STATE OF KERALA v. A. B. ABDUL KHADIR & ORS. July 30, 1969 [J.C. SHAH, ACTING C.J., V. RAMASWAMI AND A. N. GROVER, JJ.] Constitution of India, Arts, 301 and 304-Prohibition under Art. 301 -When a tax is saved.
To avoid the decision of this Court in A. B. Abdul Khadir v. The State of Kera/a, [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 w)lich was later replaced by Luxury Tax on Tobacco (Validation) Act 9 of 1964. Conse- quently 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 Kal,vani 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 Legis1atu:re to impose a tax on tobacco im- ported 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 assump- tion that the notifications therein enhancing duty on foreign liquor infring- ed the guarantee under Art. 30 I 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 \Vould be tantamount per se to an infringement of Art. 301.
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. 30 I. A tax may in certain cases directly and immediately restrict or hamper the fiow 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 1,
·B c ·G KERALA v. ABDUL KHADIR (Ramaswami, J.) 70 I flow of trade, ,comQi.e1ce <lD;d intercourse, and, therefore, fell within th~ prohibition imposed uhder 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 _wt . ..!ther the statute is saved under Aft. 304(b) does not arise and the principle laid down in Kalyc.ni Stores' case cannot be invoked. This
case, therefore must go :back to the High Court. [709 E-710 El Atiabari Ter. Co, Ltd. v. The State of Assam, [1961] 1 S.C.R. 809, Automobile Transport (Ra;asthan) Ltd. v. The State of Rajasthan, [1963] I S:C.R. 491, Andhra· Sugars Ltd. v. State of Andhra ·Pradesh. [1968] 1 S.C.R. 705 and State' of Madras v. K. Naaraja Muda/iar, [1968] 3 S.C.R. 829, refe'rred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 517 of 1967. Appeal from the judgment and order dated October 3, 1966 of the Kerala High C~urt'in Original Petition No. 934 of 1964. M. R. K. Pillai; for the appellant.
R. Gopalakrishna'!, for the respOiDdents. 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 prepara- tions and are doing btisiness in Mattancherry in the name and style of A. S. Bava, T<;>ba9sonist. 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 ther~under. Sectibn 6 of the Act gave power to the Dewan to make n\Ies1 from time to time consistent with the Act, to permit absolutely or subject to any condition the possession for sale, or cultivation o~. tobacco. In pursuance of the power given by this section the Dewan was making rules from time to time relaiing to the matters specified in the Act. Cochin State was integrated with Trav~ncore on, April 1, 1960 in order to form the new State cif 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 tlie Act provided that if imme- diately before the fir~! day of April, 1960 there was in force in any State other than;] am!)m & Kashmir a law corresponding to, but [1970] l S.C.R.
other than, an Act referred to in sub-s. (I) or (2) of s. 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 l, 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 intro- duced for various classes of licences including 'C' class licences. The State of Travancore-Cochin was collecting licence fee from tl:e respondents for the period from August 17, 1950 to December ~I, l 967 on the strength of the said rules framed by the Travan- core-Cochin State. In 1956 the respondents filed 0. 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 I of 1944 to the Part B State of Travancore-Cochin and in consequence the noti- ficatitms issued in August 1950 and January 1961 framing new rules for the issue of licences and prescribing fees therefor under the powers conferred hy 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 I of 1944 to Travancore-Cochin State. The High Court dismissed the writ petition holding that the tax leviec'. hy virtue of the rules framed under the Travancore-Cochin
Tobacco Acts was rot a duty of excise coming within the Union List but it was a ta~ on luxuries coming 9.ithin 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 I 087 (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 Ac!. 1944 and hence were superseded on April I, 196) by virtue of s. 13(2) of the Finance Act, 1960. Consequently, the new rules fram.~d 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 C@rt did not consider it necessary to decide whether the Cochin and Travancore Acts were within the competence of ·the State Le~islature 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 com- plained to the appellant that a sum of Rs. 1,11,750 had been illeg:ally collected as licence Ice from 1125 to 1133 M.N. On
c c KERALA v. ABDUL KHADIR (Ramaswami, /.) April 29, 1962 the appellant refunded a sum of Rs. 73,500 but did not return the balance. On December 16, J 963 the Government of Kerala Promul-
gated Ordinance I of 1963 which was later replaced by Act 9 of 11964. The Ordinance was promulgated in order to avoid the effect of the decision of this Court in A. B. Abduikhadir & 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 \Vith the 17th day of August, 1950 artd ending on the 31st day of December, 1957 every person vending or stocking tobacco within any area to which this Act extends shal! be liable and
shall be deemed always to have been liable to pay a luxury tax on such tobacco in the form of a fe~ for licence for the yend and stocking of the tobacco, at such rates as may be prescribed not excec·ding the rates speci- fied in the sche,dule."
