Court Judgments

PETITIONER:
VIDEO ELECTRONICS PVT. LTD. AND ANR. ETC. ETC.

Vs.

RESPONDENT:
STATE OF PUNJAB & ANR. ETC. ETC.

DATE OF JUDGMENT22/12/1989

BENCH:
MUKHARJI, SABYASACHI (CJ)
BENCH:
MUKHARJI, SABYASACHI (CJ)
RANGNATHAN, S.
VERMA, JAGDISH SARAN (J)

CITATION:
1990 AIR  820          1989 SCR  Supl. (2) 731
1990 SCC  (3)    87      JT 1989  Supl.    457
1989 SCALE  (2)1483

ACT:
U.P.  Sales     Tax Act, 1948–Sections 4A, 5A and  48     and
Notification  dated  January  29,  1985     and  December     26,
1985–Constitutional  validity of Manufacturers of goods  in
state–No liability to pay tax-Dealers selling goods import-
ed from outside state—liable to pay tax-whether  discrimi-
natory, legal and permissible.
Constitution of India 1950–Articles 14, 19, 38, 39, 301
and  304-Sales Tax Law–Manufacturers of goods in the  state
exempted  from    Sales Tax–Non-manufacturer  of     same  goods
importing  goods and selling–Liable to     sales    tax–Whether
valid, legal and constitutional.

HEADNOTE:
A common question of law having arisen for determination
in  these petitions filed under Article 32 of the  Constitu-
tion, they are disposed of by a Common Judgment, though     the
petitioners–dealers are different and carry on their  busi-
ness in different states and have challenged the  respective
provisions of law by which their cases are governed.
The     petitioners in WP 803/88 carry on the    business  of
selling     cinematographic  Idms    and  other  equipments    like
projector, sound recording and reproducing equipments, X-Ray
films etc. in the State of U.P. and in Delhi. The  petition-
ers receive these goods from their manufacturers outside the
State of U.P. In U.P. there is a single point levy of  Sales
Tax.
The     State    of Uttar Pradesh  issued  two  notifications
under  section    4A of the Uttar Pradesh Sales  Tax  Act     and
under  Section 8(5) of the Central Sales Tax  Act  exempting
new units of manufacturers as defined in the Act in  respect
of the various goods for different periods ranging from 3 to
7 years, from payment of Sales Tax. The petitioners by these
petitions  challenge  the constitutional validity  of  these
Notifications. They have also challenged the  constitutional
validity  of section 4A of the Uttar Pradesh Sales  Tax     Act
and  sections  8(5) of the Central Sales Tax  Act,  and     the
proceedings taken by the Respondent under section 5A of
732
the  said Act. The case of the petitioners is that they     are
discriminated  on  account  of these  notifications  as     the
manufacturers covered by these Notifications are entitled to
sell the articles manufactured by them without liability  to
pay  sales-tax while the manufacturers in other     states     and
non-manufacturers of the same article selling the same goods
in  the     State are liable to pay sales tax under  the  local
Sales  Tax Act as well as under the Central Sales  Tax    Act.
Their contention, therefore, is that they became subject  to
gross  discrimination  and their business was  crippled.  In
these  premises the petitioners challenge the provisions  as
ultra  vires the constitution being violative of the  provi-
sions of Articles 301 to 305 of part III of the Constitution
as also Articles 14 and 19 of the Constitution.
The     Respondents counter the assertion of the  petition-
ers.  According     to them the contention put forward  by     the
petitioners  ignores the basic features of the    Constitution
and also the fact that the concept of economic unity may not
necessarily be the same as it was at the time of the Consti-
tution making; the state which was technically and  economi-
cally  weak in 1950 cannot be allowed to remain in the    same
state  of affairs. The state has to give subsidy  and  grant
exemptions/concessions    for the economic development of     the
state to new industries. It was urged that if all the states
are economically strong or developed then only can  economic
unity as a whole be assured or strengthened.
Dismissing the petitions, this Court,
HELD:  Sales Tax Laws in all the States provide     for  exemp-
tion.
Power  to  grant  exemption is inherent  in     all  taxing
Legislations. Economic unity is a desired goal.     Development
on  parity  is one of the commitments of  the  Constitution.
Directive Principles enshrined in Articles 38 and 39 must be
harmonised with economic unity as well as economic  develop-
ment of developed and under-developed area. [756H; 757A-B]
Taxes may sometime amount to restrictions but it is only
such  taxes as directly and immediately restrict trade    that
would fail within the mischief of Art. 301. [740E]
See Atiabari Tea Co. Ltd. v. The State of Assam &  Ors.,
[1961]    1 SCR 809 and Automobile Transport (Rajasthan)    Ltd.
v. The State of Rajasthan & Ors., [1963] 1 SCR 491.
The taxes which do not directly and immediately restrict or
733
interfere  with trade, commerce and  intercourse  throughout
the territory of India would therefore be excluded from     the
ambit  of Art. 30 1 of the Constitution. It has to be  borne
in mind that sales tax has only an indirect effect on  trade
and commerce. [747F]
In    the  instant case, the general    rate  applicable  to
locally     made goods is the same as that on  imported  goods.
Even  supposing without admitting that Sales Tax is  covered
by Art. 301 as a tax directly and immediately, hampering the
free flow of trade, it does not follow that it fails  within
the exemption of Art. 304 and it would be hit by Art. 30  1.
Still the general rate of tax which is to be compared  under
Art.  304(a)  is at par, and the same qua the  locally    made
goods and the imported goods. [751G-H]
Concept of economic barrier must be adopted in a dynamic
sense with changing conditions. What constitutes an economic
barrier at one point of time often ceased to be so at anoth-
er  point of time. It will be wrong to denude the people  of
the  state of the right to grant exemptions which flow    from
the  plenary powers of legislative heads in List III of     the
7th Schedule of the Constitution. [752A-B]
Basically  the concept of equality embodied in  Articles
304(a)    and  16 are the same. Article 14  enjoins  upon     the
state  to  treat  every person equal before  the  law  while
Article     304(a) enjoins upon the state not  to    discriminate
with respect to imposition of tax on imported goods and     the
locally made goods. [753C]
It    is not that with changing times the meaning  changes
but changing times illustrate and illuminate the meaning  of
the  expressions  used. The connotation of  the     expressions
used  takes its shape and colour in evolving dynamic  situa-
tions. [757B-C]
James  v.  Commonwealth of Australia, [1936] AC  578  at
613;  Firm  A.T.B. Mehtab Majid & Co. v. State of  Madras  &
Anr., [1963] 2 Suppl. SCR 435; A. Hajee Abdul Shakoor &     Co.
v. State of Madras, [1964] 8 SCR 217 at 225; State of Madras
v.  N.K. Nataraja Mudaliar, [1968] 3 SCR 829 at 847;  Andhra
Sugars    Ltd. & Anr. etc v. State of Andhra Pradesh  &  Ors.,
[1968]    1  SCR    705; Bengal Immunity Co. Ltd.  v.  State  of
Bihar,    [1955] 2 SCR 603 at 754; State of Madhya Pradesh  v.
Bhailal Bhai & Ors., [1964] 6 SCR 261 at 268-9; Rattan Lal &
Co.  & Anr. v. The Assessing Authority & Anr., [1969] 2     SCR
544 at 557; India Cement & Ors. v. State of Andhra Pradesh &
Ors.,  [1988] 1 SCC 743; Weston Electroniks & Anr. v.  State
of Gujarat & Ors., [1988] 2 SCC
734
568  at 571; C.A.F. Seeling Inc. v. Charles H.    Baldwin,  79
L.Ed.  2d  1033 at 1038; Smt. Ujjam Bai v.  State  of  U.P.,
[1963]    1 SCR 778 at 851; Coffee Board, Bangalore  v.  Joint
Commercial  Tax Officer, Madras & Anr., [1970] 3 SCR 147  at
156; V. Guruviah Naidu & Sons v. State of Tamil Nadu & Anr.,
[1977]    1 SCR 1065 at 1070; Kathi Raning Rawat v. The  State
of  Saurashtra, [1952] SCR 435; Kalyani Stores v. The  State
of  Orissa & Ors., [1966] 1 SCR 865; Bharat General  &    Tex-
tiles  Industries Ltd. v. State of Maharashtra, 72 STC    354;
H. Anraj v. Government of Tamil Nadu, [1986] 1 SCC 414; West
Bengal Hosiery Assn. & Ors. v. State of Bihar & Anr., [1988]
4 SCC 134; State of U. P. & Ors. v. Babu Ram Upadhya, [1961]
2  SCR 679 at 702; State of Tamil Nadu, v. Hind Stone  etc.,
[1981]    2 SCR 742 at 757; State of Mysore v. H.     Sanjeeviah,
[1967]    2  SCR 361; Kailash Nath & Anr. v. State of  U.P.  &
Ors., AIR 1957 SC 790 at 791; State of U.P. & Ors. v.  Renu-
sagar Power Co. & Ors., [1988] 4 SCC 59 at 100; M/s Narinder
Chand  Hem Raj & Ors. v. Lt. Governor, Administrator,  U.T.,
Himachal Pradesh & Ors., [1971] 2 SCC 747 at 751 and Associ-
ated  Tanners Vizianagram A.P.v.C.T.O., Vizianagram,  Andhra
Pradesh & Ors., [1986] 1 SCR 969, reffered to.

