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IN SUPREME COURT OF INDIA Page 1 of 14

CASE NO.:
Appeal (civil) 4998 of 2000

PETITIONER:
M/S SHARMA TRANSPORT REP.BY SHRI D.P.SHARMA

Vs.

RESPONDENT:
GOVERNMENT OF A.P. & ORS.

DATE OF JUDGMENT: 03/12/2001

BENCH:
B.N. Kirpal, K.G. Balakrishnan & Arijit Pasayat

JUDGMENT:

With
[C.A. No.4999-5008/2000, C.A. No. 5009/2000, C.A.
No.5010/2000, C.A. No.5011/2000, C.A. No.5012/2000]

J U D G M E N T

ARIJIT PASAYAT, J.

These appeals relate to a common judgment of the Andhra Pradesh

High Court by which challenge to Notification issued by the State
Government in G.O. Ms. No.83, Transport, Roads and Buildings (Tr.II)
Department dated 5.6.2000 was rejected. By the said Notification issued
under clause (b) of Section 9(1) of the Andhra Pradesh Motor Vehicles
Taxation Act, 1963 (in short ’the Taxation Act’) an earlier order dated
1.7.1995 issued by the Transport, Roads and Buildings (Tr. II) Department,
was cancelled. The appellants who are operators of tourist buses originating
from Karnataka State (their home State) and plying in adjacent States
including the State of Andhra Pradesh filed the writ petitions assailing the
legality and constitutional validity of the said Notification dated 5.6.2000.

Case of the appellants as canvassed before the High Court and

reiterated in this Court is essentially as follows:

Vehicles of the appellants are covered by the tourist vehicles permits

issued by the State Transport Authority, Karnataka under Rule 64(1) of the
Karnataka Motor Vehicles Rules and the authorization certificates issued by
the same authority under the Motor Vehicles (All India Permit for Tourist
and Transport Operators) Rules, 1993 (in short ’permit rules) and also the
recognition certificates issued by the Director of Tourism, Bangalore under
the said Rules. By virtue of these permits and certificates, tourist vehicles of
the appellants are authorized to ply in certain contiguous States including the
State of Andhra Pradesh. Central Government after discussions with the
State Governments and with their consent formulated policies in the matter
of concessions to be extended to tourist vehicles. A Notification dated
1.7.1995 was issued pursuant to a directive of the Central Government and
its withdrawal is clearly unconstitutional. Rule 1(4) of the Permit Rules
makes it clear that the conditions prescribed in Rules 82 to 85A of the
Central Motor Vehicles Rules, 1989 (in short ’the Central Rules’) do not
apply to permits granted under the scheme governed by the Permit Rules.
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Therefore, in the garb of levying taxes on fares and freights, the directives of
the Central Government are being violated and the same is impermissible.
With reference to Articles 73, 256 and 257 of the Constitution of India 1950
(for short ’the Constitution’), it is submitted that the directives of the Central
Government are binding and the withdrawal Notification i.e. G.O.Ms.No.83
dated 5th June, 2000 is clearly illegal. With reference to Entry 35 of List III
of the Seventh Schedule, it was submitted that the earlier Notification was in
accord with the said entry. Section 88(9) of the Motor Vehicles Act, 1988 (in
short ’the Act’) throws considerable light on the controversy and similar is
the position in respect of Section 88(14) of the Act. State Legislature has no
competence to rescind or reverse the Notification conferring the benefits of
concessional rate of tax to tourist operators. State law cannot go counter to
the directives of Central Government on this subject. Therefore, the
impugned Notification is beyond the legislative power which the State
derives under Entry 57 of List II of the Seventh Schedule to the Constitution,
in view of the express language used in Entry 35 of List III and also by
virtue of the mandate contained in Article 254 of the Constitution. A plea of
promissory estoppel was also pressed into service. It was submitted that the
withdrawal of the concessional tax is an instance of arbitrary exercise of
power which is not backed by any relevant consideration. Article 256 of the
Constitution obligates the State to exercise its executive power to ensure
compliance with the laws made by Parliament. Therefore, the impugned
Notification could not have been withdrawn. In any event, after the
withdrawal of the Notification there was a repeal of the relevant provision
and without an operative Notification, taxes cannot be charged. Lastly, it
was submitted that the action is clearly violative of guarantees and
protections provided by Article 301 of the Constitution. It is to be noted that
except the last stand indicated above, all other stands were examined by the
High Court and negatived.

