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Analysis of Atiabari Tea Co Ltd. v/s The State of Assam

Analysis of Atiabari Tea Co., Ltd. v. The State of Assam And Others [AIR 1961 SC 232]

The case relates to interpretation of Article 301 of the constitution. Article 301 enacts a general rule that trade, commerce and intercourse throughout the territory of India shall be free. The object of this article in our federal constitution was 1).to achieve the free flow of goods for trade, commerce and intercourse without any internal borders between the states, 2).to gain a sustaining force for the stability of the cultural and political unity of the federal polity, so that the country should function as the single economic unit devoid of any internal barriers. The scope and content of Article 301 depends on the interpretations of three expressions used therein, viz., 'trade, commerce and intercourse,' 'free' and 'throughout the territory of India'.

The framers of the Indian constitution, instead of leaving the idea of 'intercourse' to be implied by the process of judicial pronouncements, expressly incorporated the same in Article 301. Though, the words “trade and commerce” have been broadly interpreted. The said case is one such case where the words “trade and commerce” were interpreted along with interpretation of other aspects.

An Overview of Article.301-
The intention of the constitutional makers was to have constitutional sanction and not merely a legislative sanction for the promotion and protection of the economic unity and integrity of the trade and commerce of the country. They were also cautious of the fact that internal trade should not be entangled in the political controversies of the vested interests. They wanted the trade and commerce within the country to be free so that the country’s economy functions as a single economic unit without any restrictions or barriers as to internal trade and commerce. Economic unity of India is one of the constitutional aspirations and safeguarding its attainment and maintenance of that unity are the objectives of the Indian Constitution. The Constitutional framers were well aware that the State legislatures would be subjected to local and regional pulls and in order to ensure that the a vested interest would not hamper the economic integrity of India, they had inserted Article 301-305 to the Indian Constitutional provision.

Now, from the plain reading of Article 3012, it is clear that it emphasizes on three things viz., ‘trade, commerce and intercourse’, ‘free’, ‘throughout the territory of India’. The interpretation of this section is very wide and also takes within its scope all the internal trade and commerce whose intercourse within the territory of India shall be free. To understand further importance of the trade and commerce, we need to look at the Commerce Clause in the US Constitution. It is to be seen that in the US Constitution there is no use of the word intercourse in the provision. According to the judicial interpretation of the clause in Gibbons v. Ogden, the Supreme Court had opined that “commerce undoubtedly is traffic, but it is something more: it is intercourse’. Hence, the Court had opined that the word commerce included within its ambit intercourse, which was not expressly provided in the provision
Article 301 says that trade, commerce and intercourse throughout the territory of India shall be free. And “this article should be understood in the context of an orderly society and it must recognize the need and legitimacy of some degree of regulatory control irrespective of the restrictions imposed by other articles in part XIII. Thus, Regulatory measures and compensatory taxes for the use of trading facilities do not come within the purview of restrictions contemplated by article 301.

It is pertinent to bear in mind that all taxation is not necessarily an impediment or a restraint in the matter or trade, commerce and intercourse. Instead of being such impediments or restraints, they may, on the other hand, also provide for improvement of different kinds of means of transport, for example, in cane growing areas, unless there are good roads, facility for transport of sugarcane from sugarcane fields to sugar mills may be wholly lacking or insufficient. In order to make new roads as also to improve old ones, cess on the grower of cane or others interested in the transport of this commodity has to be imposed. It is the tax thus realized that makes it feasible for opening new means of communication or for improving old ones. It cannot therefore, be said that taxation in every case must mean an impediment or restraint against free flow of trade and commerce. The Supreme Court in the Atiabari Tea Co. case held that taxes, which hampered free flow of trade and commerce, contravened Part XIII and, therefore were unconstitutional. The Court qualified this decision in the Automobile Transport case and ruled that regulatory and compensatory taxes did not come within the purview of Article 301.