JUDGMENT:
ORIGINAL JURISDICTION: Writ Petition No. 665 of 1988
(Under Article 32 of the Constitution of India).
Sanjay  Parikh,  M.L. Sachdev, C.S.     Vaidyanathan,    S.R.
Bhat,  S.R. Setia, S.C. Dhanda, H.K. Puri, Harish N.  Salve,
Rajiv  Dutta, Anil Kumar and Sultan Singh for the  Petition-
ers.
Raja  Ram  Agarwal, S.C. Manchanda,     G.L.  Sanghi,    A.S.
Nambiar, Ashok K. Srivastava, R.S. Rana, P.G. Gokhale,    B.R.
Agarwala,  R.B.     Hathikhanawala, C.M. Nayar,  P.K.  Manohar,
P.N.  Misra,  Ms. Halida Khatoon and Santhanam for  the     Re-
spondents.
G.L. Sanghi, Ms. Vrinda Grover, Miss Seita Vaidialingam,
Kailash Vasudev and A.C. Gulathi for the Intervenor.
The Judgment of the Court was delivered by
SABYASACHI    MUKHARJI,  CJ. In these several     writ  peti-
tions, we are concerned with the question of harmonising the
power of different States in the Union of India to legislate
and/or give
735
appropriate directions within the parameters of the subjects
in list II of the 7th Schedule of the Constitution with     the
principle  of economic unity envisaged in Part XIII  of     the
Constitution of India. We are also concerned with the provi-
sions  of exemption, encouragement/incentives given by    dif-
ferent States to boost up or help economic growth and devel-
opment    in those States, and in so doing the attempt of     the
States to give preferential treatment to the goods  manufac-
tured or produced in those States. The question     essentially
is  the same in all the matters but the question has  to  be
appreciated  in the context of the provisions and  the    fact
situation  of  the different States involved in     these    writ
petitions. It would, therefore, be appropriate to first deal
with writ petition No. 803/88 (Niksin Marketing Associate  &
Ors. v. Union of India & Anr.) which is under article 32  of
the Constitution by four petitioners.
Petitioner    No. 1 in W’.P. No. 803/88 is  a     partnership
firm carrying on business in New Delhi. Petitioner No. 2  is
its  partner  and petitioner No. 3  is    another     partnership
business  carrying on business at Kanpur in U.P.  consisting
of  petitioner No. 4 and other partners. The petition  chal-
lenges    the constitutional validity of notification No.     ST-
II7558/X-9(208)-1981  U.P.  Act XV-48 order  85     dated    26th
December,  1985 issued by Uttar Pradesh Govt. u/s 4A of     the
Uttar Pradesh Sales Tax Act, 1948. A prior notification     No.
ST-II/604-X-9(208)-198    1 U.P. Act XV-48-Order 85  dt.    29th
January,  1985 was superseded by the aforesaid    notification
dt.  26th December, 1985. It also challenges  the  constitu-
tional validity of notification No. ST-II/8202/X-9(208)-1981
issued by Uttar Pradesh Govt. u/s 8(5) of the Central  Sales
Tax  Act, 1956 which superseded a previous notification.  It
also challenges the constitutional validity of s. 4A of     the
Uttar Pradesh Sales Tax Act, 1948 as substituted by U.P. Act
22  of 1984 and also s. 8(5) of the Central Sales  Tax    Act,
1956  and consequentially all actions and proceedings  taken
by the respondent u/s 5A of the said Act. The respondents to
this  application are the State of Uttar Pradesh, the  Union
of India, and the Commissioner of Sales Tax, Uttar Pradesh.
It is stated that the petitioners carry on the  business
of  selling cinematographic films and other equipments    like
projectors,  sound  recording  and  reproducing      equipment,
industrial X-ray films, graphic art films, Photo films    etc.
in the State of Uttar Pradesh and in Delhi. The     petitioners
sell  the goods upon receiving these from the  manufacturers
from outside the State of U.P. They are dealers on behalf of
those  manufacturers. The petitioners are dealers of  Hindu-
stan Photo Films Mfg. Co. Ltd., a Government of India under-
taking. In
736
U.P. there is a single point levy of sales taX. The State of
U.P.  had issued two notifications u/s 4A of the U.P.  Sales
Tax Act and u/s 8(5) of the Central Sales Tax Act  exempting
new units of manufacturers as defined in the Act in  respect
of the various goods for different periods ranging from 3 to
7  years as the case may be, from payment of any sales    tax.
These  notifications are annexed and terms thereof  are     set
out in annexures A- 1 & B- 1 to the writ petition.
The  notification  dated 26th December, 1985  stated,  inter
alia:
“The  Governor  is pleased to direct  that  in
respect of any goods manufactured in an indus-
trial unit, which is a new unit as defined  in
the  aforesaid Act of 1948 established in     the
areas mentioned in column 2 of the Table given
below, the date of starting production whereof
falls  on or after the first day    of  October,
1982  but not later than 31st March, 1990,  no
tax  under the aforesaid Act of 1956 shall  be
payable  by  the manufacturer thereof  on     the
turnover of sales on such goods for the period
specified     in  column 3  against    each,  which
shall be reckoned from the date of first    sale
if  such    sale takes place not  later  than  6
months  from the date of    starting  production
subject to certain conditions mentioned.”
It    is not necessary to set out the conditions.  In     the
annexure several districts have been mentioned. In column  2
categories have been made for exemption and have been divid-
ed  in 2 categories, one in case of units with    capital     in-
vestment  not  exceeding 3 lakhs of rupees  and     another  in
cases of the units with capital investment exceeding 3 lakhs
of rupees. For one the period of exemption is 5 years  while
for  the latter it is 7 years. Period of  exemption  various
from  3     to  7 years in different districts.  More  or    less
similar     were the terms of notification dated  29th  January
1985.
The     case of the petitioners is that they did  not    ini-
tially feel the adverse effects or discrimination on account
of  these  notifications.  Petitioners point  out  that     the
manufacturers covered by the said notification are  entitled
to sell the articles manufactured by them without  liability
to pay sales tax while the manufacturers in other States and
non-manufacturers of the same article selling the same goods
in  the     State are liable to pay sales tax under  the  local
Sales  Tax Act as well as under the Central Sales  Tax    Act.
The  petitioners  found that they had become liable  to     pay
sales tax on their sales at 12% + 10% surcharge
737
(13.2%)     under    the U.P. Sales Tax Act on  photographic     and
graphic     arts  material and @ 8% + 10% surcharge  (8.8%)  on
medical     x-ray films and chemicals and a minimum of  10%  on
their inter-State turnover whereas the manufacturers in     the
State  of  U.P. and their dealers had no  tax  liability  by
virtue of the exemption granted under the impugned notifica-
tions.    Thus the petitioners contend that the goods sold  by
them became costlier by 8.8% to 13.2% depending on the    item
sold compared to the goods of manufacturers in the State  of
U.P. They had given a chart illustrating the position. They,
hence, contended that they became subject to gross discrimi-
nation and their business was crippled and wanted to sustain
the  said contention by referring to a chart  showing  gross
sale prices of the products in diverse States. In the  prem-
ises  the  petitioners challenge these provisions  as  ultra
vires  of the Constitution of India, the  rights  guaranteed
under part XIII as also under articles 14 & 19(l)(g) of     the
Constitution.
The     question is, are these notifications valid,  proper
and  sustainable in the light of part XIII of the  Constitu-
tion of India judged in the background of the said articles.
Appearing  in support of the petition, Mr. Sanjay Parikh  in
writ petitions Nos. 790,665 and 1939-40/88, Mr. C.S.  Vaidy-
nathan and Mr. S.C. Dhanda in writ petition No. 761/88,     Mr.
Harish    N.  Salve for the petitioners in writ  petition     No.
803/88.     Miss Seita Vaidialingam, Mr. G.L.  Sanghi,  Kailash
Vasudev for the intervenors. Mr. Raja Ram Agarwal, Mr.    G.L.