It was submitted by learned counsel appearing for the appellants that

reliance placed by the High Court on the decision of this Court in B.A.
Jayaram and Ors. Vs. Union of India and Ors. (1984 (1) SCC 168) is
inappropriate as factual and legal background involved are different. In any
event, some of the observations made in the said case need re-consideration
in view of what has been stated by a 7-Judge Bench in The Automobile
Transport (Rajasthan) Ltd. Vs. The State of Rajasthan and Ors. (1963 (1)
SCR 491).
Learned Solicitor General appearing for the Union of India stated that
the letter dated 30th August, 1993 issued by the Joint Secretary to the
Government of India to which reference was made in the Notification dated
1.7.1995 cannot be construed to be a directive by the Central Government to
the States. Apparently, Articles 73, 256 and 257 deal with different
situations in which directives can be issued. But the present case is one to
which none of these Articles apply. He, however, submitted that there are
certain observations in Jayaram’s case (supra) which are prima facie at
variance with the views expressed by the larger Bench in the Automobile
Transport’s case (supra).

Learned counsel appearing for the State of Andhra Pradesh submitted

that there was no challenge before the High Court on the question of Article
301 of the Constitution, except a vague and general plea taken in the writ
petitions. In any event, this was a case to which Article 301 of the
Constitution had no application. In fact, President’s assent had been taken
and, therefore, without any plea being taken as to how the levy is not
reasonable or is not in public interest. For the first time in these appeals,
such a plea cannot be pressed into service. It was also submitted that this
was not a case of repeal and was cancellation of a Notification in terms of
Section 9 (1)(b) of the Taxation Act.

The respective stands need careful consideration. The primary

question which appears to have been urged before the High Court was
whether the letter of Joint Secretary to the Government of India dated 30th
August, 1993 is in the nature of directive. Articles 73, 256 and 257 are the
relevant provisions. Article 73 relates to the extent of executive power of the
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Union, while Articles 256 and 257deal with obligation of States and the
Union and the control of the Union over the States in certain cases
respectively. Entry 57 of List II of 7th Schedule deals with taxes on motor
vehicles. This is, however, subject to the provisions of Entry 35 of List III.
The said Entry of the Concurrent List reads as under:

"Mechanically propelled vehicles including the principles

on which taxes on such vehicles are to be levied".

By no stretch of imagination the letter dated 30th August, 1993 can be

regarded as a law laying down the principles of taxes on vehicles. It cannot
also be treated as a subordinate legislation deriving its power or force from
the Act or any other law made by the Union. It has been fairly stated by
learned Solicitor General that though reference has been made to the consent
of the various State Governments, it cannot be treated to be a directive. It
was only a request to the States to act in terms of the deliberations which
took place at the meeting of the Transport Development Council. The letter
so far as relevant reads as follows:

"No.RT-11053/1/92-MVL (Vol.II) 30th August, 1993

To:
All the Transport Secretaries of
The State Govts./Union Territory
Administrations.

Sub: Scheme for national permits for tourist coaches.

Sir,

1
2.

3. I am writing to request you to take necessary action to

incorporate these provisions relating to composite fee in the
State Motor Vehicles Taxation Rules and also issue necessary
instructions/guidelines to the State Transport Authorities for
grant of permits. It may also be clarified that the composite fee
is in lieu of all taxes.

Yours faithfully,

(C.S.Khairwal)
Joint Secretary to the
Govt. of India"

This is not a case where the theory of occupied field can be made
applicable. The Taxation Act essentially deals with fares charged from
passengers and freight collected from them. On the contrary, the Act deals
with levy on vehicles. They are conceptually different. Whatever has been
stated above in the background of Article 73 is equally applicable to Articles
256 and 257 of the Constitution. Article 256 provides that the executive
power of every State shall be so exercised as to ensure compliance with the
laws made by Parliament and any existing laws which apply in that State and
the executive power of the Union shall extend to the giving of such
directions to a State as may appear to the Government of India to be
necessary for that purpose. This Article has application only when any law
has been made by Parliament and the executive power of the State is made
subservient to it by requiring it to ensure compliance with such laws. Where
it appears to the Government of India that it is so necessary to do, directions
can be issued. Article 257 provides that the executive power of every State
shall be so exercised as not to impede or prejudice the exercise of the
executive power of the Union. Where the Government of India feels it so
necessary to do so, it can issue a direction. At the cost of repetition it may be
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noted that there is no law specifying the principles of taxation on the subject
matter of controversy so as to bring in application of either Article 256 or
Article 257 of the Constitution.

It has to be noted that clause (b) in Article 73 cannot apply to

legislative powers of the State. The expression ’agreement’ referred to in the
said clause has to be considered in terms of Article 299 of the Constitution.
Article 246 deals with subject matter of laws made by Parliament and
Legislatures of States. Clause (1) of the said Article gives exclusive power
to deal with the matters enumerated in List II of the Seventh Schedule. The
expression ’for that purpose’ in Article 256 refers to the requirement of
compliance with the laws made by Parliament. Article 256 operates if the
Government of India feels that the executive power of the States is being
exercised in a manner which may amount to impediment with the executive
power of the Union. It has to be noted that Entry 56 of List II of the Seventh
Schedule deals with passengers and the Union has no power to levy taxes in
respect of passengers. Above being the position, there is no substance in the
plea of the appellants that the letter of the Joint Secretary to the Government
of India dated 30th August, 1993 was in the nature of a direction.