Thus, a measure which operates on trade, commerce and intercourse directly and immediately may not be violative of article 301 if it is regulatory or compensatory in the form of imposition of taxes for the use of trading facilities. For the sake of convenience I have discussed the trade, commerce and intercourse in one section of my paper. In the other part I have discussed in brief about taxes being or not an impediment of trade, commerce and intercourse and at the end - what are regulatory and compensatory taxes and how do they not violate the article 301 with the help of case laws.

Scope & Content of Article 301:
Article 301 enacts a general rule that trade, commerce and intercourse throughout the territory of India shall be free. The object of this article in our federal constitution was 1).to achieve the free flow of goods for trade, commerce and intercourse without any internal borders between the states, 2).to gain a sustaining force for the stability of the cultural and political unity of the federal polity, so that the country should function as the single economic unit devoid of any internal barriers. The scope and content of Article 301 depends on the interpretations of three expressions used therein, viz., 'trade, commerce and intercourse', 'free' and 'throughout the territory of India'.

The framers of the Indian constitution, instead of leaving the idea of 'intercourse' to be implied by the process of judicial pronouncements, expressly incorporated the same in Article 301. The words trade and commerce have been broadly interpreted. In most of the cases, the accent has been on the movement aspect. For example, in the Atiabari Tea Co. v. State of Assam case, the court emphasized: whatever else it (Art.301) may or may not include, it certainly includes movement of trade which is of the very essence of all trade and is its integral part," and, further, that "primarily it is the movement part of the trade which Article 301 has in its mind, that the movement or the transport of the trade must be free, and that it is the free movement or the transport of goods from one part of the country to the other that is intended to be saved.

The word 'free' in Article 301 cannot mean an absolute freedom or that each and every restriction on trade and commerce is invalid. The Supreme Court has held in Atiabari that freedom of trade and commerce guaranteed by Article 301 is freedom from such restrictions as directly and immediately restrict or impede the free flow or movement of trade. Therefore Article 301 would not be attracted if a law creates an indirect or inconsequential impediment on trade, commerce and intercourse which may be regarded as remote. The word 'free' in Article 301 does not mean freedom from regulation. As has been observed by the supreme court: "there is a clear distinction between laws interfering with freedom to carry out the activities constituting trade and laws imposing on those engaged therein rules of proper conduct or other restraints directed to the due and orderly manner of carrying out the activities." Regulation of hours, equipment, weight, size of load, lights, traffic laws are some examples of regulatory laws which are not hit by Article 301.

The view is definitely held now that Article 301 applies not only to interstate but also to intrastate trade and commerce, i.e. trade within the state. Therefore, it means freedom of trade commerce and intercourse is there within the state and/or outside the state and/or any part within the territory of India.

Article 302 authorizes Parliament to impose restrictions in the public interest. Article 303 prohibits state preference or discrimination on regional basis, but makes an exception for Parliament in order to meet a situation of scarcity in any part of the country. Article 304 prohibits the states from making any discrimination against goods 'imported' from other states in taxing them. It only authorizes the states to impose 'reasonable' restrictions in the public interest with the sanction of the President. Article 305 removes the laws, as they existed on January 26, 1950, and later at the commencement of the Fourth Amendment, 1955, from the operation of Article 301 and 303. Article 306, now repealed, dealt with the former Native States authorizing them to levy import-export duties on the goods to and from the rest of the country in accordance with the terms of their accession. Article 307 envisages an authority appointed by Parliament to carry out the objectives of the first four Articles of this Part. No such authority has ever been constituted. Part XIII allows reasonable restrictions imposed by the states in the 'public interest.’ One is strongly inclined to think that a tax is always in the public interest and, therefore, the prohibition does not apply to it.

When does a tax violate Art.301?
Regulatory And Compensatory Tax:
Tax is a compulsory Contribution and is the sovereign attribute of the State. It is a branch of Public Finance of every Economy. Taxation is collection of revenue and Public expenditure is the application of the revenue so collected. Tax is necessary for the Functioning of Every Economy of the World, without it all the duties and the obligations of the state will be undone and power unused.

