This article was written by Devashish Jain, Co-Founder & Research Head of Racolb Legal.

T.S Thakur, C.J (for himself and A.K Sikri and A.M Khanwilkar, JJ.:

 Starting with the prior position of the cases decided pre 1995, court in numerous decisions expressed the view that the facilities provided by state led to be of compensatory nature and thus it is well within the power to the state to impose the tax which is compensatory in nature as it doesn’t violates Art. 301. The matter than came for consideration before a constitutional bench in the case of Jindal stainless Ltd. v. State of Haryana[1] by which the court said that the test of some connection laid down in Bhagatram case and held that the doctrine of direct and immediate effect laid down in Atiabari case and working test doctrine laid down in automobile Transport case will apply to determine whether the said tax is compensatory in nature or not.

Numerous questions that were discussed in detail are as follows:-

  1. Whether the power to impose tax is the sovereign right of the state:- Apex court while giving an answer in affirmation held that yes, it is a sovereign right of the state and the reliance was placed on Raja Jagannath Baksh Singh State ofU.P[2], Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.[3] Court while laying emphasis also explained that even though it is a sovereign right but it has be exercised in accordance with the framework established by the constitution and on the said point reliance was placed on Synthetics and Chemicals ltd. v. State of U.P.[4]
  2. Whether the entry tax is a tax or a fee:- Court while placing reliance on Commissioner of  Income Tax, Udiapur, Rajasthan.MCdowell and Co. ltd.[5] , various terminology namely cess, duty, tax and fee were duly explained. Further the following definition were considered by the court:

Blackwell on Tax Titles as cited in ‘Tata Iron & Steel Co. Ltd. v. State of Bihar, AIR 1991 Patna 75, 81 has the following to say about taxes:

‘Taxes are defined to be burdens or charges imposed by the legislative power upon persons or property to raise money for public purposes.’

Black’s Law Dictionary, 7th Edn., P. 1469 defines tax as under:

“A monetary charge imposed by government on persons, entities or property to yield public revenue,”

While analyzing the above definition courts were of the view that if a tax is for benefit of public at large than every tax is of compensatory in nature and thus the theory of compensatory Tax won’t be having any effect.

  1. Whether there are any limitation in this regard in the constitution:- Apex court while placing reliance on Maharaj Umeg Singh State of Bombay[6], and Firm Bansidhar Premsukhdas v. State of Rajasthan[7] held for limitation to exist there should be express provision or clause in the constitution which refer to limitation.
  2. Whether there was unreasonably high rate of tax:- Court held that there was no merit in the said contention and held that no matter whether the tax is high or low it doesn’t constitute to be restriction under Art. 301 of the constitution. Further the levy of tax is both attribute of sovereignty and unavoidable necessity. Reliance was placed in the case of State of Madras  N.K Nataraja Mudaliar[8]
  3. Whether the use of the expression “by virtue of any entry relating to trade and commerce” appearing in Article 303 are wide enough to include entries relating to levy of taxes also:- Court held that merely because there are entries related to the head of trade and commerce and not in themselves sufficient in character to levy taxes. Reliance was placed on the case of P.V Sunderaramier’s case wherein it was held that taxing entries are different from other entries and there should be a special statue which should empower the legislature to impose such tax.
  4. Whether Non-Discriminatory tax serves as a restriction on free trade and commerce: Court held that such a thing doesn’t constitute to form a restriction on Art. 301 of the constitution of India. Further the intention of the Article thus, clearly is that where a tax exists on goods imported into a State there should be no discrimination between such a tax and a tax on similar goods manufactured or produced in the importing State.

Analysis of Various Situations:-

Supreme Court before discussing the said concept and prior to making analysis went to the historical backdrop to analysis the reasoning and the mindset of the constitutional makers behind the said provisions and for that very purpose while analyzing various case laws in great detail court reiterated the well established concept that the Indian constitution is quasi federal in character with strong focus on center. Further on the said point court even referred that to the extent of its federal character the concept even constitutes to be a part of basic structure doctrine and reliance was placed on S.R Bommai v. Union of India[9]  and Kesavananda Bharti v. State of Kerala[10]. Now coming back to the said concept court stated that a co-joint reading of Art. 301 and 302 led to clear implication that legislature have the power impose restriction with regard to freedom of trade and commerce. The only restriction in this regard is that parliament can’t make a legislature which is discriminatory in nature or give a special preference to one state over other.