Section 4 confers rule making power and states : "(1) The $ovemment may, by notification in the Gazette, make rules to carry out the purposes of this Act. (2) In pa(ticular, and without pre1•1dice to the
generality of the foregoing power, such rules may pro- vide for:- (i) the prohibition of the vending of tobacco except under a licence; (ii) the ~ssue of licences for the vend and stocking
of tobacco ana'. the procedure therefor; (iii) classification of licences rund the rate at which tax in the forni 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 (Travan¢ore Act I of 1087) or the Cochin Tobacco Act~II of 1084 as the case may be, in so far
as they relate or purport to relate to the levy and collec- tion of fees for licence.s for the vend and stocking of tobacco, shal11 'be deemed to be rules issued under this (I) [1962) Supp. s.q.R. 741.
(1970) I S.C.R. section and shall be deemed to have been in force at all 111aterial times : Section 5 providCli : "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 ( 3) of section 4 for the period beginning with the 17th day of August, 1950 and end-
ing on the 3 lst day of December, 1957 shall be deemed to hllve 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 nrovisions of this Act and accordingly (a) no suit or other proceed- ing 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 direct- ing the refund of any fees paid or purported to have been paid under any of the said rules or notification."
Section 6 enacts : c "Where any amount paid or purported to have been paid as a fee for licence under any of the rules or noti- fications 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 refund was made shall pay the
amount so r.~funded 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 I 084 reads as follows :
"In exercise of the powers conferred by section 5 of the Cochin Tobacco Act VIl of I 084 as subsequently c KEl\ALA v. ABDUL KHADIR (Ramaswami, !.) amended and as continued in force by the Travancore-
Cochin Adrn~stration and Application of Laws Act VI of 1125 and in supersession of all previous notifications and Rules on th~ subject, the following Rules are pres- cribed under sanction of His Highness the Raj Pramukb
for the import, ,export, sale, transport, possession, dis- posal 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 Jicencees shall sell only to ,other 'A' Class licen- cees or to 'B' Class Iicencees.
(ii) the ann,ha! fees for these licencees shall be as follows: Variety of tobac~o stockeµ Maximum quantity Cds A. Jaffna tobacco, B. Tobacco produced i.Q India (Mfd) JOO c. Beedi or Beedi tobacco
D. Tobacco preparation, of to the all kinds value of 20,000 Minimum fee prescribed Rs. Fee payable for stock- ing additional quantities Rs. I 500 100 for additional quantity of 100 Cds or fraction thereof.
]()()() Rs. Do. Rs. 750 for additional Q\lan- tity of 25 Cds or fraction thereof. Rs. 750 for additional quan- tity to the value of Rs. 20,000 or fraction thereof. N.B. : F.or fhe purpose of calculating stockist licence
fee in respect 1of 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.
'.fhereupon the respondent filed writ petition 70f; !1970] I S.C.R. No. C.P. 984 of J 964 which was allowed by the High Court on the ground that Act 9 of 1964 and the rules were ultra vires tM Constitution of Jr.dia.
It was held by :he High Court that in the absence of any production of tobacco inside the Kerala State it was 'DOI compe· tent for the Kerala Legislature to impose a tax on tobacco iroport· eel from outside the State and therefore the provisions of the Luxury Tax on Tobacco (Validation) Act, 1964 violated the guar.antee contained in Arts. 301 and 304 of the Comtitution. In reaching tl.is conclusion the High Court purporte<\ to follow the decision of thi' Court in Kalyani Stores v. The Str.te of Ori~sa('). It is necessary at th!s stage .to set out the relevant Articles in Part XIII of the Constitution as it ~tood at the material time : "Article 301 :
Subject to .t.he 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 restncttons
on the freedom of trade, wmmerce or intercourse bet· ween one State and another or within any part of the territory of India as m~y be required in the public in- terest."' Article 304 :
c n "l\otwithstanding anytning in Article 301 o.r Article 303, the Le~islature of a State m~ 'by law : (a) impose on .goods imported from other States (or the Union terri.tt5rics) any tax to which: similar goods
manufactured· or produced in thaS State arc rubject, so, however, as not to discriminate between !ioo9s ~o im- ported and g.;iods so manufactured or p~odu~ and (b) impose such reason'abl~ restrictions p~ the free-
dom of trade: c»mmerce or 'intercourse witb or within that State as may be required in th.c pu.bli~ interest; Provided tMt no Bill or amendment for the pur· po~cs· of clau~~ (b) shall be introduced or moved in the
(I) J19!>6J I S.t.R 86l. c KERALA v. ABDUL KHADIR (Ramaswami, J.) Legislature of a State without the previous sanction of the President." The true scope and effect of those Articles was the subject mat- ter of consideration in Atiabari Tea Co. Ltd.
v. The State of Assam('). The majority view was 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 Jaws. The construction of Art. 301 should not be determined on a purely academic or doctrinnaire considerations; in con- struing the said Articles we must adopt a realistic ap-
proach 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 th,e impact of Art. 301 must be judged accordingly.