Sanghi and Mr. Nambiar for the State of U.P. and respondents
have made their elaborate submissions. These petitions    have
been heard together.
Apart  from the submission that the provisions  impugned
violate     articles 19(l)(g) and 14 of the  Constitution,     and
are  in violation of the principles of natural justice,     the
main  challenge     to these provisions by Mr. Salve  was    that
they violated the provisions of articles 301 to 305 of    Part
XIII  of  the Constitution of India. The contention  of     the
petitioners  was that, subject to other provisions  of    Part
XIII, trade, commerce and intercourse throughout the  terri-
tory  of India was enjoined to be free. Article 302  of     the
Constitution  empowers the Parliament by law to impose    such
restrictions  on  the freedom of trade, commerce  or  inter-
course    between one State and another or within any part  of
the  territory    of India as may be required  in     the  public
interest.  Article  303 indicates the  restrictions  on     the
legislative  powers of the Union and the States with  regard
to trade and commerce, and stipulates that,  notwithstanding
anything  contained in article 302, neither  Parliament     nor
the  legislature of the States shall have power to make     any
law  giving or authorising the giving of any  preference  to
one State
738
over  another  or making or authorising the  making  of     any
discrimination    between one State and another by  virtue  of
any entry relating to trade and commerce in any list of     the
7th  Schedule.    Sub-clause (2) of article 303  enjoins    that
nothing     in clause (1) shall prevent Parliament from  making
any law giving, or authorising the giving of, any preference
or making, or authorising the making of, any  discrimination
if it is declared by such law that 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.
Article     304 deals with restrictions on trade, commerce     and
intercourse among States, which is as follows:
“304.  Restrictions  on  trade,  commerce     and
intercourse among States.–
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 Legislature of a  State  without
the previous sanction of the President.”
Article 305 saves certain existing laws and laws provid-
ing for State monopolies.
Our attention was drawn to the decision of this Court in
Atiabari Tea Co. Ltd. v. The State of Assam & Ors., [1961] 1
SCR  809.  There  this Court was concerned  with  the  Assam
Taxation  (on goods carried by Roads and  Inland  Waterways)
Act, 1954 which was passed under entry 56 of list II of     the
7th  Schedule  to the Constitution. The     appellants  therein
contended  that     the Act had violated the freedom  of  trade
guaranteed by article 301 of the Constitution and as it     was
not  passed  after obtaining the previous  sanction  of     the
President as
739
required by art. 304(b), it was ultra vires. The  respondent
therein had urged that taxing laws governed only by Part XII
and  not Part XIII (which contained articles 301 & 304)     and
in the alternative that the provisions of Part XIII  applied
only  to  such legislative entries in the  7th    Schedule  as
dealt  specifically  with trade, commerce  and    intercourse.
Gajendragadkar, Wanchoo and Das Gupta, JJ. held that the Act
violated  art.    301  and since it did not  comply  with     the
provisions  of art. 304(b) it was ultra vires and  void.  On
the  contrary, Chief Justice Sinha held that the  Assam     Act
did not contravene art. 301 and was not ultra vires. Accord-
ing  to the learned Chief Justice, neither the    one  extreme
position  that art. 301 included freedom from  all  taxation
nor  the other that taxation was wholly outside the  purview
of  art. 301 was correct; and that the freedom conferred  by
art. 301 did not mean freedom from taxation simpliciter     but
only  from the erection of trade barriers, tariff walls     and
imposts     which had a deleterious effect on the free flow  of
trade,    commerce and intercourse. Justice Shah on the  other
hand  expressed     the view that the Assam Act  infringed     the
guarantee  of freedom of trade and commerce under  art.     301
and as the Bill was not moved with the previous sanction  of
the President as required by art. 304(b) nor was it validat-
ed by the assent of the President under art. 255(c), it     was
ultra vires and void.
In construing the provisions with which we are concerned
herein,     in  our opinion, it is instructive to    remind    our-
selves,     as was said in James v. Commonwealth of  Australia,
[19361    AC  578 at 613, that the relevant provision  of     the
Constitution has to be read not in vacuo but as occurring in
a  single  complex instrument in which one  part  may  throw
light  on another, and therefore, Gajendragadkar, J. as     the
learned     Chief Justice then was, at p. 860 of the  said     re-
port, rightly in our opinion. posed the problem as follows:
"In  construing Art. 301 we  must,  therefore,
have  regard  to    the general  scheme  of     our
Constitution as well as the particular  provi-
sions in regard to taxing laws. The  construc-
tion of Art. 301 should not be determined on a
purely academic or doctrinaire considerations;
in construing the said Article we must adopt a
realistic approach and bear in mind the essen-
tial  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. 30 1 must be judged accord-
ingly. Besides, it is not irrelevant to remem-
ber in this connection that the Article 23 are
construing imposes a constitutional limitation
on the power of
740
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 restric-
tions 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  immedi-
ately  restrict trade that would    fall  within
the  purview of Art. 30 1. The  argument    that
all  taxes  should  be governed  by  Art.     301
whether or not their impact on trade is  imme-
diate 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 legisla-
tive  enactment prescribing the minimum  wages
to  industrial employees may fall     under    Part
XIII because in an economic sense an addition-
al  wage bill may indirectly affect  trade  or
commerce. We are, therefore, satisfied that in
determining the limits of the width and ampli-
tude  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?"
It is in that light we must examine the impugned  provi-
sion.  It  is necessary to bear in mind that taxes  may     and
sometimes  do  amount to restrictions but it  is  only    such
taxes as directly and immediately restrict trade that  would
fall  within the mischief of art. 301. Mr.  Salve,  however,
rightly     reminded  us that regulatory measures    or  measures
imposing compensatory taxes for using trading facilities  do
not  come  within the purview of  restrictions    contemplated
under art. 301. Here, it is necessary to refer to the  deci-
sion  of this Court in the Automobile Transport     (Rajasthan)
Ltd.  v.  The State of Rajasthan & Ors., [1963]     1  SCR     491
which was a decision of a bench of this Court consisting  of
7 learned Judges, and was concerned with the Rajasthan Motor
Vehicles Taxation Act, 1951. Sub-section (1) of s. 4 of that
Act  provided  that no motor vehicle shall be  used  in     any
public    place or kept for use in Rajasthan unless the  owner
thereof had paid in respect of it, a tax at the     appropriate
rate specified in the schedules to that Act within the    time
allowed.  The appellants therein were carrying on the  busi-
ness  of plying stage carriages in the State of Ajmer.    They
held permits and plied their buses on diverse routes.  There
was one route which lay
741
mainly    in Ajmer State but it crossed narrow strips  of     the
territory of the State of Rajasthan. Another route, Ajmer to
Kishangarh,  was  substantially in the Ajmer  State,  but  a
third of it was in Rajasthan. Formerly, there was an  agree-
ment between the Ajmer State and the former State of Kishan-
garh,  by  which neither State charged any tax    or  fees  on
vehicles  registered in Ajmer or Kishangarh. Later,  Kishan-
garh  became  a     part of Rajasthan. On the  passing  of     the
Rajasthan Motor Vehicles Taxation Act, 1951, and the promul-
gation    of  the rules made thereunder,    the  Motor  Vehicles
Taxation Officer, Jaipur, demanded of the appellants payment
of  the tax due on their motor vehicles for the period    from
April  1, 1951 to March 31, 1954. The appellants  challenged
the  legality of the demand on the grounds that s. 4 of     the
Act read with the Schedules constituted a direct and immedi-
ate  restriction on the movement of trade and commerce    with
and  within Rajasthan inasmuch as motor vehicles which    car-
ried passenger and goods within or through Rajasthan had  to
pay  tax  which     imposed a pecuniary  burden  on  commercial
activity and was therefore hit by art. 301 of the  Constitu-
tion and was not saved by Art. 304(b) inasmuch as the provi-
so  to    Art. 304(b) was not complied with, nor was  the     Act
assented to by the President within the meaning of art.     255
of  the Constitution. It was held by Das, Kapur, Sarkar     and
Subba  Rao,  JJ. as the learned Judges then were,  that     the
Rajasthan Motor Vehicles Taxation Act, 1951 did not  violate
the provisions of art. 301 of the Constitution of India     and
that  the taxes imposed under the Act were  compensatory  or
regulatory taxes which did not hinder the freedom or  trade,
commerce and intercourse assured by that article. Das, Kapur
and  Sarkar, JJ. held that the concept of freedom of  trade,
commerce  and  intercourse postulated by art.  301  must  be
understood in the context of an ordinary society and as part
