Full Judgment Text
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PETITIONER:
STATE OF KERALA
Vs.
RESPONDENT:
A.B. ABDUL KHADIR & ORS.
DATE OF JUDGMENT:
30/07/1969
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C. (CJ)
GROVER, A.N.
CITATION:
1970 AIR 1912 1970 SCR (1) 700
1969 SCC (2) 363
CITATOR INFO :
F 1976 SC 182 (6)
RF 1981 SC 463 (34)
R 1986 SC1085 (20)
RF 1990 SC 781 (74)
ACT:
Constitution of India, Arts, 301 and 304--Prohibition
under Art. 301 --When a tax is saved.
HEADNOTE:
To avoid the decision of this Court in A. B. Abdul
Khadir v. The State of Kerala, [1962] 2 S.C.R. 741, wherein
rules framed for the issue of licences and payment of fee
for storage of tobacco were ’held to be invalid, the
appellant-State promulgated Ordinance I of 1963 which was
later replaced by Luxury Tax on Tobacco (Validation) Act 9
of 1964. Consequently the appellant-State made a demand on
the respondent to repay the amount which had been refunded
to the respondent in accordance with the aforesaid judgment.
Thereupon, the respondent filed a writ petition in the High
Court. The High Court relying upon the decision of this
Court in Kalvani Stores v. State of Orissa, [1966] 1 S.C.R.
865, held that in the absence of any production of tobacco
inside the appellant-State it was not competent for the
State Legislature to impose a tax on tobacco imported from
outside the State and therefore, the provisions of the Act
(9 of 1964) violated the guarantee contained in Arts. 301
and 304 of the Constitution.
HELD: The High Court had not correctly appreciated the
import of the decision in Kalyani Stores’ case. The decision
was based on the assumption that the notifications therein
enhancing duty on foreign liquor infringed the guarantee
under Art. 301 and may be saved if it fell within the
exceptions contained in Art 304 of the Constitution. As no
liquor was produced or manufactured within the State the
protection of Art. 304 was not available. This Court did
not intend to lay down the proposition that the imposition
of a duty or tax in every case would be tantamount per se to
an infringement of Art. 301.
Only such restrictions or impediments which directly and
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immediately impede the free flow of trade, commerce and
intercourse fall within the prohibition imposed by Art. 301.
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. Every case must be judged on its own facts
and in its own setting of time and circumstance.
In the present case the High Court had not gone into the
question whether the provisions of the Act and the
notifications constituted such restrictions or impediments
as directly and immediately hamper the free
701
flow of trade, commerce and intercourse, and, therefore,
fell within the prohibition. imposed under Art. 301 of the
Constitution. Unless the High Court first comes to the
finding whether or not there is the infringement of the
guarantee under Art. 301 of the Constitution the further
question as to whether the statute is saved under Art.
304(b) does not arise and the principle laid down in Kalyani
Stores’ case cannot be invoked. This case, therefore must
go back to the High Court. [709 E--710 E]
Atiabari Tea Ca., Ltd. v. The State of Assam, [1961] 1
S.C.R. 809, Automobile Transport (Rajasthan) Ltd. v. The
State of Rajasthan, [1963] 1 S.C.R. 491, Andhra Sugars Ltd.
v. State of Andhra Pradesh, [1968] 1 S.C.R. 705 and State
o/Madras v. K. Nataraja Mudaliar, [1968] 3 S.C.R. 829,
referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 517 of
1967.
Appeal from the judgment and order dated October 3, 1966
of the Kerala High Court in Original Petition No. 934 of
1964.
M.R.K. Pillai, ’for the appellant.
R. Gopalakrishnan, for the respondents.
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought by certificate
from the judgment of the Kerala High Court in O.P. No. 934
of 1964.
The respondents are dealers in tobacco and tobacco
preparations and are doing business in Mattancherry in the
name and style of A.S. Bava, Tobacconist. In the year 1909,
Cochin Tobacco Act 7 of 1084 (M.E.) was enacted by the
Maharaja of Cochin. Section 4 of that Act prohibited the
transport, import of export, sale and cultivation of tobacco
except as permitted by the Act and Rules framed thereunder.
Section 6 of the Act gave power to the Dewan to make rules
from time to time consistent with the Act, to permit
absolutely or subject to any condition the possession for
sale, or cultivation of tobacco. In pursuance of the power
given by this section the Dewan was making rules from time
to time relating to the matters specified in the Act.
Cochin State was integrated with Travancore on April 1,
1960 in order to form the new .State of Travancore-Cochin.