To smoothen the movement of interstate trade and commerce, the state has to provide many facilities by way of roads etc.. The concept of regulatory and compensatory taxation has been evolved with a view to reconcile the freedom of trade and commerce guaranteed by Art. 301 with the need to tax such trade at least to the extent of making it pay for the facilities provided to it by the state, e.g., a road net-work. If a charge is imposed not for the purpose of obtaining a proper contribution to the maintenance and upkeep of the road, but for the purpose of adversely affecting trade or commerce, then it would amount to, a restriction on the freedom of trade, commerce and intercourse.
The concept of regulatory and compensatory taxation has been applied by the Indian courts to the state taxation under entries 56 and 57 of List II.

Judicial Pronouncements

Atiabari Tea Co. V. State of Assam[1] :
Facts: A tax levied by the State of Assam on the carriage of tea by road or inland waterways was held bad for "the transport or movement of goods is taxed solely on the basis that the goods are thus carried or transported, and thus "directly affects the freedom of trade as contemplated by Art. 301."

The Supreme Court took the view that the freedom guaranteed by Art. 301 would become illusory if the movement, transport, or the carrying of goods were allowed to be impeded, obstructed or hampered by the taxation without satisfying the requirements of Art. 302 to 304. The court did not take into consideration the quantum .of tax burden, which by no means was excessive. Simply because the tax was levied on 'movement' of goods, from one place to another, it was held to offend Art. 301.

The view propounded in Atiabari was bound to have great adverse effect upon the financial autonomy of the states. It would have rendered their taxing power under entries 56 and 57, List II.

Accordingly, the matter came to be re-considered by the Supreme Court in, Automobile Transport V. Rajasthan[2]:
Facts: The State of Rajasthan had levied a tax on motor vehicles ( Rs. 60 on a motor car and Rs. 2000 on a goods vehicle per year) used within the state in any public place or kept for use in the state. The validity of the tax was challenged. Taking the view that freedom of trade and commerce under Art. 301 should not unduly cripple state autonomy, and that it should be consistent with an orderly society, the Supreme Court now ruled that regulatory measures and compensatory taxes for the use of trading facilities were not hit by Art. 301 as these did not hamper, but rather facilitated, trade, commerce and intercourse.

Issue: A working test to decide whether a tax is compensatory or not would be to enquire whether the trades people are having the use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities? A tax does not cease to be compensatory because the precise or specific amount collected is not actually used in providing facilities.

The concept of compensatory tax evolved in this case was something new as in Atiabari, the court had dismissed the argument that the money realized through the tax would be used to improve roads and waterways rather curtly by saying that there were other ways, apart from the tax in question, to realize the money, and that if the said object was intended to be achieved by levying a tax on the carriage of goods, the same could be done only by satisfying Art. 304(b).

Decision: The court ruled that Art.301 did not hit the tax, as it was a compensatory tax having been levied for use of the roads provided for and maintained by the state. Thus, to this extent, the majority view in Atiabari was now overruled by Automobile.

Since then the concept of regulatory and compensatory taxes has become established in India with reference to entries 56 and 57, List II, and the concept has been applied in several cases, and progressively the courts have liberalized the concept so as to permit state taxation at a higher level.

Further in the case of State of Mysore V H. Sanjeevah, section 39 of the Mysore forest Act was in question as violative of the freedom under Art. 301. It was held by the Court that the provision is invalid on the ground that it totally prohibits the movement of forest produce during the period between Sunset and Sunrise is prohibitory of right to transport Forest produce. The court held that the rule cannot be called valid because A rule regulating transport in its essence, certain to certain conditions devised to promote transport; such a rule aims at making the transport orderly, so that it does not harm other person carrying the same vocation, and enables transport to function for the public good.