of  a Constitution which envisaged a distribution of  powers
between the States and the Union, and if so understood,     the
concept     must  recognise  the need and    legitimacy  of    some
degree    of regulatory control, whether by the Union  or     the
States. Mr. Justice Subba Rao, as the learned Chief  Justice
then was, observed that the freedom declared under art. 30 1
referred to the right of free movement of trade without     any
obstructions by way of barriers, inter-State or intra-State,
or  other  impediments operating as such barriers;  and     the
said freedom was not impeded, but on the other hand, promot-
ed, by regulations creating conditions for the free movement
of  trade,  such   as, police  regulations,  provisions     for
services,  maintenance of roads, provision  for     aerodromes,
wharfs etc., with or without compensation. Parliament may be
law  impose restrictions, it was stated, on such freedom  in
the  public  interest, and the States also, in    exercise  of
their legislative power, may impose similar restrictions,
742
subject     to the proviso mentioned therein. Laws of  taxation
were not outside the freedom enshrined either in Art. 19  or
301. Mr. Justice Hidayatullah, as the learned Chief  Justice
then  was, and Rajagopala Ayyangar and Mudholkar,  JJ.    held
that  s. 4(1) of the Rajasthan Motor Vehicles Taxation    act,
195  1 offended art. 301 of the Constitution, and as  resort
to the procedure prescribed by art. 304(b) was not taken  it
was ultra vires the Constitution. The pith and substance  of
the  Act was the levy of tax on motor vehicles in  Rajasthan
or  their use in that State irrespective of where the  vehi-
cles came from and not legislation in respect of inter-State
trade or commerce. A tax which is made the condition  prece-
dent  of the right to enter upon and carry on business is  a
restriction  on     the right to carry on    trade  and  commerce
within    art. 30 1 of the Constitution. The tax levied  under
the Act was not truly a fair recompense for wear and tear of
roads but a restriction which art. 30 1 forbade. The act was
not,  in  its  true character, regulatory.  In    judging     the
situation it would be instructive to bear in mind the obser-
vations     of Mr. Justice Das at p. 5 12 of the report,  where
he  observed that in evolving an integrated policy  on    this
subject     our Constitution makers seem to have kept  in    mind
three main considerations which may be broadly stated  thus:
first,    in the larger interests of India there must be    free
flow  of trade, commerce and intercourse,  both     inter-State
and intra-State; second, the regional interests must not  be
ignored     altogether;  and third, there must be    a  power  of
intervention by the Union in any case of crisis to deal with
particular problems that may arise in any part of India.  At
p. 523 of the report, it was reiterated that 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.  Dealing
with wide interpretation Justice Das observed at p. 523-5 of
the said report as follows:
“The widest view proceeds on the footing    that
Art.  301     imposes a  general  restriction  on
legislative  power  and grants  a     freedom  of
trade,  commerce    and intercourse in  all     its
series of operations, from all barriers,    from
all restrictions, from all regulation, and the
only qualification that is to be found in     the
article is the opening clause, namely,
subject to the other provisions of Part  XIII.
This in actual practice will mean that if     the
State  Legislature wishes to control or  regu-
late trade, commerce and intercourse in such a
way  as  to facilitate its free  movement,  it
must  yet     proceed to make a  law     under    Art.
304(b)  and no such bill can be introduced  or
moved  in the Legislature of a  State  without
the  previous sanction of the  President.     The
practi-
743
cal effect would be to stop or delay effective
legislation  which may be urgently  necessary.
Take, for example, a case where in the  inter-
ests  of    public health, it  is  necessary  to
introduce urgently legislation stopping  trade
in goods which are deleterious to health, like
the  trade in diseased potatoes in  Australia.
If  the State Legislature wishes to  introduce
such a bill, it must have the sanction of     the
President.  Even such legislation     as  imposes
traffic regulations would require the sanction
of  the  President.  Such     an   interpretation
would,  in our opinion, seriously     affect     the
legislative  power of the     State    Legislatures
which  power has been held to be plenary    with
regard to subjects in list II.”
Mr. Justice Subba Rao, as the learned Chief Justice then
was,  at  page    550 of the report, observed that  if  a     law
directly  and immediately imposes a tax for general  revenue
purposes on the movement of trade, it would be violating the
freedom.  The learned Judge reiterated that the     Court    will
have  to ascertain whether the impugned law in a given    case
affects directly the said movement or indirectly and remote-
ly affects it.
Mr.     Salve, however, sought to contend that     as  regards
the  local sales tax, there were broadly two  well  accepted
propositions,  namely,    sales tax was a tax levied  for     the
purpose     of  general  revenue. Secondly, it  was  neither  a
compensatory  tax nor a measure regulating any trade.  Reli-
ance was placed on the observations of Mr. Justice  Raghubar
Dayal,    J.  in Firm A.T.B. Mehtab Majid & Co.  v.  State  of
Madras    & Anr., [1963] 2 Suppl. SCR 435 but the     context  in
which  the said observations were made has to  be  examined.
That case dealt with a petition under art. 32 of the Consti-
tution.     The petitioners therein were dealers in  hides     and
skins in the State of Madras. The impugned sales tax assess-
ment related to turnover sales tanned hides and skins  which
had been obtained from outside the State of Madras. The main
contention was that the tanned hides and skins imported from
outside     and sold inside the State were, under r. 16 of     the
Madras General Sales Tax Rules, subject to a higher rate  of
tax than the tax imposed on hides and skins tanned and    sold
within    the State and this discriminatory taxation  offended
art.  304  of the Constitution. The contentions of  the     re-
spondents  therein were that sales tax did not    come  within
the  purview of art. 304(a) as it was not a tax on  the     im-
port. of goods at the point of entry, that the impugned rule
was  not a law made by the State legislature, that  the     im-
pugned    rule by itself did not impose the tax but fixed     the
single    point at which the tax was imposed by ss. 3 &  5  of
the Act was to
744
be  levied; and that the impugned rule was not made with  an
eye  on the place of origin of the goods. It was  held    that
taxing    laws  can  be restrictions on  trade,  commerce     and
intercourse,  if they hamper the flow of trade and  if    they
are  not  what    can be termed to be  compensatory  taxes  or
regulating measures.
Reliance  was also placed by Mr. Salve on  the  observa-
tions of Justice Raghubar Dayal in A. Hajee Abdul Shakoor  &
Co.  v. State of Madras, [1964] 8 SCR 2 17 at 225. See    also
the observations in State of Madras v. N.K. Nataraja Mudali-
ar,  [1968] 3 SCR 829 at 847 and Andhra Sugars Ltd.  &    Anr.
etc.  v.  State of Andhra Pradesh & Ors., [1968] 1  SCR     705
where at p. 7 18 of the report it was reiterated that a sale
tax  which discriminates against goods imported     from  other
States may impede the free flow of trade and is then invalid
unless    protected by art. 304(a). It is, however,  necessary
to  bear in mind that in N.K.N. Mudaliar’s, case (supra)  at
p. 850 Mr. Justice Bachawat after referring to several cases
observed as follows:
“But, there can be no doubt that a tax on such
sales  would not normally offend Article    301.
That  Article  makes  no    distinction  between
movement from one part of the State to another
part  of the same State and movement from     one
State to another. Now, if a tax on intra-State
sale does not offend Article 301, logically, I
do  not see how a tax on inter-State sale     can
do so. Neither tax operates directly or  imme-
diately on the free flow of trade or the    free
movement    of the transport of goods  from     the
part  of the country to the other. The tax  is
on the sale. The movement is incidental to and
a consequence of the sale.”
There was a reference in the said judgment to the obser-
vations of Jagannathadas, J. in The Bengal Immunity Co. Ltd.
v.  State of Bihar, [1955] 2 SCR 603 at 754 wherein  it     was
stated:
“Now it is not disputed that a tax on a purely
internal sale which occurs as a result of     the
transportation  of goods from a  manufacturing
centre within the State to a purchasing market
within  the same State is clearly     permissible
and  not hit by anything in the  Constitution.
If  a sale in that kind of trade can bear     the
tax  and    is not a burden on  the     freedom  of
trade,  it  is difficult to see why  a  single
point  tax  on the same kind of sale  where  a
State boundary intervenes bet-
745
ween the manufacturing centre and the  consum-
ing  centres  need  be treated  as  a  burden,
especially  where     that tax is  ultimately  to
come out of the residents of the very State by
which  such sale is taxable. Freedom of  trade
and commerce applies as much within a State as
outside it. It appears to me again, with great
respect, that there is no warrant for treating
such  a tax as in any way contrary  either  to
the  letter  or the spirit of the     freedom  of
trade,  commerce    and’  intercourse   provided
under Article 301.”