Court than went into the chronological development that took place since the inception in this regard i.e. tax on inter-state sale and movement of goods. The first decision that was referred by the court was M.P. v. Sunderaramier v. State of Andhra Pradesh[11] in which a writ petition was filed under Article 32 of the constitution of India whereby the tax on interstate sale of yarn was challenged and the contention of the assessee was that freedom guaranteed under Art. 301 also include the freedom from taxation as any such imposition of tax will offend that guarantee. The court in the said case found it to be suffering from the infirmities and discarded the argument of the assessee.

While another view came after 3 year of this judgment in the case of Atiabari Tea Company case[12] where the constitutional validity of the Assam Taxation (on Goods Carried by Roads or Inland Waterways) Act, (Assam Act XIII of 1954) was challenged and it was held that it was constitutionally invalid as it is in direct contravention with Art. 301 of the constitution.

Under Para 104 of the judgment in the present case, sums up the intention behind the judgment of the court in delivering the judgment:

‘Dealing in particular with the scope and meaning of Article 304(b) of the Constitution on a true and correct interpretation Seervai in his treatise Constitutional Law of India (supra) sounded a note of caution and observed that if Article 304(b) was interpreted in a manner that would include levy of taxes as a restriction within the meaning of that Article, it would totally dislocate the scheme under our Constitution. The celebrated author, in our opinion, was right in saying so for the taxing power of the Union and the States are mutually exclusive. While the Parliament cannot legislate on the subjects reserved for the States, the States cannot similarly trespass onto the taxing powers of the Union. If the Constitutional scheme does not allow the Parliament to usurp the taxing powers of the State Legislatures, such process of usurpation cannot also be permitted to take place in the garb of making Union executive’s concurrence an essential pre-requisite for any taxing legislation’.

Analysis of Contention:-

Further there was a contention on behalf of the assessee that state legislature may levy tax which operate to be a fiscal barrier and which led to be restriction of interstate trade and commerce and the aggrieved party will be left with no option to challenge the said fiscal barrier.  Further the reliance was placed on the case of where such case was not held maintainable Ramjilal v. Income Tax Officer, Mohindargarh[13]. The court while discarding the said contention held that taxing statue is not immune from challenge[14]

Further there was a contention from the said of the assessee counsel that a tax can only be lived if it is in public interest. As in the case of Mudaliar’s it was held that central sales tax act was constitutionally valid because it was for public interest but as held by the court the said ground doesn’t serve as a limitation.

  1. A BOBDE J.

The said justice while agreeing with the chief justice held that taxes are not a restriction on freedom of trade commerce and intercourse. Further on this point he stated that if this would be considered to be a restriction than even paying a charge of bus ticket would be considered to restriction on freedom of movement. Further while giving the same reasons for the question so formulate in the said case as given by the chief justice he gave a concurring judgment.


The said justice while giving a concurring judgment held that Atiabari’s case one was required to apply the test of “direct or immediate” effect of Entry Tax. If it restricts freedom of trade and commerce, it had to be struck down. Since such a view did not permit certain levies imposed by the State legislature to provide better facilities for interstate trade and commerce, the concept of regulatory and compensatory taxation was advanced as a permissible exception, by the majority view in Automobile Transport case. Now even the said concept as discussed by CJI doesn’t have any application as every tax is compensatory in nature.  But there has to be some level of limitation in freedom of trade and commerce and the only limitation in that regard in the one enumerate under art. 304(a).

He further expressed that law laid down in Atiabari case[15] as well as in Automobile Transport case[16] is no longer a good law and a non discriminatory tax is not a restriction under article 301

 Justice expressly stated that state legislatures are free to exercise their taxing powers without the need of declaring and showing that taxes imposed by them are for the benefit of concerned traders or manufacturers. But such tax must be non-discriminatory in nature. To ultimately reach compliance with Part XIII of the Constitution, the tax must pass the twin tests embodied in Article 304(a) –

  1. Similar goods produced locally must also be subjected to similar tax and
  2. Such state action should not attract the vice of discrimination between the two varieties of goods.

[1] (2006) 7 SCC 241

[2] AIR 1962 SC 1563

[3] (2000) 5 SCC 694

[4] (1990) 1 SCC 109

[5] (2009) 10 SCC 755

[6] AIR 1955 SC 540

[7] AIR 1967 SC 40

[8] AIR 1969 SC 147

[9] (1994) 3 SCC 1

[10] (1973) 4 SCC 225

[11] AIR 1958 SC 468.

[12] AIR 1958 SC 468.

[13] AIR 1951 SC 97

[14] Moopil Nair’s case

[15] Supra

[16] Supra

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