It is also submitted that Rule 1(4) of the Permit Rules is intended to

curtail the power of State to levy taxes in respect of vehicles. This plea also
is without any substance. The said rule is not intended to have the effect of
curtailing power of States to levy taxes under relevant enactments. The said
Rule reads as follows:

"1(4): The conditions prescribed in Rules 82 to 85-A of

the Central Motor Vehicles Rules, 1989 shall not apply
to the permits granted under this scheme".

Power to levy taxes on vehicles, whether mechanically propelled or

not vests solely on the State Legislature, though it may be open to the
Parliament to lay down the principles on which the taxes may be levied on
mechanically propelled vehicles in the background of Entry 35 of List III.
To put it differently, Parliament may lay down the guidelines for the levy of
taxes on such vehicles, but the right to levy such taxes vests solely in the
State Legislature. No principles admittedly have been formulated by the
Parliament. In that sense, the Government of India’s communication dated
30th August, 1993 does not in any sense violate the power of the State
Legislature or its delegatee to levy or exempt taxes from time to time.

It is the stand of the appellants that what is ruled out by application of

Rule 1(4) of the Permit Rules has been indirectly brought into force.
Reference has been made to Rule 84 of the Central Rules to submit that the
levy which is permitted in terms of that rule is clearly excluded of its
application. This plea is equally without any substance as Rule 84 states that
the liability to pay taxes under the law does not cease merely on account of
obtaining a tourist permit. Said rule is not a substantive charging provision
as far as levy is concerned. The power to levy tax, to reduce or exempt the
tax and to withdraw concession granted did not have its source in Rule 84,
but are clearly founded on the taxing statutes i.e. Taxation Act. It is
nobody’s case that State is authorized to levy or collect taxes only by
operation of Rule 84.

Next plea is the oft repeated one of promissory estoppel. It has to be

noted that even though a concession is extended for a fixed period, the same
can be withdrawn in public interest. In Sales Tax Officer and another Vs.
M/s Shree Durga Oil Mills and Anr. (1997 (7) SCALE 726), it has been held
by this Court that a Notification granting exemption of tax can be
withdrawn by any point of time. There cannot be estoppel against any
statute. Where it is in public interest, the Court will not interfere because
public interest must override any consideration of private loss or gain [see
Kasinka Trading & Anr. Vs. Union of India & Anr. (1995 (1) SCC 274)]. In
Shrijee Sales Corporation & Anr. Vs. Union of India (1997 (3) SCC 398), it
was observed that where there was supervening public interest, the
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Government is free to change its stand and withdraw the exemption already
granted. One such reason for changing its policy decision can be resource
crunch and the loss of public revenue. There is preponderance of judicial
opinion that to invoke the doctrine of promissory estoppel, clear, sound and
positive foundation must be laid in the petition itself by the party invoking
the doctrine and that bald expressions, without any supporting material, to
the effect that the doctrine is attracted because the party invoking the
doctrine has altered its position relying on the assurance of the Government
would not be sufficient to press into aid the doctrine. The principle of
promissory estoppel is that where one party has by his word or conduct
made to the other a clear and unequivocal promise or representation which is
intended to create legal relations or affect a legal relationship to arise in the
future, knowing or intending that it would be acted upon by the other party
to whom the promise or representation is made and it is in fact so acted upon
by the other party, the promise or representation would be binding on the
party making it and he would not be entitled to go back upon it, if it would
be inequitable to allow him to do so, having regard to the dealings which
have been taken place between the parties. The doctrine of promissory
estoppel is now well established one in the field of administrative law. The
foundation for the claim based on the principle of promissory estoppel in
public law was laid by Lord Denning in 1948 in Robertson Vs. Minister of
Pensions (1949 (1) K.B. 227). Prof. De Smith in his "Judicial Review of
Administrative Action" (4th Edition at page 103) observed that "the citizen is
entitled to rely on their having the authority that they have asserted".

Doctrine of ’Promissory Estoppel’ has been evolved by the courts, on

the principles of equity, to avoid injustice.

’Estoppel’ in Black’s Law Dictionary, is indicated to mean that a

party is prevented by his own acts from claiming a right to the detriment of
other party who was entitled to rely on such conduct and has acted
accordingly. Section 115 of the Indian Evidence Act is also, more or less,
couched in a language which conveys the same expression.

’Promissory Estoppel’ is defined as in Black’s Law Dictionary as ’an

estoppel which arises when there is a promise which promisor should
reasonably expect to induce action or forbearance of a definite and
substantial character on the part of promise, and which does induce such
action or forbearance, and such promise is binding if injustice can be
avoided only by enforcement of promise’.