G.K. Krishnan v. State of Tamil Nadu[3]:
Facts: The State of Tamil Nadu increased the motor vehicles tax from Rs. 30 to 100 per seat per quarter and this was challenged as being violative of Art. 301

Issue:
whether a non-discriminatory tax levied by a state should be regarded as a restriction on trade and commerce because of the feeling that this would curtail state autonomy to levy taxes falling in the state legislative sphere?
But the Supreme Court upheld the tax. The court stated, "A compensatory tax is not a restriction upon the movement part of trade and commerce." The tax should not go beyond "a proper recompense to the State for the actual use made of the physical facilities provided in the shape of a road." In the instant case, the tax collections amounted to over Rs. 16 crores while the expenditure for the year amounted to Rs. 19.51 crores and this amount did not include the grants to local governments for the repair and maintenance of roads within their jurisdiction. The tax was thus held to be compensatory and hence valid.

The Supreme Court further liberalized the state taxing power by upholding a state tax on passengers and goods carried on national highways.

Bolani Iron Ores v. State of Orissa[4]:
A compensatory tax is levied to raise revenue to meet the expenditure for making roads, maintaining them and for facilitating the movement and regulation of traffic. The Supreme Court held that taxation under entry 57, List II, couldn’t exceed the compensatory nature, which must have some nexus with the vehicles using the roads. The regulatory and compensatory nature of the tax is that taxing power should be used to impose taxes on motor vehicles, which use the roads in the state or are kept for use thereon.

International Tourist Corporation v. State of Haryana[5]:
Facts: The state of Haryana levied a tax on transporters plying motor vehicles between Delhi and Jammu & Kashmir. They use national highway, pass through Haryana without picking up or setting down any passenger in the state. The responsibility for constructing and maintaining of national highways rests on the Centre. It was therefore argued by the transporters that the tax could hardly be regarded as compensatory, but the court rejected the contention.

The Supreme Court said that what is necessary to uphold such a tax is the existence of a specific, 'identifiable' object behind the levy and a 'sufficient nexus' between the 'subject and the object of the levy.' The court further said that a state incurs considerable expenditure for maintenance of roads and providing facilities for transport of goods and passengers. Even in connection with national highways, a state incurs considerable expenditure not directly by constructing or maintaining them but by facilitating the transport of goods and passengers along with them in various ways such as lighting, traffic control, amenities for passengers, halting places for buses and trucks. That part of a national highway which lies within municipal limits is to be developed and maintained by the state. There is thus sufficient nexus between the tax and the passengers and goods carried on the national highways to justify the imposition of the said tax. Decision: the tax was held to be valid.

Malwa Bus Service v. State of Punjab[6]:
Facts: In this case, in the year 1981, the State of Punjab substantially increased the rate of tax on every stage carriage plying for hire and transport of passengers. The rates adopted were Rs. 500 per seat per year subject to a maximum of Rs. 35,000 per bus irrespective of the distance over which it operated daily. According to the budget figures for 1981-82, the revenue receipts of the government from motor vehicles tax was Rs. 50 crores as against the expenditure of Rs. 34 crores. The tax was challenged on the ground that it was not compensatory as the government was using it for augmenting its general revenues, but the court upheld the tax as compensatory.
In the instant case, the budget expenditure on the roads and bridges did not include the expenditure incurred by the state on other heads connected with road transport, such as, the directorate of transport, transport authorities, provision for bus stands, lighting, traffic police, grants to local authorities. Taking all this expenditure into account, it became clear that a substantial part of the levy on motor vehicles was being spent annually on providing facilities to motor vehicles operators. The court also pointed out that in later years, the government expenditure on roads and bridges had substantially increased. It also said that the figures of income and expenditure for only one year might present a distorted picture. In this case, cumulative figures of receipts and expenditure for nine years (1973-1982) presented a different picture. Describing the principle underlying such a tax, the court said: "what is essential is that the burden should not disproportionately exceed the cost of the facilities provided by the state."

Decision: Therefore the tax imposed by the state of Punjab was held to be valid.