On that date, after the Constitution came into force the
State of Travancore-Cochin became a Part B State and by
the Finance Act, 1960 the Central Excise and Salt Act 1 of
1944 was extended to the Travancore-Cochin State. Section
13(2) of the Act provided that if immediately before the
first day of .April, 1960 there was in force in any State
other than Jammu & Kashmir a law corresponding to, but
702
other than, an Act referred to in sub-s. (1) or (2) of s.
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11, such law was repealed with effect from such date. In
consequence of this provision in the Finance Act rules
which were in force on April 1, 1950 were changed in Cochin
and by a notification dated August 3, 1950 the system of
auction sales of A and B Class shops was done away with and
instead graded licence fees were introduced for various
classes of licences including ’C’ class licences. The State
of Travancore-Cochin was collecting licence fee from the
respondents for the period from August 17, 1950 to December
31, 1967 on the strength of the said rules framed by the
Travancore-Cochin State. In 1956 the respondents filed O.P.
No. 70 of 1956 in the High Court of Kerala for the refund of
the licence fee collected after April 1, 1950 on the ground
that the Cochin Tobacco Act stood repealed by the Finance
Act, 1960 because of the extension of the Central Excise and
Salt Act 1 of 1944 to the Part B State of Travancore-Cochin
and in consequence the notifications issued in August 1950
and January 1961 framing new rules for the issue of
licences and prescribing fees therefor under the powers
conferred by the Cochin and Travancore Acts were ab initio
void because the Acts under which the notifications .were
purported to be issued stood repealed from April 1, 1950.
The petition was opposed by the appellant on the ground that
the Act and the rules were not repealed by the extension of
the Central Excise and Salt Act 1 of 1944 to Travancore-
Cochin State. The High Court dismissed the writ petition
holding that the tax levied by virtue of the rules framed
under the Travancore-Cochin Tobacco Acts was not a duty of
excise coming within the Union List but it was a tax on
luxuries coming within entry 62 of the State List. The
respondents took the matter in appeal to this Court which
held that the rules framed under the Cochin Tobacco Act of
1084 (M.E.) and the Travancore Tobacco Regulation of 1087
(M.E.) requiring licences to be taken out for storage and
sale of tobacco and for payment of licence fee in respect
thereof were law corresponding to the provisions of the
Central Excise and Salt Act, 1944 and hence were superseded
on April 1, 1960 by virtue of s. 13(2) of the Finance Act,
1960. Consequently, the new rules framed in August 1950 and
January. 1951 for the respective areas of Cochin and
Travancore for the issue of licences and payment of fee for
storage of tobacco were invalid ab initio. The Court did not
consider it necessary to decide whether the Cochin and
Travancore Acts were within the competence of the State
Legislature under Entry 62 of List II for that question
would only arise if those Acts were not repealed as
corresponding law under s. 13(2) of the Finance Act.
Soon after the decision of this Court the respondent
complained to the appellant that a sum of Rs. 1,11,750 had
been illegally collected as licence fee from 1125 to 1133
M.N. On
703
April 29, 1962 the appellant refunded a sum of Rs. 73,500
but did not return the balance.
On December 16, 1963 the Government of Kerala
Promulgated Ordinance I of 1963 which was later replaced by
Act 9 of 1964. The Ordinance was promulgated in order to
avoid the effect of the decision of this Court in A.B.
Abdulkhadir & Ors v. The State of Kerala(1) in respect of
the period from August 17, 1950 to December 31, 1957.
Section 3 of the Act provides:
"For the period beginning with the 17th
day of August, 1950 and ending on the 31st
day of December, 1957 every person rending or
stocking tobacco within any area to which this
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Act extends shall be liable and shall be
deemed always to have been liable to pay a
luxury tax on such tobacco in the form of a
fee for licence for the vend and stocking of
the tobacco, at such rates as may be
prescribed not exceeding the rates specified
in the schedule."
Section 4 confers rule making power and
states:
"(1) The Government may, by notification
in the Gazette, make rules to carry out the
purposes of this Act.
(2) In particular, and without prejudice
to the generality of the foregoing power,
such rules may provide for :--
(i) the prohibition of the vending of
tobacco except under a licence;
(ii) the issue of licences for the vend
’and stocking of tobacco and the procedure
therefor;
(iii) classification of licences and the
rate at which tax in the form of a fee for
licence may be levied for each class of
licences;
(iv) appeals from orders under the rules.
