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PETITIONER: FIRM A. T. B. MEHTABMAJID AND CO.

       Vs.

RESPONDENT: STATE OF MADRAS AND ANOTHER

DATE OF JUDGMENT: 22/11/1962

BENCH: DAYAL, RAGHUBAR BENCH: DAYAL, RAGHUBAR DAS, S.K. KAPUR, J.L. SARKAR, A.K. HIDAYATULLAH, M.

CITATION:  1963 AIR  928            1963 SCR  Supl. (2) 435  CITATOR INFO :  RF         1964 SC1006  (9,14)  R          1964 SC1729  (4,8,10,13,32)  E          1968 SC 599  (14)  R          1969 SC 147  (8,18,26)  F          1969 SC 504  (6)  R          1971 SC 870  (13)  RF         1974 SC2344  (1)  D          1977 SC 548  (4,6)  RF         1977 SC 879  (13,14,19,23)  R          1986 SC  63  (36)  D          1986 SC 515  (104,106)  F          1987 SC1922  (7,10,12)  RF         1988 SC 740  (19)  R          1988 SC1814  (6)  R          1988 SC2038  (4)  D          1989 SC1949  (12)  R          1989 SC2015  (8)  E&D        1990 SC 820  (14,18)

ACT: Sales  Tax-Tanned hides and skin imported from  outside  and sold inside the State-Hides and skins tanned and sold inside the State-Sales Tax higher on the latter-If  discriminatory- Old  rule Substituted by new rule-Old rule does  not  revive when  new  rules  declared  invalid-Constitution  of  India, Arts.301, 304-Madras General Sales Tax Act (IX Of 193),  ss. 3,5, 19.Madras General Sales Tax Rules, r. 16.

HEADNOTE: This  is a petition under Art. 32 of the  Constitution,  the petitioners  are dealers in hides and skins in the State  of Madras.  The impugned sales tax assessment relates to  turn- over  of  sales  of tanned hides and skins  which  had  been obtained  from  outside  the  State  of  Madras.   The  main contention  of the petitioners is that the tanned hides  and skins  imported from outside and sold inside the State  are, under  r. 16 of the Madras General Sales Tax Rules,  subject to  a higher rates of tax than the tax imposed on hides  and skins   tanned   and  sold  within  the   State   and   this

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discriminatory  taxation  offended  Art.  304  (a)  of   the Constitution. The  respondents  contentions were (a) sales tax  doe,;  not come within the purview of Art. 304 (a)’ as it is not a  tax on  the  import  of goods at the point  of  entry,  (b)  the impugned 436 rule  is  not a law made by the State legislature,  (c)  the impugned  rule by itself does not impose the tax  but  fixes the single point at which the tax is imposed by ss. 3 and  5 of  the Act is to be levied. (d) The impugned rule  was  not made with an eye on the place of origins of the goods. Held,  that it is now well settled 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. Sales  Tax, of the kind under consideration, cannot be  said to be a measure, regulating any trade, or a compensatory tax levied  for the use of trading facilities, Sales  Tax  which has the effect of discriminating between goods of one  State and goods of another, may affect the free flow of trade  and it will then offend against Art. 301 and will be valid  only if it comes within the terms of Art. 304 (a). Atiabari  Tea Co. Ltd. v. State of Assam, [1961] 1 S. C.  R. 809,   Automobile  Transport,Rajasthan  Ltd.  v.  State   of Rajasthan, [1963] 1 S. C. R. 491, followed. Article 304 (a) allows the legislature of a State to  impose taxes  on  goods  imported from other States  and  does  not support  the contentions that the imposition must be at  the point of entry. Section 19 (5) of the Madras General Sales Tax Act  provides that  the  ’rules made thereunder shall have  effect  as  if enacted in the Act and r. 16 of the Madras General Sales Tax Rules would fall within a law made by the State Legislature. What  that  rule  provides  is  a  step  necessary  fur  the imposition  of tax in view of ss. 3 and 5 and therefore  the impugned  rule is a part of the enactment which imposes  the tax.   The fact that the impugned rule was made in  view  of ss. 385, in order to prescribe the single point in series of sales does not justify its discriminatory character, Rule 16 (2) discriminates against the imported hides or skins  which had  been  purchased  or tanned  outside  and  therefore  it contravenes Art. 304 (a) of the Constitution. Once  an  old rule has been substituted by a  new  rule,  it ceases  to  exist and it does not get revived when  the  new rule is held invalid. The tax imposed in the present case has not been imposed  by misconstruing the provisions of a valid Act but it has  been imposed without jurisdiction by reason of the invalidity  of r. 16.  437 Ujjam  Bai  v.  State  of  U. P.,  [1963]  1  S.C.  R.  778, distinguished.