These definitions in Black’s Law Dictionary which are based on

decided cases, indicate that before the Rule of ’Promissory Estoppel’ can be
invoked, it has to be shown that there was a declaration or promise made
which induced the party to whom the promise was made to alter its position
to its disadvantage.

In this backdrop, let us travel a little distance into the past to

understand the evolution of the Doctrine of ’Promissory Estoppel’.

Dixon, J. as Australian jurist, in Grundt & Ors. Vs. The Great Boulder
Proprietary Gold Mines Ltd. (1938 (59) CLR 641), laid down as under:

"It is often said simply that the party asserting the

estoppel must have been induced to act to his detriment.
Although substantially such a statement is correct and
leads to no misunderstanding, it does not bring out
clearly the basal purpose of the doctrine. That purpose is
to avoid or prevent a detriment to the party asserting the
estoppel by compelling the opposite party to adhere to
the assumption upon which the former acted or abstained
from acting. This means that the real detriment or harm
from which the law seeks to give protection is that which
would flow from the change of position if the assumption
were deserted that led to it."
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The principle, set out above, was reiterated by Lord Denning in

Central London Property Trust Ltd. Vs. High Trees House Ltd. (1947 KB
130), when he stated as under:

"A promise intended to be binding, intended to be acted

upon, and in fact acted upon is binding"

Lord Denning approved the decision of Dixon, J. (supra) in Central

Newbury Car Auctions Ltd. Vs. Unity Finance Ltd. & Anr. (1956 (3) All ER
905). Apart from propounding the above principle on judicial side, Lord
Denning wrote out an article, a classic in legal literature, on "Recent
Developments in the Doctrine of Consideration", Modern Law Review,
Vol.15, in which he expressed as under :
"A man should keep his word. All the more so when the
promise is not a bare promise but is made with the
intention that the other party should act upon it. Just a
contract is different from tort and from estoppel, so also
in the sphere now under discussion promises may give
rise to a different equity from other conduct.

The difference may, lie in the necessity of showing

’detriment’. Where one party deliberately promises to
waive, modify or discharge his strict legal rights,
intending the other party to act on the faith of promise,
and the other party actually does act on it, then it is
contrary, not only to equity but also to good faith, to
allow the promisor to go back on his promise. It should
not be necessary for the other party to show that he acted
to his detriment in reliance on the promise. It should be
sufficient that he acted on it."

This principle has been evolved by equity to avoid injustice. It is neither in

the realm of contract nor in the realm of estoppel. Its object is to interpose
equity shorn of its form to mitigate the rigour of strict law. In Union of
India & Ors. Vs. M/s Anglo Afgan Agencies etc. (AIR 1968 SC 718), it was
inter alia observed as follows:

"We are unable to accede to the contention that the

executive necessity releases the Government from
honouring its solemn promises relying on which citizens
have acted to their detriment. Under our constitutional set
up no person may be deprived of his authority of law, if a
member of the Executive seeks to deprive a citizen of his
right or liberty otherwise than in exercise of power
derived from the law common or statute the Courts will
be competent to and indeed would be bound to protect
the rights of the aggrieved citizens."

It was further held in its summing up thus :

"Under our jurisprudence the Government is not exempt

from liability to carry out the representation made by it as
to its future conduct and it cannot on some undefined and
undisclosed ground of necessity or expediency fail to
carry out the promise solemnly made by it, not claim to
be the Judge of its own obligation to the citizen on an ex
parte appraisement of the circumstances in which the
obligation has arisen."
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In Century Spinning and Manufacturing Co. Ltd. & Anr. Vs. The
Ulhasnagar Municipal Council & Anr. (1970 (3) SCR 854), this doctrine of
promissory estoppel against public authorities was extended thus:

"This Court refused to make distinction between the

private individual and a public body to far as the doctrine
of promissory estoppel is concerned."