(3) The rules and notifications
specified ’below purported to have been issued
under the Tobacco Act of 1087 (Travancore Act
I of 1087) or the Cochin Tobacco Act VII of
1084 as the case may be, in so far as they
relate or purport to relate to the levy and
collection of fees for licences for the vend
and stocking of tobacco, shall be deemed to
be rules issued ,under this
(1) [1962] Supp. S.C.R. 741.
704
section and shall be deemed to have been in force at all
material times:
. . . . . . . . .
Section 5 provides:
"Notwithstanding any judgment, decree or order of any
court, all fees for licences for the vend or stocking of
tobacco levied or collected or purported to have been levied
or collected under any of the rules or notifications
specified in sub-section (39 of section 4 for the period
beginning with the 17th day of August, 1950 and ending on
the 31st day of December, 1957 shall be deemed to have been
validly levied or collected in accordance with law-as if
this Act were in force on and from the 17th day of August,
1960 and the fees for licences were a luxury tax on tobacco
levied under the provisions of this Act and accordingly (a)
no suit or other proceeding shall be maintained or continued
in any court for the refund of any fees, paid or purported
to have been paid under any of the said rules or
notifications;
(b) no court shall enforce a decree or order
directing the refund of any fees paid or purported to have
been paid under any of the said rules or notification."
Section 6 enacts:
"Where any amount paid or purported to have been paid
as a fee for licence under any of the rules or notifications
specified in sub-section (3) of section 4 has been refunded
after the 24th day of January, 1962 and such amount would
not have been liable to be refunded’ if this Act had been in
force on the date of the refund,the person to whom the
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refund was made shall pay the amount so refunded to the
credit of the Government in any Government treasury on or
before the 16th day of April, 1964 where such amount is not
so paid, the amount may be recovered from him as an
arrear of land revenue under the Revenue Recovery Act for
the time being in force."
The notification dated January 25, 1951 issued under
the Cochin Tobacco Act of 1084 reads as follows:
"In exercise of the powers conferred by section 5 of
the Cochin Tobacco Act VII of 1084 as subsequently
705
amended and as continued in force by the Travancore-Cochin
Administration and Application of Laws Act Vl of 1125 and in
supersession of all previous notifications and Rules on the
subject, the following Rules are prescribed under sanction
of His Highness the Raj Pramukh for the import, export,
sale, transport, possession, disposal of things confiscated
and the grant of rewards under the said Act and for
generally carrying out the provisions thereof.
. . . . . . . . .
Clause 16:
(i) Holders (stockist or ’A’ Class licences shall be
entitled to purchase tobacco from any dealer within or
without the State without any quantative restriction. This
class of licencees shall sell only to other ’A’ Class
licencees or to ’B’ class licencees.
(ii) the annual fees for these licencees shall be as
follows:
------------------------------------------------------------
Variety of tobacco Maximum Minimum fee Fee payable
stocked Quantity Cds Prescribed for stocking
Rs. additional qu-
antities Rs.
------------------------------------------------------------
A.Jaffna tobaco 100 1500 100 for additional
quantity of 100
Cds or fraction
thereof.
B.Tobacco produced 100 1000 Rs 750 Do.
in India(Mfd)
C.Beedi or Beedi 25 1000 Rs 750 for addit-
tobacco. ional quantity of
25 Cds or fraction
thereof
D.Tobacco preparation to the 1000 Rs 750 for addi-
of all kinds. Value of tional quantity to
20,000 the value of
20,000 or fraction
thereof.
-------------------------------------------------------------
N.B: For the purpose of calculating stockist license fee
in respect of tobacco preparations,the cost price of the
article will be taken into account. The licence fee will be
realised only for the quantities brought in from outside the
State."
After the enactment of Act 9 of 1964 the appellant made a
demand on the respondent to repay the amount of Rs. 73,500
which had been refunded to the respondent in accordance with
the Supreme Court judgment. Thereupon the respondent filed
writ petition
706
No. C.P. 984 of 1964 which was allowed by the High Court on
the ground that Act 9 of 1964 and the rules were ultra vires
the Constitution of India.
It was held by the High Court that in the absence of any
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production of tobacco inside the Kerala State it was not
competent for the Kerala Legislature to impose a tax on
tobacco imported from outside the State and therefore the
provisions of the Luxury Tax on Tobacco (Validation) Act,
1964 violated the guarantee contained in Arts. 301 and 304
of the Constitution. In reaching this conclusion the High
Court purported to follow the decision of this Court in
Kalyani Stores v. The State of Orissa(1).
It is necessary at this stage to set out the relevant
Articles in Part XIII of the Constitution as it stood at the
material time:
"Article 301:
Subject to the other provisions of this Part, trade,
commerce and intercourse throughout the territory of India
shall be free.