JUDGMENT: ORIGINAL JURISDICTION : Petition No. 147 of 1959. (Under  Article  32  of the Constitution of  India  for  the enforcement of Fundamental Rights). S.T. Desai and S. Venkatakrishnan, for the petitioner. A.Banganadham  Chetty and A. V. Rangam,  for  respondents Nos.  1 and 2. R. V. S. Mani, for the intervener. 1962.   November,  22.   The  judgment  of  the  Court   was

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delivered by RAGHUBAR  DAYAL,  J.-This  petition under  Art.  32  of  the Constitution raises the question of the validity of r. 16 of the Madras General Sales Tax (Turnover & Assessment)  Rules, 1939,  hereinafter called the rules.  The impugned rule  was published  on September 7, 1955, and was substituted in  the place  of old r. 16.  The new rule was to be effective  from April 1, 1955. The  petitioner  is a dealer in hides and  skins.  He  sells hides and skins tanned outside the State of Madras, as  well as those tanned inside the state.  The Deputy Commercial Tax Officer,  1,  Moore Market Division,  Madras,  assessed  the petitioner  to sales tax for the year 1955-56 on a  turnover of  Rs.  29,89,624-15-11.   Out of this a  turnover  of  Rs. 28,10,625-2-0  represented sales of tanned hides  and  skins which had been obtained from outside the State of Madras. Sales tax was levied on hides and skins under the provisions of the Madras General Sales Tax Act, 438 1939 (Act IX of 1939), hereinafter called the Act. Section 3 is  the charging section and its relevant portions  read: "3.  (1)  Subject to the provisions of this Act,  (a)  every dealer  shall pay for each year a tax on his total  turnover for such year; and (b)  the  tax shall be calculated at the rate of three  pies for every rupee in such turnover :- x          x           x          x         x" Section 5 of the Act provides for exemptions and  reductions of tax in certain cases.  Clause (vi ) thereof provides that the  sale  of hides and skins, whether tanned  or  untanned, shall  be  liable to tax under section 3,  sub-section  (1), only  at  such  single  point in  the  series  of  sales  by successive dealers as may be prescribed. Section  19 empowers the State Government to make  rules  to carry out the purposes of the Act. The  new  rule  16, whose validity  is  challenged  for  the petitioner, reads : "16.(1)  In the case of untanned hides and/or skins the  tax under  section 3(1) shall be levied from the dealer  who  is the  last  purchaser in the State not exempt  from  taxation under  section 3(3) on the amount for which they are  bought by him. (2)  (i)  In  the  case of hides or skins  which  have  been tanned outside the State the tax under section 3(1) shall be levied from the dealer who in the State is the first  dealer in  such  hides  or skins not  exempt  from  taxation  under section 3(3) on the amount for which they are sold by him. 439 (ii)In  the case of tanned hides or skins which  have  been tanned within the State, the tax under section 3(1) shall be levied  from a person who is the first dealer in such  hides or skins not exempt from taxation under section 3(3) on  the amount for which they are sold by him: Provided  that, if he proves that the tax has  already  been levied  under sub-rule (1) on the untanned hides  and  skins out  of which the tanned hides and skins had been  produced, he shall not be so liable. (3)The burden of proving that a transaction is not  liable to taxation under this rule shall be on the dealer." It  is contended for the petitioner that the effect of  this rule is that tanned hides or skins imported from outside the State and sold within the State are subject to a higher rate of  tax  than the tax imposed on hides or skins  tanned  and sold  within  the  State-,  inasmuch as  sales  tax  on  the importer]  hides  or skins tanned outside the  State  is  on