Further in case of Meenakshi V State of Karnataka[7] , the Court upheld the increase in the passenger tax on the vehicles of Bus Operators even though the imposition was made to compensate the loss of revenue due to abolition of Octoroi.In the course of exempting the tax laws from the purview of Art. 301. The Court has even relaxed the limitation of Art. 304(a). Upholding the validity of State Notifications giving tax exemptions to or imposing lower rate of tax on certain goods made within the State, the Court held that the notifications do not violate Art. 301 and therefore do not violate Art. 304(a) also.

Utility of Atiabari Tea co. case today
Though, Atiabari Tea co. and Automobile Transport (Rajasthan) ltd. is considered landmark judgement when it comes to interpretation of part xiii of the constitution, the cases left a lot of questions unanswered, some of such questions were identified in Jindal stainless v. State of Haryana[8] by 5 judge constitution bench.

The Bench of the Court in Jindal Stainless v. State of Haryana, dated 16th April 2010, states:
“Applying the tests laid down in the aforestated two cases, i.e., Keshav Mills Co. Ltd. and Central Board of Dawoodi Bohra Communit , we find that on number of aspects a larger Bench of this Court needs to revisit the interpretation of Part XIII of the Constitution including the various tests propounded in the judgments of the Constitution Bench of this Court in the aforestated two cases, namely, Atiabari Tea Co. and Automobile Transport (Rajasthan) Limited. Some of these aspects which need consideration by larger Bench of this Court may be briefly enumerated. Interplay/interrelationship between Article 304(a) and Article 304(b). The significance of the word "and" between Article 304(a) and (b). The significance of the non obstante clause in Article 304. The balancing of freedom of trade and commerce in Article 301 vis-`-vis the States' authority to levy taxes under Article 245 and Article 246 of the Constitution read with the appropriate legislative Entries in the Seventh Schedule, particularly in the context of movement of trade and commerce. Whether Article 304(a) and Article 304(b) deal with different subjects? Whether the impugned taxation law to be valid under Article 304(a) must also fulfil the conditions mentioned in Article 304(b), including Presidential assent? Whether the word "restrictions" in Article 302 and in Article 304(b) includes tax laws? Whether validity of a law impugned as violative of Article 301 should be judged only in the light of the test of non-discrimination? Does Article 303 circumscribe Article 301? Whether "internal goods" would come under Article 304(b) and "external goods" under Article 304(a)? Whether "per se test" propounded in Atiabari's case should or should not be rejected? Whether tax simpliciter constitutes a restriction under Part XIII of the Constitution? Whether the word "restriction" in Article 304(b) includes tax laws? Is taxation justiciable? Whether the "working test" laid down in Atiabari makes a tax law per se violative of Article 301? Inter-relationship between Article 19(1)(g) and Article 301 of the Constitution? These are some of the questions which warrant reconsideration of the judgments in Atiabari Tea Co. Ltd and Automobile Transport (Rajasthan) Ltd. by a larger Bench of this Court… For the aforestated reasons, let this batch of cases be put before Hon'ble Chief Justice of India for constituting a suitable larger Bench for reconsideration of the judgments of this Court in Atiabari Tea Co. and Automobile Transport (Rajasthan) Ltd. (supra).”

Then in case of Jaiprakash Associates Ltd. & Others vs. State of M.P. & Others where the Hon’ble Court of Five Judges Bench observed the unanswered aspects of the said case as under :
"….. When question, therefore, which we need to answer, in the first instance, before going into the validity of each of the State Laws impugned before us is whether after 49 years, this Court should revisit the tests propounded in the earlier decisions in the case of Atiabari Tea Co. Ltd. (1961) 1 SCR 809 (5 Judge Bench decision) and Automobile Transport (Rajasthan) Ltd. 1963) 1 SCR 491 (7 Judge Bench decision)? At this stage, it may be mentioned that the States whose Entry Tax Laws have been challenged have contended before us that the tests propounded in Atiabari Tea Co. Ltd. and Automobile Transport (Rajasthan) Ltd. have failed to strike a balance between the "freedom of trade and commerce" under Article 301 of the Constitution and the States’ authority to levy taxes under Articles 245 and 246 of the Constitution read with the appropriate Legislative Entries in the Seventh Schedule to the Constitution of India. The states, therefore, sought revisiting of the aforestated two decisions in Atiabari Tea Co. Ltd. and Automobile Transport (Rajasthan) Ltd. by a larger Bench."
That it was necessary to examine the interpretation of Part XIII of the Constitution including the various tests propounded in the earlier judgments of the Constitutional Bench and was thus referred to "put up this batch of cases before Hon’ble Chief Justice of India for constituting a suitable larger Bench for reconsideration of the judgments of this Court in Atiabari Tea Co. and Automobile Transport (Rajasthan) Limited". One wonders that while the wheels of justice slowly churn, what happens to the interest meter that is continuously ticking.