Article 302:
"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."
Article 304: ’
"Notwithstanding anything in Article 301 or Article
303, the Legislature of a State may by law:
(a) impose on goods imported from other States (or the
Union territories) any tax to which similar goods
manufactured or produced in that State are subject, so,
however, as not to discriminate between goods so imported
and ’goods so manufactured or produced and
(b) impose such reasonable restrictions on the freedom
of trade, commerce or intercourse with or within that 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
(1) [19661 1 S.C.R. 865.
707
Legislature of a State without the previous sanction of the
President."
The true scope and effect of those Articles was the
subject matter of consideration in Atiabari Tea Co. Ltd. v.
The State of Assam(1).’ The majority view vas expressed by
Gajendragadkar J. at p. 860 as follows:
"In construing Art. 301 we must, therefore, have regard
to the general scheme of our Constitution as well as the
particular provisions in regard to taxing laws.The
construction of Art. 301 should not be determined on a
purely academic or doctrinnaire considerations; in
construing the said Articles we must adopt a realistic
approach and bear in mind the essential features of the
separation of powers on which our Constitution rests. It is
a federal Constitution which we are interpreting, and so the
impact of Art. 301 must be judged accordingly. Besides, it
is not irrelevant to remember in this connection that the
Article we are construing imposes a constitutional
limitation on the power of the Parliament and State
Legislatures to levy taxes, and generally, but for such
limitation, the power of taxation would be presumed to be
for public good and would not be subject to judicial review
or scrutiny. Thus considered we think it would be
reasonable and proper to hold that restrictions freedom from
which is guaranteed by Art. 301, would be such restrictions
as directly and immediately restrict or impede the free flow
or movement of trade.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
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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. If the
said argument is accepted it would mean, for instance, that
even a legislative enactment prescribing the minimum wages
to industrial employees may fall under Part XIII because
in an economic sense an additional wage bill may in-directly
affect trade or commerce. We are, therefore, satisfied that
in determining the limits of the width and amplitude of the
freedom guaranteed by Art. 301 a rational and workable test
to apply would be: Does the impugned restriction operate
directly or immediately on trade or its movement ?"
(1) [1961] 1 S.C.R. 809.
708
In the Automobile Transport (Rajasthan) Ltd v. The State of
Rajasthan(1) the view of Gajendragadkar, J., was accepted
as correct by the majority of the Judges. The principle was
reiterated by this Court in Andhra Sugars Ltd. v. State
of Andhra Pradesh(2). In that case the question which arose
was whether s. 21 of the Andhra Pradesh Sugarcane
(Regulation of Supply and Purchase) Act which authorised the
State Government to levy a tax at such rate ..not exceeding
five rupees per metric tonne as may be prescribed on the
purchase of cane required for use, consumption or sale in a
factory Was constitutionally valid. It was held by this
Court that normally a tax on the sale of goods-did not
,directly impede or hamper the flow of trade and s. 21 was
no exception and was not violative of Art. 301 of the
Constitution. A similar view was expressed in the State of
Madras v. K. Nataraja Mudaliar(3) in which the question at
issue was whether ss. 8(2) and 8(5) of the Central Sales Tax
Act, 1956 were intra vires of Arts. 301 and 303 of the
Constitution. It was pointed out that an Act which was
merely enacted for the purpose of imposing.tax which was to
be collected and to be retained by the State did not amount
to a 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,
merely because of varying rates of tax prevailing in
different States. At p. 150 of the report Shah, J.,
speaking. for the Court observed:
"The flow of trade does not necessarily
depend upon the rates of sales tax: it depends
upon a variety of factors, such as the source
of supply, place of consumption, existence of
trade channels, the rates of freight, trading
facilities, availability of efficient
transport
and other facilities for carrying on trade.
Instances can easily be imagined of cases in
which notwithstanding the lower rate of tax in
a particular part of the country goods. may be
purchased from another part, where a higher
rate of tax prevails. Supposing in a
particular State in respect of a commodity the
rate of tax is 2 per cent, but if the benefit
of that low rate is offset by the freight
which a merchant in another State may have to
pay for carrying that commodity over a long
distance, the merchant would be willing to
purchase the goods from a nearer State even
though the rate of tax in that State may be.
higher. Existence of long-standing business
relations, availability of communications,
credit facilities and a host of other
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factors--natural and business--enter into the
maintenance of trade relations and the free
flow of
(1) [1963] 1 S.C.R. 491. (2) [1968] 1 S.C.R. 705.
(3) [1968] 3 S.C.R. 829.