It    was  contended that the Central Sales  Tax  Act     ex-
hypothesi violates art. 301 of the Constitution since it  is
a tax on inter-State movement of goods. Shah, J. in  Mudali-
ar’s case (supra) at p. 84 1 of the report observed that tax
under the Central Sales Tax Act on interState sales, it must
be noticed, is in its essence a tax which encumbers movement
of  trade or commerce, if it–(a) occasions the movement  of
goods from one State to another; (b) is effected by a trans-
fer of documents of title to the goods during their movement
from  one  State to another. It was contended by  Mr.  Salve
that  by exempting the local manufacturers from     both  local
and central sales tax, the State Govt. has clearly made     the
imposition of both local and central sales tax discriminato-
ry and prejudicial to outside goods. The goods of the  local
manufacturer, when sold by him, do not bear any tax  whereas
the  goods imported from outside the State have to bear     the
burden    of sales tax. It was also contended that  similarly,
the  goods of a ‘local manufacturer, when exported from     the
State  of U.P. do not have to bear tax, while goods  brought
into the State of U.P. and further ex- , ported in  competi-
tion with the local goods have to bear the tax, so there  is
clear discrimination against goods produced by manufacturers
situated  outside the State. The discrimination     within     the
meaning of art. 301 read with art. 304 arises where there is
a difference in the rates of sales tax levied, it was sought
to be emphasised by Mr. Sanjay Parikh for some of the  peti-
tioners. This proposition has been reiterated by this  Court
in  a  large number of cases, according to counsel,  and  we
were referred to the observations in State of Madhya Pradesh
v. Bhailal Bhai & Ors., [1964] 6 SCR 261 at 268-9 and Mudal-
iar’s case (supra) where at p. 847 Shah, J. reiterated    that
imposition of differential rates of tax by the same State on
goods  manufactured  or produced in the     State    and  similar
goods imported in the State is prohibited under art. 304(a).
It  was also reiterated by this Court in Rattan Lal & Co.  &
Anr. v. The Assessing Authority & Anr., [1969] 2 SCR 544  at
557 dealing with the Punjab General Sales Tax Act that    when
a  taxing  State was not imposing rates of tax    on  imported
goods different from the rates of
746
tax  on     goods    manufactured or produced, art.    304  had  no
application. So long as the rate was the same, art. 304     was
satisfied.  Reference  was made to India Cement     &  Ors.  v.
State of Andhra Pradesh & Ors., [1988] 1 SCC 743, whereas at
p.  759     this Court observed that variation of the  rate  of
inter-state sales tax did affect free trade and commerce and
created a local preference which was contrary to the scheme-
of Part XIII of the Constitution. To similar effect are     the
observations  to which Mr. Sanjay Parikh has referred us  in
Weston    Electronics  &    Anr. v. State  of  Gujarat  &  Ors.,
[1988]    2 SCC 568 at 571. Mr. Salve strongly relied  on     the
observations  of Justice Cardozo in C.A.F. Seeling  Inc.  v.
Charles     H.  Baldwin, 79 L. Ed. 2d 1033 at  1038  where     the
learned Judge observed while he was dealing with Art. (1) s.
8, clause (3) of the American Constitution which is known as
the  ‘Commerce Clause’–”This part of the  Constitution     was
framed    under  the dominion of a political  philosophy    less
parochial  in range. It was framed upon the theory that     the
peoples of the several States must sink or swim together and
that  in the long run prosperity and salvation are in  union
and not division”. This passage has been cited with approval
in this Court in Atiabari’s case (supra) by  Gajendragadkar,
J. as aforesaid.
We    were  referred to the observations  of    Firm  A.T.B.
Mehtab Majid & Co.s case [1963] 2 Suppl. SCR 435 at 445.  It
was  contended that the acceptance of the petitioner’s    case
would  not conflict with the plenary power of the  State  to
grant exemptions under the Act because statutory powers have
to  yield  to  constitutional  inhibitions  and,  therefore,
article     304(a) & (b) being envisaged to safeguard the    eco-
nomic  unity of the country, these must have precedence.  It
was  also contended that the petitions under art.  301    read
with 304(a) are clearly maintainable.
Reliance was placed in Smt. Ujjam Bai v. Stale of  U.P.,
[1963]    1  SCR 778 at 85 1 and Coffee  Board,  Bangalore  v.
Joint  Commercial Tax Officer, Madras & Anr., [1970]  3     SCR
147  at     156.  In light of these, it was  contended  by     the
petitioners  that  the    petition under art.  32     is  clearly
maintainable.
The     question  as we see is, how to harmonise  the    con-
struction of the several provisions of the Constitution.  It
is  true that if a particular provision being taxing  provi-
sion  or otherwise impedes directly or immediately the    free
flow  of  trade within the Union of India then    it  will  be
violative of art. 301 of the Constitution. It has further to
be borne in mind that art. 301 enjoins that trade,  commerce
and
747
intercourse throughout the territory of India shall be free.
The  first question, therefore, which one has to examine  in
this  case is, whether the sales tax  provisions  (exemption
etc.)  in these cases directly and immediately restrict     the
free  flow of trade and commerce within the meaning of    art.
30  1  of the Constitution. We have examined the  scheme  of
art.  30  1 of the Constitution read with art. 304  and     the
observations  of  this    Court in  Atiabari’s  case  (supra),
as,also     the observations made by this Court  in  Automobile
Transport,  Rajasthan’s case (supra). In our  opinion,    Part
XIII of the Constitution cannot be read in isolation. It  is
part and parcel of a single constitutional instrument envis-
aging a federal scheme and containing general scheme confer-
ring  legislative powers in respect of the matters  relating
to list II of the 7th Schedule on the State. It also confers
plenary     powers on States to raise revenue for its  purposes
and  does  not require that every legislation of  the  State
must  obtain assent of the President. Constitution of  India
is  an    organic document. It must be so     construed  that  it
lives and adapts itself to the exigencies of the  situation,
in a growing and evolving society, economically, politically
and  socially.    The meaning of the  expressions     used  there
must, therefore, be so interpreted that it attempts to solve
the  present problem of distribution of power and rights  of
the  different States in the Union of India, and  anticipate
the  future contingencies that might arise in  a  developing
organism.  Constitution     must  be  able     to  comprehend     the
present at the relevant time and anticipate the future which
is natural and necessary corollary for a growing and  living
organism. That must be part of the constitutional  adjudica-
tion.  Hence,  the economic development of States  to  bring
these into equality with all other States and thereby devel-
op  the economic unity of India is one of the major  commit-
ments  or  goals of the constitutional aspirations  of    this
land. For working of an orderly society economic equality of
all the States is as much vital as economic unity.
The taxes which do not directly or immediately  restrict
or interfere with trade, commerce and intercourse throughout
the territory of India, would therefore be excluded from the
ambit of art. 301 of the Constitution. It has to be borne in
mind that sales tax has only an indirect effect on trade and
commerce.
Reference may be made to the Constitution bench judgment
of this Court in Andhra Sugar Ltd. & Anr. v. State of A.  P.
&  Ors.,  [1968] 1 SCR 705 where this  Court  observed    that
normally a tax on sale of goods does not directly impede the
free  movement    of transport. See also the  observations  in
Mudaliar’s case (supra) where at p. 851 it was observed that
a tax on sale would not normally offend art. 301. That
748
article     made nO distinction between movement from one    part
of State to another part of the same State and movement from
one State to another. In this connection, reference may also
be  made  to  the observations    in  Bengal  Immunity’s    case
(supra). Both the preceding cases clearly establish that  if
a  taxing provision in respect of intra-State sale does     not
offend art. 30 1, logically it would not affect the  freedom
of trade in respect of free flow and movement of goods    from
one part of the country to the other under art. 301 as well.
It has to be examined whether difference in rates per se
discriminates  so as to come within articles 301 and  304(a)
of the Constitution. It is manifest that free flow of  trade
between two States does not necessarily or generally  depend
upon the rate of tax alone. Many factors including the    cost
of  goods  play an important role in the movement  of  goods
from one State to another. Hence the mere fact that there is
a  difference in the rate of tax on goods  locally  manufac-
tured  and those imported would not amount to  hampering  of
trade between the two States within the meaning of art.     301
of  the Constitution. As in manifest, art. 304 is an  excep-
tion  to art. 30 1 of the Constitution..The need  or  taking
resort    to exception will arise only if the tax impugned  is
hit  by articles 301 and 303 of the Constitution. If  it  is
not  then  art. 304 of the Constitution will not  come    into
picture at all. See the observations in Nataraja  Mudaliar’s
case (supra) at pp. 843-6 of the report. It has to be  borne
in mind that there may be differentiations based on  consid-
eration     of  natural or business factors which are  more  or
less  in  force in different localities. A  State  might  be
allowed to impose a higher rate of tax on a commodity either
when it is not consumed at all within the State or if it  is
felt that the burden falling on consumers within the  State,
will  be more than that and large benefit is derived by     the
revenue. The imposition of rates of sales tax is  influenced
by  various political, economic and social  factors.  Preva-
lence  of  differential     rate of tax on sales  of  the    same
commodity  cannot be regarded in isolation as  determinative
of the object to discriminate between one State and another.