In M/s Motilal Padampat Sugar Mills Co. (P) Ltd. Vs. State of Uttar Pradesh
& Ors. (1979 (2) SCR 641), the doctrine of promissory estoppel was applied
to the executive action of the State Government and also denied to the State
of the doctrine of executive necessity as a valid defence. It was held that in a
republic governed by the rule of law, no one high or low, is above the law.
Every one is subject to the law as fully and completely as any other and the
Government is no exception. The Government cannot claim immunity from
the doctrine of promissory estoppel. Equity will, in a given case where
justice and fairness demands, prevent a person from exercising strict legal
rights even where they arise not in contract, but on his own Title deed or in
statute. It is not necessary that there should be some pre-existing contractual
relationship between the parties. The parties need not be in any kind of legal
relationship before the transaction from which the promissory estoppel takes
its origin. The doctrine would apply even where there is no pre-existing
legal relationship between the parties, but the promise is intended to create
legal relations and effect a legal relationship which will arise in future. It
was further held that it is indeed pride of constitutional democracy and rule
of law that the Government stands on the same footing as a private
individual so far as the obligation of the law is concerned. The former is
equally bound as the latter. Therefore, the Government cannot claim any
immunity from the doctrine of promissory estoppel and it cannot say that it
is under no obligation to act in a manner, i.e., fair and just or that it is not
bound by the considerations of honesty and good faith. In fact, the
Government should be held a high standard of rectangular rectitude while
dealing with citizens. Since the doctrine of promissory estoppel is an
equitable doctrine, it must yield where the equity so requires. If it can be
shown by the Government that having regard to the facts as they have
transpired, it would be inequitable to hold the Government or public
authority to the promise or representation made by it, the Court would not
raise an equity in favour of the promise and enforce the promise against the
Government. The doctrine of promissory estoppel would be displaced in
such a case, because on the facts, equity would not require that the
Government should be held bound by the promise made by it. But the Govt.
must be able to show that in view of the fact as have been transpired, public
interest would not be prejudiced. Where the Govt. is required to carry out
the promise the Court would have to balance, the public interest in the
Government’s carrying out the promise made to the citizens, which helps
citizens to act upon and alter his position and the public interest likely to
suffer if the promises were required to be carried out by the Government and
determine which way the equity lies. It would not be enough just to say that
the public interest requires that the Govt. would not be compelled to carry
out the promise or that the public interest would suffer if the Govt. were
required to honour it. In order to resist its liability the Govt. would disclose
to the Court the various events insisting its claim to be except from liability
and it would be for the Court to decide whether those events are such as to
render it equitable and to enforce the liability against the Govt.

It is equally settled law that the promissory estoppel cannot be used

compelling the Government or a public authority to carry out a
representation or promise which is prohibited by law or which was devoid of
the authority or power of the officer of the Government or the public
authority to make. Doctrine of promissory estoppel being an equitable
doctrine, it must yield place to the equity, if larger public interest so
requires, and if it can be shown by the Government or public authority for
having regard to the facts as they have transpired that it would be inequitable
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to hold the Government or public authority to the promise or representation
made by it. The Court on satisfaction would not, in those circumstances
raise the equity in favour of the persons to whom a promise or representation
is made and enforce the promise or representation against Government or the
public authority. These aspects were highlighted by this Court in
Vasantkumar Radhakishan Vora Vs. The Board of Trustees of the Port of
Bombay (AIR 1991 SC 14), Sales-tax Officer and another Vs. M/s Shree
Durga Oil Mills and another (supra) and Dr. Ashok Kumar Maheshwari Vs.
State of U.P. and another (1998 (2) SCC 502). Above being the position, the
plea relating to promissory estoppel has no substance.
It has been pleaded as noted above that withdrawal is without any
rational or relevant consideration. In this context, it has to be noted that the
operators in the State of Andhra Pradesh are required to pay the same tax as
those registered in other states. Therefore, there cannot be any question of
irrationality. The tests of arbitrary action applicable to executive action do
not necessarily apply to delegated legislation. In order to strike down a
delegated legislation as arbitrary it has to be established that there is
manifest arbitrariness. In order to be described as arbitrary, it must be shown
that it was not reasonable and manifestly arbitrary. The expression
"arbitrarily" means: in an unreasonable manner, as fixed or done
capriciously or at pleasure, without adequate determining principle, not
founded in the nature of things, non-rational, not done or acting according to
reason or judgment, depending on the will alone. In the present cases all
persons who are similarly situated are similarly affected by the change. That
being so, there is no question of any discrimination. That plea also fails.

What remains now to be considered is plea in the background of

Article 301 of the Constitution. The said Article talks of freedom of trade,
commerce and intercourse. Imposition of a tax does not in every case
tantamount to infringement of Article 301. One has to determine whether the
impugned provision amounts to a restriction directly and immediately on the
movement of trade or commerce. In the Automobile’s case (supra), this
question was elaborately and succinctly stated by this Court. Some of the
observations relevant for the present dispute are as follows:

"We have tried to summarise above the various stand

points and views which were canvassed before us and we
shall now proceed to consider which, according to us, is
the correct interpretation of the relevant articles in Part
XIII of the Constitution. We may first take the widest
view, the view expressed by Shah, J., in the Atiabari Tea
Co. case ( 1961)1 SCR 809) a view which has been
supported by the appellants and one or two of the
interveners before us. This view, we apprehend, is based
on a purely textual interpretation of the relevant articles
in Part XIII of the Constitution and this textual
interpretation proceeds in the following way. Article 301
which is in general terms and is made subject to the other
provisions of Part XIII imposes a general limitation on
the exercise of legislative power, whether by the Union
or the States, under any of the topics taxation topics as
well as other topics enumerated in the three lists of the
Seventh Schedule, in order to make certain that "trade,
commerce and intercourse throughout the territory of
India shall be free". Having placed a general limitation
on the exercise of legislative powers by Parliament and
the State Legislatures, Article 302 relaxes that restriction
in favour of Parliament by providing that that authority
"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". Having relaxed the
restriction in respect of Parliament under Article 302, a
restriction is put upon the relaxation by Article 303(1) to
the effect that Parliament shall not have the power to
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make any law giving any preference to any one State
over another or discriminating between one State and
another by virtue of any entry relating to trade and
commerce in lists I and III of the Seventh Schedule.
Article 303(1) which places a ban on Parliament against
the giving of preferences to one State over another or of
discriminating between one State and another, also
provides that the same kind of ban should be placed upon
the State Legislature also legislating by virtue of any
entry relating to trade and commerce in lists II and III of
the Seventh Schedule. Article 303(2) again carves out an
exception to the restriction placed by Article 303(1) on
the powers of Parliament, by providing that nothing in
Article 303(1) shall prevent Parliament from making any
law giving preference to one State over another or
discriminating between one State and another, if it is
necessary to do so for the purpose of dealing with a
situation arising from scarcity of goods in any part of the
territory of India. This exception applies only to
Parliament and not to the State Legislatures. Article 304
comprises two clauses and each clause operates as a
proviso to Articles 301 and 303. Clause (a) of that article
provides that the Legislature of a State may "impose on
goods imported from other States 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." This clause, therefore, permits the levy on
goods imported from sister States any tax which similar
goods manufactured or produced in that State are subject
to under its taxing laws. In other words, goods imported
from sister States are placed on a par with similar goods
manufactured or produced inside the State in regard to
State taxation within the State allocated field. Thus, the
States in India have full power of imposing what in
American State legislation is called the use tax, gross
receipts tax, etc., not to speak of the familiar property
tax, subject only to the condition that such tax is imposed
on all goods of the same kind produced or manufactured
in the taxing State, although such taxation is undoubtedly
calculated to fetter inter-State trade and commerce. As
was observed by Patanjali Sastri, C.J., in State of
Bombay Vs. United Motors ( 1953 SCR 1069), the
commercial unity of India is made to give way before the
State power of imposing ’any’ non-discriminatory tax on
goods imported from sister States. Now, clauses (b) of
Article 304 provides that notwithstanding anything in
Article 301 or Article 303, the Legislature of a State may
by law 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. The
proviso to clause (b) says that no bill or amendment for
the purpose of clause (b) shall be introduced or moved in
the Legislature of a State without the previous sanction of
the President. This provision appears to be the State
analogue to the Union Parliament’s authority defined by
Article 302, in spite of the omission of the word
’reasonable’ before the word ’restrictions’ in the latter
article. Leaving aside the pre-requisite of previous
Presidential sanction for the validity of State legislation
under clause (b) provided in the proviso thereto, there are
two important differences between Article 302 and
Article 304(b) which require special mention. The first is
that while the power of Parliament under Article 302 is
subject to the prohibition of preferences and
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discriminations decreed by Article 303(1) unless
Parliament makes the declaration contained in Article
303(2), the State’s power contained in Article 304(b) is
made expressly free from the prohibition contained in
Article 303(1), because the opening words of Article 304
contain a non-obstante clause both to Article 301and
Article 303. The second difference springs from the fact
that while Parliament’s power to impose restrictions
under Article 302 upon freedom of commerce in the
public interest is not subject to the requirement of
reasonableness, the power of the States to impose
restrictions on the freedom of commerce in the public
interest under Article 304 is subject to the condition that
they are reasonable".

Freedom granted by Article 301 is of the widest amplitude and is

subject to only such restrictions as are contained in the succeeding Articles
in Part XIII of the Constitution. The following observations in Automobile’s
case are relevant:

"Even in the matter of textual construction there are

difficulties. One of the difficulties which was adverted to
during the Constituent Assembly debates related to the
somewhat indiscriminate or inappropriate use of the
expressions ’subject to’ and ’notwithstanding’ in the
articles in question. Article 302, as we have seen, makes
a relaxation in favour of Parliament. Article 303 again
imposes a restriction on that relaxation ’notwithstanding
anything in Article 302 but Article 303 relates both to
Parliament and the State Legislature, though Article 302
makes no relaxation in favour of the State Legislature.
The non obstante clause in Article 303 is, therefore,
somewhat inappropriate. Clause (2) of Article 303 carves
out an exception from the restriction imposed on
Parliament by clause (1) of Article 303. But again clause
(2) relates only to Parliament and not to the State
Legislature even though clause (1) relates to both. Article
304again begins with a non-obstante clause mentioning
both Article 301 and Article 303, though Article 304
relates only to the Legislature of a State. Article 303
relates to both the State Legislature and Parliament and
again the non obstante clause in article 304 is somewhat
inappropriate. The fact of the matter is that there is such a
mix up of exception upon exception in the series of
articles in Part XIII that a purely textual interpretation
may not disclose the true intendment of the articles. This
does not mean that the text of the articles, the words
used therein, should be ignored. Indeed, the text of the
articles is a vital consideration in interpreting them; but
we must at the same time remember that we are dealing
with the constitution of a country and the inter-
connection of the different parts of the Constitution
forming part of an integrated whole must not be lost sight
of. Even textually, we must ascertain the true meaning of
the word ’free’ occurring in Article 301. From what
burden or restrictions is the freedom assured? This is a
question of vital Importance even in the matter of
construction. In Section 92 of the Australian Constitution
the expression used was ’absolutely free’ and repeatedly
the question was posed as to what this freedom meant.
We do not propose to recite the somewhat chequered
history of the Australian decisions in respect of which
Lord Porter, after a review of the earlier cases, said in
Commonwealth of Australia V. Bank of New South
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Wales ( 1950 AC 235) that in the ’labyrinth of cases
decided under Section 92 there was no golden thread.’
What is more important for our purpose is that he
expressed the view that two general propositions stood
out from the decisions: (i) that regulation of trade,
commerce and intercourse among the States is
compatible with its absolute freedom, and (ii) that
Section 92 of the Australian Constitution is violated only
when a legislative or executive act operates to restrict
such trade, commerce and intercourse directly and
immediately as distinct from creating some indirect or
inconsequential impediment which may fairly be
regarded as remote. Lord Porter admitted "that in the
application of these general propositions, in determining
whether an enactment is regulatory or something more
or, whether a restriction is direct or only remote or
incidental, there cannot fail to be difference of opinion."
It seems clear, however, that since "the conception of
freedom of trade, commerce and intercourse in a
community regulated by law presupposes some degree of
restriction upon the individual", that freedom must
necessarily be delimited by considerations of social
orderliness. In one of the earlier Australian decisions
(Duncan v. The State of Queensland) (1916 (22) CLR
556), Griffith, C.J. said:

"But the word "free" does not mean extra legem, any
more than freedom means anarchy. We boast of being an
absolutely free people, but that does not mean that we are
not subject to law". (p.573)

As the language employed in Article 301 runs

unqualified the Court, bearing in mind the fact that
provision has to be applied in the working of an orderly
society, has necessarily to add certain qualifications
subject to which alone that freedom may be exercised.
This point has been very lucidly discussed in the
dissenting opinion which Fullagar,J., wrote in Mc Carter
v. Brodie [(1950) 80 CLR 432], an opinion which was
substantially approved by the Privy Council in Hughes
and Vale Proprietary Ltd. V. State of New South Wales
[(1955) AC 241]. The learned Judge gave several
examples to show the distinction between what was
merely permitted regulation and what true interference
with freedom of trade and commerce. He pointed out that
in the matter of motor vehicles most countries have
legislation which requires the motor vehicle to be
registered and a fee to be paid on registration. Every
motor vehicle must carry lamps of a specified kind in
front and at the rear and in the hours of darkness these
lamps must be alight if the vehicle is being driven on the
road, every motor vehicle must carry a warning device,
such as a horn; it must not be driven at a speed or in a
manner which is dangerous to the public. In certain
localities a motor vehicle must not be driven at more than
a certain speed. The weight of the load which may be
carried on a motor vehicle on a public highway is limited.
Such examples may be multiplied indefinitely. Nobody
doubts that the application of rules like the above does
not really affect the freedom of trade and commerce; on
the contrary they facilitate the free flow of trade and
commerce. The reason is that these rules cannot fairly be
said to impose a burden on a trader or deter him from
trading: it would be absurd, for example, to suggest that
freedom of trade is impaired or hindered by laws which
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require a motor vehicle to keep to the left of the road and
not drive in a manner dangerous to the public. If the word
’free’ in Article 301 means ’freedom to do whatever one
wants to do’ then chaos may be the result; for example,
one owner of a motor vehicle may wish to drive on the
left of the road while another may wish to drive on the
right of the road. If they come from opposite directions,
there will be an inevitable clash. Another class of
examples relates to making a charge for the use of
trading facilities, such as, roads, bridges, aerodromes etc.
The collection of a toll or a tax for the use of a road or for
the use of a bridge or for the use of an aerodrome is no
barrier or burden or deterrent to traders who, in their
absence, may have to take a longer or less convenient or
more expensive route. Such compensatory taxes are no
hindrance to anybody’s freedom so long as they remain
reasonable; but they could of course be converted into a
hindrance to the freedom of trade. If the authorities
concerned really wanted to hamper anybody’s trade, they
could easily raise the amount of tax or toll to an amount
which would be prohibitive or deterrent or create other
impediments which instead of facilitating trade and
commerce would hamper them. It is here that the
contrast, between ’freedom’ (Article 301) and
’restrictions’ (Articles 302 and 304) clearly appears: that
which in reality facilitates trade and commerce is not a
restriction, and that which in reality hampers or burdens
trade and commerce is a restriction. It is the reality or
substance of the matter that has to be determined. It is not
possible a priori to draw a dividing line between that
which would really be a charge for a facility provided
and that which would really be a deterrent to a trade; but
the distinction: if it has to be drawn, is real and clear. For
the tax to become a prohibited tax it has to be a direct tax
the effect of which is to hinder the movement part of
trade. So long as a tax remains compensatory or
regulatory it cannot operate as a hindrance".