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their  sale  price while the tax on hides  or  skins  tanned within the State, though ostensibly on their sale price  is, in  view of the proviso to cl. (ii) of sub-r. (2) of r.  16. really  on the sale price of these hides or skins when  they are   purchased   in  the  raw  condition   and   which   is substantially  less than the sale price of tanned  hides  or skins.   Further,  for  similar  reasons,  hides  or   skins imported from outside the State after purchase in their  raw condition and then tanned inside the State are also  subject to higher taxation than hides or skins purchased in the  raw condition  in the State and tanned within the State, as  the tax  on the former is on the sale price of the tanned  hides or  skins and on the latter is on the sale price of the  raw hides or skins.  Such a discriminatory taxation is said to 440 offend  the provisions of Art. 304(a) of  the  Constitution. Similar are the contentions for the interveners in the case. The  contentions for the respondents are Sales tax does  not come within the purview of Art. 304(a) as it is not a tax on the import of goods at the point of entry. (2) The  impugned rule  is  not a law made by the State Legislature.  (3)  The impugned rule, by itself, does not impose the tax, but fixes the sin-ale point at which the tax imposed by ss. 3 and 5 of the Act is to be levied. (4) The impugned rule was not  made with  an  eye on the place of origin of the goods but  as  a matter  of  necessity, in view of the  requirements  of  the statutory provisions to the effect that hides or skins,  raw or tanned, came within one category and that the tax on them could be levied at a single point only.  The impugned  rule, therefore, fixed that single point with respect to the  sale of raw hides or skins at the last purchase by the dealer  in the  State and with respect to the sale of tanned  hides  or skins at the first sale of such tanned hides or skin$ by the dealer in the State.  In the former case, the tax was levied on the price the purchaser paid while in the latter case  it was on the price at which the seller sold. Article  301 of the Constitution which provides  for  trade, commerce  and intercourse throughout the territory of  India to be subject to the other provisions of Part XIII, has been construed  by  this Court in Atiabari Tea Co.  Ltd.  v.  The State  of Assam and Others (1) and in  Automobile  Transport (Rajasthan) Ltd. etc. v. The State of Rajasthan and  Ors.(2) : The majority view in the Atiabari Tea Co. Case (1) which has been  accepted in the Automobile Transport Case (2)  is,  as expressed by Gajendragadkar, J., at p. 860 : "Thus considered we think it would be reasonable and  proper to hold that restrictions freedom (1) [1961] 1. S.C.R. 809. (2) [1963] 1 S.C.R. 491,  441 from  which  is  guaranteed  by  Art.  301,  would  be  such restrictions 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 immediately  restrict  trade  that  would  fall  within  the purview of Art. 301......... We arc therefore satisfied that in determining the limits of the width and amplitude 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 ?...... Our conclusion  therefore  is that when Art. 301  provides  that trade  shall  be free throughout the territory of  India  it means that the flow of trade shall run smooth and unhampered by any restriction either at the boundaries of the States or