CONCLUSION
The position as it stands today is not as vague as it was during the time of the Atiabari and the Automobile cases. We must reconcile the ratio in these two landmark cases. From the discussion of the Supreme Court in the said cases, the following salient features can be noticed:
· The fundamental right under Article 19(1)(g) guarantees that every citizen would be entitled to the right to carry on trade, occupation or profession subjected to the restrictions as the State may employ in public interest. Article 19(1)(g) protects the freedom of each individual citizen to practice any profession or carry on any occupation, trade or business. This is a right distinct from Article 301 which relates to trade, commerce or intercourse both with and within the State.[9]

· Measures that operate on freedom of trade and commerce remotely and indirectly do not impede Article 301 and need not be justified under the provisions of Article 304 (b).
· Measures which operate directly and immediately on the freedom of trade, commerce and intercourse may be violative of Article 301, unless it is not violative of the reasonableness aspect guaranteed by Article 304 (b).

· Lastly, those measures having direct and immediate effect will not come under the restrictive provisions of Article 301 provided that these measures are compensatory or are regulatory. The Supreme Court in the Automobile case has read this additional gloss into the Article 301.

To reconcile the freedom of trade and commerce and the power of taxation, the Supreme Court has evolved the concept of regulatory and compensatory tax. This means that Article 301 cannot stand in a way of a regulatory or compensatory tax. The concept of regulatory and compensatory tax has been applied by Indian Courts mainly to the State taxation under Entries 56 and 57 of List II. The need for imposing this type of a tax is to impose a levy on trade and commerce at least to the extent of making it pay for the facilities provided by the State, for example, a road network and other infrastructural facilities. The reason for this is that taxes of this nature facilitate rather than hamper, the flow of trade and commerce.
It can be thus stated that the freedom of trade and commerce can be infringed in any manner except for the situations when regulatory and compensatory measures are imposed. Otherwise, restrictions imposed on the freedom of trade and commerce may take the form of fiscal as well as non-fiscal measures. Thus, there is a violation of this freedom only when a legislative or executive act operates to restrict trade, commerce and intercourse, directly and immediately, as distinct from creating some indirect or inconsequential impediment that may be regarded as remote.

Only taxes that directly and immediately restrict trade will be in contravention to Article 301. When a tax is imposed solely on the basis that goods are carried or are transported, it would affect the freedom of trade and commerce, or when a tax that discriminates between goods of one State and another is imposed, it would violate Article 301.Further it has to be concluded that only those taxes that directly hamper the trade or business will be void, otherwise no tax can be struck down as being invalid of Article 301. Laws, which are purely regulatory and compensatory in nature, are not violative of the freedom so guaranteed.

End-Notes
[1] AIR 1961 SC 232
[2] AIR 1958 Raj 114
[3] 1975 SCR (2) 715
[4] 1975 SCR (2) 138
[5] 1981 SCR (2) 364
[6] 1983 SCR (2)1009
[7] AIR 1983 SC 1283
[8] (2006) 283 ITR 1 (SC) (BCAJ)
[9] M.R.F Ltd. v. Inspector Kerala Government AIR 1999 SC 188

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