It was further observed:

"After carefully considering the arguments advanced
before us we have come to the conclusion that the narrow
interpretation canvassed for on behalf of the majority of
the State cannot be accepted, namely, that the relevant
articles in Part XIII apply only to legislation in respect of
the entries relating to trade and commerce in any of the
lists of the Seventh Schedule. But we must advert here to
one exception which we have already indicated in an
earlier part of this judgment. Such regulatory measures as
do not impede the freedom of trade, commerce and
intercourse and compensatory taxes for the use of trading
facilities are not hit by the freedom declared by Article
301.They are excluded from the purview of the
provisions of Part XIII of the Constitution for the simple
reason that they do not hamper trade, commerce and
intercourse but rather facilitate them".

The following conclusions really constitute the core of the principles:

"Regulatory measures or measures imposing
compensatory taxes for the use of trading facilities do not
come within the purview of the restrictions contemplated
by Article 301 and such measures need not comply with
the requirements of the proviso to Article 304(b) of the
Constitution".
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It has to be noted that in Automobile’s case (supra) as quoted above, it
was held that it is the reality or substance of the matter that has to be
determined. It is not possible a priori to draw a dividing line between that
which would really be a charge for a facility provided and that which would
really be a deterrent to a trade; but the distinction: if it has to be drawn, is
real and clear. For the tax to become a prohibited tax it has to be a direct tax
the effect of which is to hinder the movement part of trade. So long as a tax
rema‘ins compensatory it cannot operate as a hindrance. A Constitution
Bench of this Court considered an identical question in M/s Sainik Motors,
Jodhpur & Ors. Vs. State of Rajasthan (AIR 1961 SC 1480).

Observations in Jayaram’s case (supra) to the following effect do not

appear to have kept the said aspect in view when it was observed as follows:
"Taxes of a compensatory and regulatory character are
outside the expanse of Article 301 of the Constitution.
Regulatory measures and compensatory taxes far from
impeding the free flow of trade and commerce, often
promote such free flow of trade and commerce by
creating agreeable conditions and providing appropriate
services. All that is necessary to uphold a tax which
purports to be or is claimed to be a compensatory tax is,
"the existence of a specific, identifiable object behind the
levy and a nexus between the subject and the object of
the levy".

(underlined for emphasis)

A mere claim that tax is compensatory would not suffice. To that

extent the observations in Jayaram’s case (supra) do not reflect the correct
position in law. Whether a tax is compensatory or not cannot be made to
depend on the preamble of the statute imposing it. A tax cannot also be said
not to be compensatory because the precise or specific amount collected is
not actually used to providing any facilities.

We may note here that though arguments were advanced in the

background of Article 301 of the Constitution, as has been rightly submitted
by the learned counsel for the State of Andhra Pradesh, there were no
pleadings in this regard in the writ petitions, excepting some general
statements about violation of Article 301. It has been fairly considered that
President’s assent as required has been obtained. Thus the case is not
relatable to Article 301, but Article 304. With reference to clause (b) of the
said Article, it is submitted that mere obtaining assent is not sufficient, and
it has to be shown that the levy was in public interest. There was no
averment in the petitions before the High Court in this regard. There was
also no view expressed by the High Court on this issue, in the absence of
any argument or plea before it. The question whether public interest was
involved or not required a factual adjudication. Since there were no
pleadings, the State did not have an opportunity to indicate its stand. Under
the circumstances, we do not think it appropriate to consider that question
for the first time in these appeals, particularly, when factual adjudication
would be necessary.

Coming to the plea relating to repeal of the Notification, it is to be

noted that the Notification dated 1.7.1995 was issued in exercise of powers
conferred under Section 9(1)(a) of the Taxation Act, while the impugned
Notification was issued in exercise of powers conferred under Section
9(1)(6) of the said Act. It is to be noted that originally Notification was
issued under Section 3 of the said Act and its operation has not been
questioned. That being the position, there was no requirement to issue a
fresh Notification to make the levy. Notification dated 1.7.1995, did not
supersede the original Notification issued under Section 3 of the Taxation
Act.
In the result, the appeals are dismissed.

.J.
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(B.N. KIRPAL)

.J.
(K.G. BALAKRISHNAN)

J.
(ARIJIT PASAYAT)
December 3, 2001

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