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at any other points inside the States themselves.  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,  and  if any Act imposes any direct restrictions on the very movement of  such goods it attracts the provisions of Art.  301,  and its  validity  can  be sustained only if  it  satisfies  the requirements of Art. 302 or Art. 304 of Part XIII." In  the majority  judgment in the Automobile Transport  Case               (1) it was said at p. 1424 : "The  interpretation which was accepted by the  majority  in the  Atiabari Tea Co. Case is correct, but subject  to  this clarification.   Regulatory  measures or  measures  imposing Compensatory taxes for the use of trading facilities do  not come within the purview of the restrictions contemplated  by Art. 301." Earlier in the judgment it was observed, at p. 1422: "Such regulatory measures as do not impede (1)  [1963] 1 S.C.R. 491. 442 the   freedom  of  trade,  commerce  and   intercourse   and compensatory taxes for the use of trading facilities are not hit by the freedom declared by Art. 301.  They are  excluded from  the  purview  of the provisions of Part  XIII  of  the Constitution  for the simple reason that they do not  hamper trade, commerce and intercourse but rather facilitate them." Subba Rao J., concurred in this view and said at p. 1436 : "(1)  Art.  301 declares a right of free movement  of  trade without any obstructions by way of barriers, inter-State or,               intrastate, or other impediments operating  as               such  barriers.  (2) The said freedom  is  not               impeded, but, on the other hand, promoted,  by               regulations  creating conditions for the  free               movement    of   trade,   such   as,    police               regulations,  provision  for  services,  main-               tenance  of roads, provision  for  aerodromes,               wharfs etc., with or without compensation." It  is  therefore now well settled 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  regulatory  measures. Sales  tax, of the kind under consideration here, cannot  be said to be a measure regulating any trade or a  compensatory tax  levied for the use of trading facilities.   Sales  tax, which has the effect of discriminating between goods of  one State  and  goods of another, may affect the  free  flow  of trade  and it will then offend against Art. 301 and will  be valid only if it comes within the terms of Art. 304 (a). Article  304(a) enables the Legislature of a State  to  make laws affecting trade, commerce and intercourse.  It  enables the  imposition  of  taxes on goods  from  other  States  if similiar goods in the State are 443 subjected  to  similiar  taxes, so as  not  to  discriminate between the goods manufactured or produced in that State and the goods which are imported from others States.  This means that if the affect of the sales-tax on tanned hides or skins imported from outside is that the latter becomes subject  to a  higher tax by the application of the proviso to  sub-rule of  r. 16 of the Rules, then the tax is  discriminatory  and unconstitutional and must be struck down. We  do not agree with the contentions for  the  respondents. The contention that Art. 304 (a) is attracted only when  the impost  is  at the border, i.e., when the  goods  enter  the State  on  crossing the border of the State, is  not  sound. Art.  304(a)  allows the Legislature of a  State  to  impose

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taxes  on  goods  imported from other States  and  does  not support  the contention that the imposition must be  at  the point of entry only. Section  5  (vi) provides that the sale of hides  or  skins, whether tanned or untanned, shall be liable to tax under  s. 3(1)  only  at such single point in the series of  sales  by successive dealers as may be prescribed.  ’Prescribed’ means ’Prescribed by rules made under the Act.’ Rule 16 prescribes such  single point.  This rule was made by the  Governor  in the  exercise of power confer-red on him under s. 19 of  the Act and would therefore have statutory force.  In fact, sub- s. (5) of s. 19 provides that the rules shall have effect as if enacted in the Act.  We therefore do not agree that r. 16 is not a law which would fall within a law made by the State Legislature. It  is  true  that the impugned rule, by  itself,  does  not impose the tax, but fixes the single point at which the  tax imposed  by  ss.  3 and 5 is to be levied.   What  the  rule provides is a step necessary for the imposition of the  tax, in view of ss. 3 and 5 and therefore the impugned rule is  a part of the enactment which imposes the tax. 444 The  fact  that  the  impugned rule was  made  in  order  to prescribe  the  single  point  in the  series  of  sales  by successive  dealers  at which the tax on sale  of  hides  or skins  was to be levied, in view of ss. 3 and 5 of the  Act, does   not  justify  the  making  of  such  a   rule   which discriminates between the tax imposed on goods imported from outside the State and the goods produced or manufactured  in the State. Now,  the  only question that remains for  consideration  is whether  this  rule  discriminates between  hides  or  skins imported  from outside the State and those  manufactured  or produced in the State. Sub-rule  (1) of the rule deals with the sale of  raw  hides and  skins.   The tax is levied from the dealer who  is  the last  purchaser in the State.  Its vires is not  challenged. Clause (i) of sub-r. (2) provides for the levying of tax  on the  sale of hides and skins which had been  tanned  outside the  State.  The tax is levied from the dealer who.. in  the State,  is  the  first seller of such hide  or  skins.   The result  is that a dealer in hides or skins which  have  been tanned  outside the State has to pay the tax on  the  amount for which such hides or skins are sold by him.  Clause  (ii) of  this sub-rule is in identical terms with respect to  the sale of tanned hides or skins which have been tanned  within the  State.  The tax is to be levied from the person who  is the first dealer in such hides or skins and is levied on the amount  for which they are sold.  The descrimination. it  is argued,  comes in on account of the proviso to this  sub-cl. (ii).   The proviso is to the effect that if the  dealer  of hides or skins which had been tanned within the State proves that  tax had already been levied on those hide or skins  in their raw condition, in accordance with sub-r. (1)., he will not  be liable to the tax under sub-cl. (ii) of sub-r.  (2). The  result  therefore is that the sale of  hides  or  skins which had been purchased in the State and then tanned within the  445 State  is not subject to any further tax.  Hides  and  skins tanned  within  the State are mostly those  which  had  been purchased in their raw condition in the State and  therefore on  which tax had already been levied on the price  paid  by the  purchaser  at  the  time  of  their  sale  in  the  raw condition.   If the quantum of tax had been the same,  there