Under the Constitution originally flamed revenue from  sales
tax was reserved for the States.
In    V. Guruviah Naidu & Sons. v. State of Tamil  Nadu  &
Anr.,  [1977]  1  SCR 1065 at 1070 this     Court    observed  as
follows:
“Article    304(a) does not prevent levy of     tax
on  goods; what it prohibits is such  levy  of
tax on goods as would result in discrimination
between  goods imported from other States     and
similar goods manufactured or produced  within
the
749
State. The object is to prevent discrimination
against imported goods by imposing tax on such
goods  at     a rate higher than  that  borne  by
local  goods since the difference between     the
two  rates would constitute a tariff  wall  or
fiscal  barrier and thus impede the free    flow
of  inter-State trade and commerce. The  ques-
tion as to when the ‘levy of tax would consti-
tute discrimination would depend upon a varie-
ty  of factors including the rate of  tax     and
the  item of goods in respect of the  sale  of
which  it is levied. The scheme of items    7(a)
and  7(b) of the Second Schedule to the  State
Act  is  that in case of raw hides  and  skins
which are purchased locally in the State,     the
levy of tax would be at the rate of 3 per cent
at  the point of last purchase in     the  State.
When  those  locally purchased raw  hides     and
skins  are  tanned  and are  sold     locally  as
dressed hides and skins, no levy would be made
on  such sales as those hides and     skins    have
already  been  subjected to local tax  at     the
rate of 3 per cent when they were purchased in
raw  form.  As against that, in  the  case  of
hides and skins which have been imported    from
other  States in raw form and  are  thereafter
tanned  and  then     sold inside  the  State  as
dressed hides and skins, the levy of tax is at
the  rate     of 1-1/2 per cent at the  point  of
first  sale in the State of the dressed  hides
and  skins. This levy cannot be considered  to
be discriminatory as it takes into account the
higher  price of dressed hides and skins    com-
pared to the price of raw hides and skins.  It
also  further takes note of the fact  that  no
tax  under  the  State Act has  been  paid  in
respect of those hides and skins. The Legisla-
ture, it seems, calculated the price of  hides
and  skins in dressed condition to  be  double
the  price  of  such hides and  skins  in     raw
state. To obviate and prevent any     discrimina-
tion  of differential treatment in the  matter
of  levy    of tax,     the  Legislature  therefore
prescribed  a rate of tax for sale of  dressed
hides and skins which was half of that  levied
under  item 7(a) in respect of raw  hides     and
skins.”
The     object     is to prevent    discrimination    against     the
imported  goods     by  imposing tax on such goods     at  a    rate
higher    than that borne by local goods. The question  as  to
when  the levy of tax would constitute discrimination  would
depend    upon a variety of factors including the rate of     tax
and the item of goods in respect of the sale on which it  is
levied.     Every    differentiation is not    discrimination.     The
word ‘discrimination’ is not used in art. 14 but is used  in
articles 16, 303 & 304(a).
750
When  used in art. 304(a), it involves an element of  inten-
tional    and  purposeful     differentiation  thereby   creating
economic  barrier and involves an element of an     unfavorable
bias.  Discrimination  implies    an  unfair   classification.
Reference  may be made to the observations of this Court  in
Kathi  Raning Rawat v. The State Of Saurashtra,     [1952]     SCR
435  where  Chief Justice Shastri at p. 442  of     the  report
reiterated  that  all  legislative  differentiation  is     not
necessarily discriminatory. At p. 448 of the report, Justice
Fazal  Ali noticed the distinction  between  ‘discrimination
without reason’ and ‘discrimination with reason’. The  whole
doctrine  of  classification  is based on this    and  on     the
well-known  fact that the circumstances covering one set  of
provisions  or    objects may not necessarily be the  same  as
these covering another set of provisions and objects so that
the question of unequal treatment does not arise as  between
the provisions covered by different sets of circumstances.
Where  the general rate applicable to the goods  locally
made  and  on those imported from other States is  the    same
nothing     more normally and generally is to be shown  by     the
State  to dispel the argument of discrimination     under    art.
304(a),     even  though the resultant tax amount    on  imported
goods may be different. Here, reference may be made to Ratan
Lal’s  case  (supra). In the instant writ petition,  in     the
State  of U.P. those producers or manufacturers who  do     not
come  within the ambit of notifications, have to pay tax  on
their  goods at the general rate described and there  is  no
differentiation     or discrimination qua the  imported  goods.
The  question  naturally arises whether the power  to  grant
exemption to specified class of manufacturers for a  limited
period    on  certain conditions as provided by s. 4A  of     the
U.P.  Sales  Tax  Act is violative of art.  304(a).  It     was
contended by the petitioners that Part XIII of the Constitu-
tion  was envisaged for preserving the unity of India as  an
economic  unit and, hence, it guarantees free flow of  trade
and  commerce throughout India including between  State     and
State  and as such art. 304(a), even though an exception  to
art.  301, yet applies where an exemption is granted by     one
State  to  a special class of manufacturers  for  a  limited
period    on  certain  conditions. It was     so  submitted    that
either a State should grant exemption to all goods irrespec-
tive of the fact that the goods are locally manufactured  or
imported  from other States, else it would be  violative  of
art. 304 and 304(a).
It was submitted by the respondents that this is not the
correct position. This argument ignores the basic feature of
the  Constitution  and    also the fact that  the     concept  of
economic unity may not necessa-
751
rily  be  the  same as it was at the  time  of    Constitution
making.     The result of the same would be acceptance  of     the
view  that  a State which was technically  and    economically
weak in 1950 due to various factors, must always remain     the
same and cannot be helped to develop economically by  grant-
ing  concessions/exemptions or allowing subsidies etc.    for
-establishing  new industries so as to be  economically     de-
veloped.  It  was also submitted that if all  the  parts  of
India i.e. to say all the States are economically strong  or
developed then only can economic unity as a whole be assured
and  strengthened. Hence, the concept of economic  unity  is
ever changing with very wide horizons and cannot and  should
not  be     imprisoned in a strait-jacket of  the    concept     and
notion    as  advocated by the petitioner. Economic  unity  of
India is one of the constitutional aspirations of India     and
safeguarding  the attainment and maintenance of     that  unity
are  objectives     of  the Indian Constitution.  It  would  be
wrong,    however, to assume that India as a whole is  already
an economic unit. Economic unity can only be achieved if all
parts  of whole of Union of India develop equally,  economi-
cally.    Indeed,     in  the affidavits  of     opposition  various
grounds     have  been indicated on behalf of  the     respondents
suggesting the need for incentives and exemptions, and these
were  suggested     to  be absolutely  necessary  for  economic
viability and survival for these industries in these States.
These  were  based  on cogent and  intelligible     reasons  of
economic encouragement and growth. There was a rationale  in
these which is discernible. The power to grant exemption  is
always     inherent   in     all   taxing    Statutes.   If     the
suggestions/submissions     as advanced by the petitioners     are
accepted,  it was averted, and in our opinion rightly,    that
it  will  destroy completely or make  nugatory    the  plenary
powers    of the States. If the exemption is based on  natural
and  business factors and does not involve  any     intentional
bias,  the  impugned notifications to  grant  exemption     for
limited period on certain specific conditions cannot be held
to  be bad. Judged by that yardstick, the present  notifica-
tions  cannot be held to be violative of the  constitutional
provisions. An examination of art. 304(a) would reveal    that
what is being prohibited by this article which is really  an
exception  to art. 30 1 will not apply if art. 301 does     not
apply.
In     the  instant case the general    rate  applicable  to
locally     made goods is the same as that on  imported  goods.
Even  supposing without admitting that sales tax is  covered
by art. 301 as a tax directly and immediately hampering     the
free flow of trade, it does not follow that it falls  within
the  exemption of art. 304 and it would be hit by art.    301.
Still the general rate of tax which is to be compared  under
art.  304(a)  is at par and the same qua  the  locally    made
goods and the imported goods.
