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
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
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
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.
Atiabari Tea Co. V. State of Assam :
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:
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:
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
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:
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:
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:
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
Further in case of Meenakshi V State of Karnataka , 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 by 5 judge
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
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
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.
· 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.
 AIR 1961 SC 232
 AIR 1958 Raj 114
 1975 SCR (2) 715
 1975 SCR (2) 138
 1981 SCR (2) 364
 1983 SCR (2)1009
 AIR 1983 SC 1283
 (2006) 283 ITR 1 (SC) (BCAJ)
 M.R.F Ltd. v. Inspector Kerala Government AIR 1999 SC 188