Besides. it is not irrelevant to remember in this connec- tion that the Article we are construing imposes a consti- tutional limitation on the power of the Parliament and State Legislatures .to levy taxes, and generally, but for
such limitation, the pov.1er of taxation v.rould be presum- ed 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 restric-
tions freedom from which is guaranteed by Art. 301, would be such restrictions as directly and immediately restrici 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 argu- ment that all taxes should be governed by Art. 301 whet- her 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 legi>lative enactment prescribing the minimum wages to
industrial employees may fall under Part XIII because ir; an economic sense an additional wage bill may in- directly affect trade or commerce. We are, therefore, sathfied that in determining the limits of the width and
~mplitude of the freedom guaranteed by Art. 301 a ra- tional and workable test to apply would be : Does the impugned restriction operate directly or immcrli'.itely on trade or its movement 9 "
I 1) [ J 11(, 1 l ~ \–, 80'~- [1970] I S.C.R. 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 reite- rated by this Court in Andhra Sugars Ltd. v. State of Andhra Pradesh('). 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 11ot exceeding five rupees per metric tonne as may be prescribed on the purchase of cane required for use, con- sumption 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 Constitu- tion.
A similar view was expressed in the State of Madras v. K. Nataraja Mudaliar(') in which the question at issue was whet- her ss. 8(2) and 8(5) of the Central Sales Tax Act, 1956 were intra vires of Arts. 301 and 303 of the Comtituticin. It was point- ed 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 autho- rising the making of, any discrimination between one State and another, merely because of varying rates of tax prevailing in diffe- rent 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 fac- tors, such as the source of supply, place of consump-
tion, 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 carry- ing 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 factors-natural and business-enter into
the maintenance of trade relations and the free flow of (l) [1963) I S.C.R. 491. (2) [1968) I S.C.R. 705. (3) [1968) l S.C.R. 829. c c -~ ·-· ' KERALA v. ABDUL .KHADIR (Ramaswami, J.)
trade cannot necessarily be deemed to have been obs, tructed 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(') applied to the present case and, that, Kerala Act 9 04' 1964 was violative of Art. 301 of the Constitution.
The view taken by the High Court was that in the absence of any produc- tion 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 manufact\j(ed or produced in that State are such that there is no discrimination against imported goods.
As no foreign liq\lor 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 iniercourse by Art.
301 of the Constitution 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 ( '). The appell,ant in that case challenged the imposi•.ion of a duty of excise on 'foreign liquor' imported into the Orissa State which had been levied at Rs. 40 per LP. Gallon until March 31, 1961 by virtue of a notification issued in 193 7 under s. 27 of the Bihar and Orissa Excise Act, 1915 and which had been en- hanced 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 viola- tion of Arts. 301, 303 and 304 of the Constitution. It was held Ii
by the majority of Judges that the notification dated March 31, 1961 enhancing the levy by Rs. 30 per LP. 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 iiquor was produced or . manufactured within the State, the protection of Art. 304 was not available.
The decision was based on the (I) [1966] l S.C.R. 865 .• SUPREME COURT REl'ORTS [1910] l S.C.R. 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 infringem'"nt of Art. 301. As
we have already pointed out it is well established by numerous authorities of this Court that only such restrictions or impedi- ments which directly and immediately impede the tree flow
of trade, commerce and intercourse fall within the prohibition im- posed by Art. 301. A tax may in certain cases directly and im- mediately restrict or hamper the flow of trade, but every imposi- tion 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 t!Ie 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 consti- tutf; such restrictions or impediments as directly and immediately hamper free flow of trade, commerce and intercourse and, there- fore, 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 ques- tion as to whether the statute is saved under Art. 304(b) does not arise and the principle laid down by this Court in Kalyani Stores case(') 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 c 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 com- petent 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] I S.C.R. 865. r'· '· ,.._
KERALA v. ABDUL KHADIR (Ramaswami, !.) On behalf of the appellants Mr. Chagla has given an undertak- ing 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 KeFala High Court for stay in the meanwhile. a Y.P. Appeal allowed.