752
Concept of economic barrier must be adopted in a dynamic
sense with changing conditions. What constitutes an economic
barrier at one point of time often cease to be so at another
point of time. It will be wrong to denude the people of     the
State  of the right to grant exemptions which flow from     the
plenary     powers of legislative heads in list II of  the     7th
Schedule  of the Constitution. In a federal polity, all     the
States    having powers to grant exemption to specified  class
for  limited  period, such granting of exemption  cannot  be
held  to be contrary to the concept of economic     unity.     The
contents  of  economic unity by the people  of    India  would
necessarily  include  the  power to grant  exemption  or  to
reduce    the rate of tax in special cases for  achieving     the
industrial  development     or  to provide     tax  incentives  to
attain economic equality in growth and development. When all
the  States have such provisions to exempt or  reduce  rates
the question of economic war between the States inter se  or
economic  disintegration  of the country as  such  does     not
arise.    It is not open to any party to say that this  should
be done and this should not be done by either one way or the
other.    It cannot be disputed that it is open to the  States
to realise tax and thereafter remit the same or pay back  to
the  local manufacturers in the shape of subsidies and    that
would neither discriminate nor be hit by art. 304(a) of     the
Constitution.  In  this case and as  in     all  constitutional
adjudications  the substance of the matter has to be  looked
into  to  find out whether there is  any  discrimination  in
violation of the constitutional mandate.
In Kalyani Stores v. The State of Orissa & Ors.,  [1966]
1 SCR 865, Shah, J. (as the learned Chief Justice then was),
speaking  for himself and on behalf of Chief Justice  Gajen-
dragadkar,  Wanchoo,  J.  and Sikri, J.     observed  that     the
restriction  on     the freedom of trade, commerce     and  inter-
course throughout the territory of India declared by Article
301 of the Constitution cannot be justified unless it  falls
within Art. 304. Exercise of power under art. 304(a) can  be
effective  only     if the tax or duty on goods  imported    from
other  States and the tax or duty imposed on  similar  goods
manufactured or produced in that State is such that there is
no  discrimination.  Hidayatullah, J. as the  learned  Chief
Justice     then was, observed, at p. 883 of the  report,    that
art.  304(a)  imposes no ban but lifts the  ban     imposed  by
articles  30 1 & 303 subject to one condition. That  article
is enabling and prospective.
Counsel for the respondents drew out attention to  arti-
cles  38  &  39 of the Constitution. The  striving  for     the
attainment  of    the objects enshrined in these    Articles  is
enjoined. For achieving these objects the States have neces-
sarily to develop themselves economically so as to
753
secure    economic unity and to minimise the inequalities     and
imbalances between State and State and region and region. If
the power to grant exemption has been conferred for  achiev-
ing these objects on all, it is not possible to assail these
as  violative  of art. 304 as the latter article has  to  be
interpreted in conjunction with others and not in isolation.
Reference  may be made to the observations of this Court  in
Bharat General & Textiles Industries Ltd. v. State of  Maha-
rashtra,  72  STC 354 where it was held that s.     41  of     the
Bombay Sales Tax Act, did not contravene articles 14 & 19 of
the Constitution of India and the State Govt. could  validly
classify  new  units producing edible oil  as  distinct     and
separate from other units and validly withdraw the exemption
in  relation to such units only. It is true that the  afore-
said  observations were made in the context  different    from
art.  304(a) but basically the concept of equality  embodied
in  articles 304(a) & 16 are the same. Art. 14 enjoins    upon
the  State to treat every person equal before the law  while
art. 304(a) enjoins upon the State not to discriminate    with
respect     to  imposition     of tax on imported  goods  and     the
locally made goods. The petitioners made reference to sever-
al  decisions of this Court, namely, H. Anraj v.  Government
of  Tamil  Nadu, [1986] 1 SCC 414; Indian Cement &  Ors.  v.
State of Andhra Pradesh & Ors., (supra); Weston     Electronics
v. State of Gujarat, (supra) and West Bengal Hosiery Assn. &
Ors.  v. State of Bihar & Anr., [1988] 4 SCC 134 wherein  it
has been reiterated that difference in rate of sales tax  is
hit  by     articles 301 & 304 but the  said  conclusions    were
arrived     at  in     the context of a  controversy    not  in     the
present     form and the question of exemption as such did     not
arise  in these cases, as explained later. These cases    were
not at all concerned with granting of exemption to a special
class  for a limited period on specific conditions of  main-
taining the general rate of tax on the goods manufactured by
all those producers in the State who do not fall within     the
exempted category at par with the rate applicable to import-
ed  goods  as we have read these cases. Hence,    it  was     not
necessary in those decisions to consider the problem in     its
present aspect. If, however, the said power is exercised  in
a  colourable  manner intentionally or purposely  to  create
unfavorable  bias  by prescribing a general  lower  rate  on
locally     manufactured goods either in the shape     of  general
exemption  to locally manufactured goods or in the shape  of
lower  rate of tax, such an exercise of power can always  be
struck down by the courts. That is not the situation in     the
instant     cases. The aforesaid decisions, therefore, are     not
authorities  for the general proposition that  while,  main-
taining     the general rate at par, special rates for  certain
industries  for a limited period could not be prescribed  by
the States.
754
There  was another subsidiary question in these  matters
as  to whether the legislation in the shape of    notification
is  law within the meaning of art. 304 of the  Constitution.
The  phrase  used  in the opening part of  art.     304  should
necessarily  mean  any    law enacted  either  by     legislature
itself    or  by its delegate. Here it may be  instructive  to
refer  to  clause 10 of art. 366 of the     Constitution  which
defines existing law and even though the word ‘Notification’
is  not to be found, yet in Kalyani Stores v. The  State  of
Orissa    &  Ors.,  (supra) it has been held that     it  was  an
existing law. In The State of U.P. & Ors. v. Babu Ram  Upad-
hya, [196] 12 SCR 679 at 702 this Court relied on a  passage
from  Maxwell “On the Interpretation of Statutes”  and    held
that a rule framed in the absence of any specific  provision
in  the Act shall be deemed to be a part of the Act  itself.
In the State of Tamil Nadu v. Hind Stone etc., [1981] 2     SCR
742  at 757 this Court relied upon the aforesaid  dictum  in
the case of Babu Ram Upadhya, (supra) and distinguished     the
decision  in State of Mysore v. H. Sanjeeviah, [1967] 2     SCR
361 cited on behalf of the petitioner. This Court in Kailash
Nath & Anr. v. State of U. P. & Ors., AIR 1957 SC 790 at 791
has  held that the notification having been made in  accord-
ance  with the power conferred by the Statute has  statutory
force  and validity and, therefore, exemption is as if    con-
tained in the Act itself. The U.P. Sales Tax Act by s. 24(4)
confers rule making powers on the State Government.  Section
25 confers powers on the State Government to issue notifica-
tions with retrospective effect. Hence, it cannot be disput-
ed  that the exemption notification is the exercise  of     the
legislative  power.  This Court in State of U.P. &  Ors.  v.
Renusagar Power Co. & Ors., [1988] 4 SCC 59 at 100 has    held
that  the power to grant exemption is quasi legislative.  In
M/s Narinder Chand Hem Raj & Ors. v. Lt. Governor,  Adminis-
trator,     U.T., Himachal Pradesh & Ors., [1971] 2 SCC 747  at
751  it was held that the exercise of the power is  legisla-
tive whether it is by the legislature or by the delegate.
In    respect of the decisions aforesaid relied on  behalf
of  the     petitioner, on examination of the  observations  in
India Cement’s case (supra) to the contrary to which  stated
hereinbefore on this aspect must be confined to the facts of
that  case  alone as the said decision had  no    occasion  to
consider it in the full light. In the aforesaid view of     the
matter    the  challenge in these petitions to  the  aforesaid
exemptions  cannot,  in     our opinion, be  upheld.  The    writ
petitions dealing with the U.P. matters on the same  conten-
tions, therefore, fail.
Writ  petition  No. 665/88 being M/s  Video     Electronics
Pvt.  Ltd. & Anr. v. State of Punjab & Anr., deals with     the
notification issued by
755
the  Punjab Government whereby two different rates of  taxes
are provided. By that notification the State Government     has
differentiated    between     the  manufacturers  of     electronics
goods outside the State and within the State. Under  section
5 of the Punjab General Sales Tax Act (hereinafter  referred
to  as    ’the Act’), the State of Punjab     had  been  imposing
sales  tax  @ 10% + 2% surcharge on electronics     goods    sold
within    the  State irrespective of  their  manufacture.     The
State Govt. in pursuance of the powers conferred on it u/s 5
of  the Act issued the notification date 11.12.1986  stating
that the rate of sales tax payable by an electronic manufac-
turing unit existing in Punjab in cases of electronic  goods
specified  in  Annexure-A of the petition within  the  State
will be 1%. Thus the rate of sales tax was brought down from
10% (+ 2% surcharge) to 1% while for similar goods  manufac-
tured  outside    the State and sold  within  the     respondent-
State, the rate of sales tax remained 10% (+ 2%     surcharge).
