42 of List I, entries 26 & 27 of List II and entry 33
of List III, or relate to all general entries which affect trade and
commerce, is academic .in the present case.
Nor do we think. it
necessary to decide whether for the purpose of Art.