709
trade cannot necessarily be deemed to have been obstructed
merely because in a particular State the rate of tax on
sales is higher than the rates prevailing in other States.
On behalf of the appellant it was contended that the
High Court was not right in holding that the ratio of
Kalyani Stores case(1) applied to the present case and,
that, Kerala Act 9 of 1964 was violative of Art. 301 of
the Constitution. The view taken by the High Court was that
in the absence of any production of tobacco inside Kerala
State it was not competent for the Kerala Legislature to
enact the impugned Act under Art. 304(a) of the
Constitution. In support of this view the High Court relied
upon the following passage from the judgment of this Court:
"Exercise of the power under Art. 304(a)
can only be effective if the tax or duty
imposed on goods imported from other States
and the tax or duty imposed on similar goods
manufactured or produced in that State are
such that there is no discrimination against
imported goods. As no foreign liquor is
produced or manufactured in the State of
Orissa the power to legislate given by Art.
304 is not available and the restriction which
is declared on the ground of trade, commerce
or intercourse by Art. 301 of the Con
stitution
remains unfettered."
In our opinion the High Court has not correctly
appreciated the import of the decision of this Court in
the Kalyani Stores case(1). The appellant in that case
challenged the imposition of a duty of excise on ’foreign
liquor’ imported’ into the Orissa State which had been
levied at Rs. 40 per L.P. Gallon until March 31, 1961 by
virtue of a notification issued in 1937 under s. 27 of the
Bihar and Orissa Excise Act, 1915 and which had been
enhanced with effect from April 1, 1961 by a fresh
notification. It was contended on behalf of the appellant
that since no ’foreign liquor’ was .manufactured within the
State and consequently no excise duty was being levied on
any locally manufactured ’foreign liquor’ countervailing
duty could not be charged on such liquor brought from
outside the State and that the impost was in violation of
Arts. 301,303 and 304 of the Constitution. It was held by
the majority of Judges that the notification dated March
31,1961 enhancing the levy by Rs. 30 per L.P. Gallon
infringed the guarantee of freedom under Art. 301 and may be
saved only if it falls within the exception contained in
Art. 304. As no liquor was produced or manufactured within
the State, the protection of Art. 304 was not available.
The decision was based on the
(1) [1966] 1 S.C.R. 865.
710
assumption that the notification dated 31-3-1961 enhancing
duty, on foreign liquor infringed the guarantee under Art.
301 and may be saved if it fell within the exceptions
contained in Art. 304 of the Constitution. The Court did
not intend to lay down the proposition that the imposition
of a duty or tax in every case would be tantamount per se to
an infringement of Art. 301. As we have already pointed out
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it is well established by numerous authorities of this Court
that only such restrictions or impediments which directly
and immediately impede the free flow of trade, commerce
and intercourse fall within the prohibition imposed by Art.
301. 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. Every case must be judged on its own
facts and in its own setting of time and circumstance. In
the present case the High Court has not gone into the
question whether the provisions of Act 9 of 1964 and the
notification dated January 25, 1951 issued under the Cochin
Tobacco Act constitute such restrictions or impediments as
directly and immediately hamper free flow of trade, commerce
and intercourse and, therefore, fall within the prohibition
imposed under Art. 301 of the Constitution. Unless the High
Court first comes to the finding on the available material
whether or not there is infringement of the guarantee under
Art. 301 of the Constitution the further question as to
whether the statute is saved under Art. 304Co) does not
arise and the principle laid down by this Court in Kalyani
Stores case(1) cannot be invoked.
It was also said on behalf of the respondents that the
State Legislature had no power to levy and collect licence
fee under the impugned Act as it was in substance a duty of
excise falling under the Union List. The contrary viewpoint
was presented on behalf of the appellant and it was
contended that the legislation falls under Entry 62 of List
II and the State Legislature was competent to enact. It is
open to the parties to argue this matter before the High
Court at the time of re-hearing.
For the reasons already expressed we hold that the
appeal should be allowed and the judgment of the Kerala High
Court dated October 3, 1966 in O.P. 934 of 1964 should be
set aside and the case should go back for hearing in the
light of the law laid down in this judgment.
It is desirable that the High Court should give an
opportunity to the parties to file further affidavits before
taking up the case for re-hearing.
(1) [1966] 1 S.C.R. 865.
711
On behalf of the appellants Mr. Chagla has given an
undertaking that the provisions of the Act would not be
enforced against the respondents for a month from this date.
The respondents say that they will apply. to the Kerala High
Court for stay in the meanwhile.
Y.P. Appeal allowed.
712