It was contended that there was differentiation. In  support
of  this contention the petitioners reiterate more  or    less
the  same submissions, as indicated before. It is true    that
there  was difference in rate yet there was reason for    this
differentiation. The State Government in its counter affida-
vit  has stated that a lower rate of tax i.e. to say  1%  in
the  case of new units and 2% in the case of existing  units
has  been  levied  to boost this industry and  to  stop     the
existing  industry shifting to neighboring States. The    pre-
vailing     peculiar  circumstances of Punjab were one  of     the
factors     indicated  for     the same. The lower  rate,  it     was
reiterated,  was  imposed in view of  the  peculiar  circum-
stances     and  also to attract new entrepreneurs     from  other
States and from within the State. It was contended that     the
said  notification was issued in public interest in view  of
the peculiar position; and that while the States of  Gujarat
and  Maharashtra  are fully developed States, on  the  other
hand, Punjab is comparatively a backward State in  industry.
Unless some incentives are given, the industries which    have
already shifted to other States, will have further deterring
effects.  Hence, in view of the situation  the    concessional
rate was introduced and was not discriminatory.
As mentioned hereinbefore, reliance was placed mainly on
H. Anraj v. Govt. of Tamil Nadu, (supra) to which one of  us
was a party. That was a decision dealing with lottery  tick-
ets,  and  dealt with the question whether  lottery  tickets
amounted to movable property so as to be within the  purview
of  the Sale of Goods Act. But in relation to  the  question
relevant  to the present purpose it was reiterated that     the
real question is, whether direct and immediate result of the
impugned  notification    was to impose  an  unfavourable     and
discriminatory    tax burden on the imported goods  (in  those
cases lottery tickets of other
756
States) when they are sold within the State of Tamil Nadu as
against     indigenous  goods (Tamil  Nadu     Government  lottery
tickets)  when    these are sold within the  State,  from     the
point  of view of the purchaser and this question had to  be
considered  from the normal business of commercial point  of
view.  It has to be reiterated that more or less all  States
used  to issue and sell lottery tickets, hence, the  lottery
tickets     from other States were     specifically  discriminated
against in the sense that there was differentiation  without
any  valid or justifiable reason. That would certainly    work
as deterrent. Trade, commerce and intercourse throughout the
territory  of India, come within art. 301 of  the  Constitu-
tion.  It  prevents imposing on goods  imported     from  other
States    a  tax to which similar goods in the State  are     not
subject so as to discriminate between the goods so  imported
and  goods produced locally. In that light the    decision  in
Anraj’s case has to be understood.
The     cases    of India Cement & Ors. v.  State  of  Andhra
Pradesh     &  Ors., (supra); Weston Electronics  v.  State  of
Gujarat & Ors., (supra) and West Bengal Hosiery Assn. & Ors.
v. State of Bihar & Anr., (supra) were cases where there was
a naked blanket preference in favour of locally manufactured
goods as against goods coming from outside the State.  These
cases,    as we read these, dealt with a conferment of  exemp-
tion  without any reason or concession in favour of  indige-
nous  manufactured goods which was not available in  respect
of the goods imported into that State. In case, however,  of
U.P. as well as State of Punjab the provisions which we have
examined, proceeded on a different basis. In these cases, it
cannot be suggested, in our opinion, that there is discrimi-
nation against goods manufactured outside the State. In case
of  Punjab an Overwhelmingly large number of local  manufac-
turers of similar goods are subject to sales tax and, there-
fore,  the general statement that the  manufacturers  within
the State are favoured against the manufacturers outside the
State,    is  incorrect. Under the notifications    in  case  of
Punjab,     only newly set up units are eligible to  claim     the
benefits thereunder for a limited period of 5 years and that
also only if they strictly comply with the terms and  condi-
tions set out in the notification.
It    has to be reiterated that sales tax laws in all     the
States    provide for exemption. It is well-settled  that     the
different entries in lists I, II and III of the 7th Schedule
deal  with  the fields of legislation, and these  should  be
construed  widely,  liberally and  harmoniously.  And  these
entries have been construed to include ancillary or inciden-
tal  power.  Power  to grant exemption is  inherent  in     all
taxing    legislations.  Economic     unity is  a  desired  goal,
economic equilibrium and prosperity
757
is  also the goal. Development on parity is one of the    com-
mitments of the Constitution. Directive principles enshrined
in  articles 38 & 39 must be harmonised with economic  unity
as  well  as economic development of  developed     and  under-
developed  areas. In that light on art. 14 of the  Constitu-
tion,  it is necessary that the prohibition in art. 301     and
the  scope  of art. 304(a) & (b) should     be  understood     and
construed. Constitution is a living organism and the  latent
meaning of the expressions used can be given effect to    only
if a particular situation arises. It is not that with chang-
ing times the meaning changes but changing times  illustrate
and  illuminate     the meaning of the  expressions  used.     The
connotation  of     the expressions used takes  its  shape     and
colour in evolving dynamic situations. A backward State or a
disturbed  State  cannot with parity engage  in     competition
with  advanced    or developed States. Even  within  a  State,
there  are often backward areas which can be developed    only
if some special recentives are granted. If the incentives in
the  form  of subsidies or grant are given to  any  part  of
units  of a State so that it may come out of its limping  or
infancy     to  compete  as equals with others,  that,  in     our
opinion,  does not and cannot contravene the spirit and     the
letter    of Part XIII of the Constitution. However,  this  is
permissible only if there is a valid reason, that is to say,
if there are justifiable and rational reasons for  differen-
tiation.  If there is none, it will amount to  hostile    dis-
crimination. Judge in this light, despite the submissions of
Mr.  Sanjay  Parikh and Mr. Vaidyanathan, we are  unable  to
accept    the contentions that the petitioners sought to    urge
in this application.
The next petition is W.P. No. 1124/88–Computer Graphics
(P)  Ltd. & Anr. v. Union of India & Ors., which  challenges
the concession given in favour of manufacturers in U.P.     and
Goa.  The same contentions were reiterated for    the  reasons
discussed  hereinbefore. We are unable to accept this  peti-
tion.  It  may be relevant to refer  to     Associated  Tanners
Vizianagram, A. P. v. C.T. 0., Vizianagram, Andhra Pradesh &
Ors.,  [1986]  1  SCR 969 where it was stated  that  when  a
taxing    statute     was not imposing rates of tax    on  imported
goods  different  from rates of tax  on     goods    manufactured
locally,  art. 304 had no application. In case an  exemption
was  granted applying the same rate the resulting tax  might
be somewhat higher but that did not contravene the  equality
clause contemplated by art. 304.
In the instant writ petition in view of the terms of the
notification  impugned and the facts and  the  circumstances
stated    in the affidavit of the State Government as well  as
the  interveners, Goa and Pondicherry,    being  comparatively
under-developed in electronic industry, in
758
our  opinion, it cannot be said that there was violation  of
either    Part XIII of the Constitution or Article 14  of     the
Constitution. This application must also, therefore, fail.
Writ petition No. 70/89–Spartek Ceramics India Ltd.  v.
Union  of  India & Ors., under art. 32 also  challenges     the
notification  under the Central Sales Tax Act and  the    U.P.
Act  as     mentioned hereinbefore. In the state  of  facts  as
appearing, this petition also fails. We have considered     the
submissions  and the statements made by the  interveners  in
these matters. Writ Petition No. 761/89–Weston     Electronics
Ltd.  &     Anr. v. State of Punjab & Anr.,  dealing  with     the
notifications  issued  by the State of    Karnataka  and    writ
petition  No. 1140/88–M/s Survo Udyog Pvt. Ltd. &  Anr.  v.
State  of Bihar & Anr., deal with the same  controversy     and
with  similar  notification. In view of the  averments    made
which we have examined in detail on behalf of the  concerned
State  Governments  in the light of the principles  we    have
reiterated before, we are of the opinion that the  notifica-
tions impugned cannot be challenged and the petition  cannot
succeed.
We have also considered writ petition No. 10  16/88–M/s
Disco Electronics Ltd. & Anr. v. State of U.P. & Others, and
in  light of the facts and the circumstances and  the  aver-
ments  made in the background of the principles     reiterated,
we  are     unable     to sustain the challenge  to  the  impugned
notifications.    In  these matters we had  the  advantage  of
having    the views of the interveners and we have  considered
the submissions made on their behalf.
In the aforesaid light the intervention applications are
allowed,  submissions  considered  and    the  aforesaid    writ
petitions  are    dismissed but in the facts and    the  circum-
stances of the case, there will be no order as to costs.
Y.   Lal                       Petitions
dismissed.
759

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