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might  have been no case for grievance by the dealer of  the tanned  hides  and skins which had been tanned  outside  the State.  The grievance arises on account of the amount of tax levied  being  different on account of the  existence  of  a substantial disparity in the price of the raw hides or skins and  of  those hides or skins after they  had  been  tanned, though  the rate is the same under s. 3 (1) (b) of the  Act. If  the  dealer has purchased the raw hide or  skin  in  the State, he does not pay on the sale price of the tanned hides or skins, he pays on the purchase price only.  If the dealer purchases raw hides or skins from outside the State and tans them within the State, he will be liable to pay sales-tax on the  sale price of the tanned hides or skins.  He  too  will have to pay more for tax even though the hides and skins are tanned  within  the State, merely on account of  his  having imported  the hides and skins from outside-, and having  not therefore  paid any tax under sub-r. (1).  It is  true  that dealers, though few, selling hides and skins which had  been tanned within the State will also have to pay similar tax if no  tax had been paid previously, they having not  purchased the  raw  hides  and  skins at all as  they  were  from  the carcasses of animals owned by them; but this does not affect the discriminatory nature of the tax as already indicated. It  is  urged  for the respondent  State  that  to  consider discrimination between the imported goods and goods produced or  manufactured in the State, circumstances and  situations at   the  taxable  point  must  be  similar  and  that   the circumstance  of hides or skins tanned within the State  and on which tax had been 446 paid  earlier  at  the time of their  purchase  in  the  raw condition  is sufficient to consider such hides or skins  to be  different from the hides or skins which had been  tanned outside  the  State.   We  do not  consider  that  the  mere circumstance  of a tax having been paid on the sale of  such hides  or  skins  in their  raw  condition  justifies  their forming  goods of a different kind from the tanned hides  or skins which had been imported from outside.  At the time  of sale of those hides or skins in the tanned state, there  was no  difference between them as goods and the hides or  skins tanned   outside  the  State  as  goods.    The   similarity contemplated by Art. 304 (a) is in the nature of the quality and  kind of the goods and not with respect to whether  they were subject of a tax already or not. We are therefore of opinion that the privisions of r. 16 (2) discriminate  against the imported hides or skins which  had been  purchased  or  tanned  outside  the  State  and   that therefore they contravene the provisions of Art. 304 (a)  of the Constitution. It  has been urged for the respondent that if  the  impugned rule be held to be invalid, old r. 16 gets revived and  that the tax assessed on the petitioner will be good.  We do  not agree.   Once the old rule has been substituted by  the  new rule,  it ceases to exist and it does not automatically  get revived when the new rule is held to be invalid. Lastly, we may refer to the Preliminary objection raised  on behalf  of  the respondent to the  maintainability  of  this petition, in veiw of the decision of this Court in Ujjam Bai v. State of Uttar Pradesh (3).  This petition does not  come within  that decision.  This is not a case in which the  tax has  been  levied by the Deputy Commercial  Tax  Officer  by misconstruing  certain provisions of a valid Act, but  is  a case where the taxing officer had no juris- (1)  [1963] 1. S.C.R. 778.  447

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diction  to assess the tax on account of the  invalidity  of the rule under which the tax was assessed. We  therefore  allow this petition with  costs  holding  the impugned  rule 16 (2) invalid and order the issue of a  writ of  mandamus  to  the  State of Madras  and  the  Sales  Tax Authorities under the Act to refrain  from, enforcing any of the  provisions of r. 16 (2) and direct them to  refund  the tax illegally collected from the petitioner. Petition Allowed.