IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.1210 OF 2004

State of Rajasthan & Ors.                  ...Appellant(s)

Versus

Heritage Crafts                    ...Respondent(s)

With  Civil  Appeal  Nos.1211/2004, 1212/2004, 1213/2004, 1214/2004, 1215/2004, 1216/2004 and 1217/2004.

O  R  D  E  R

Delay condoned.

In this batch of civil appeals, the question which  

calls  for  consideration  is  whether  imposition  of  

additional tax on transfer of ownership of a vehicle under  

the  second proviso  to Section  4(1)(b) of  the Rajasthan  

Motor  Vehicles  Taxation  Act,  1951  is  beyond  the  

legislative  competence  of  the  State  being  outside  the  

scope  of  Entry  57  of  List  II  of  Schedule  VII  of  the  

Constitution of India.

The relevant part of Section 4 (charging section)  

of  the  1951  Act,  as  amended  by  Rajasthan  Finance  Act,  

2000, is extracted hereinbelow:

“4.  Imposition  of  Tax  –  (1)  Save  as  otherwise provided by this Act or by the  Rules made thereunder or any other law for  the  time  being  in  force,  there  shall  be  levied and collected on all motor vehicles  used or kept for use in the State, -  

...2/-

- 2 -  

(a) a tax, in respect of such vehicles,  which are not covered by clause (b), (c) or  (d), at such rates as may be specified in  the  State  Government  by  notification  in  official gazette which shall not exceed 10%  of  the  cost  of  the  chassis/  vehicle  per  annum:

Provided  that  where  the  rates  are  not  specified, on quarterly or monthly basis,  by the State Government, by notification in  the  official  gazette,  and  if  the  tax  is  permissible  to  be  paid  quarterly  or  monthly,  the  amount  payable  shall  be  equivalent to the one fourth or one twelfth  respectively of the annual rate of tax;

(b) a One Time Tax in the case of non  transport vehicles at such rates as may be  notified  by  the  State  Government  by  notification in the official gazette which  shall  not  exceed  10%  of  the  cost  of  the  vehicle:

Provided that in addition to One Time Tax  there shall be paid by the owner or person  having  possession  or  control  of  a  motor  vehicle on which one time tax is payable,  any  tax  or  penalty  as  was  payable  under  this Act for any period prior to the coming  into force of the provisions of Chapter V  of  the  Rajasthan  Finance  Act,  1997  (Rajasthan Act No. 9 of 1997) at such rates  as  were  applicable  to  such  vehicles  from  time to time.

Provided further that on every transfer of  ownership of motor vehicle mentioned above,  an additional one time tax shall be payable  at  such  rates  as  may  be  notified  by  the  State Government in the Official Gazette.”

[Emphasis supplied] ...3/-

- 3 -   According to the Statement of Objects and Reasons,  

insertion of the said proviso by the said Finance Act, 2000  

was to check frequent transfers of the vehicles.  The said  

proviso  was  added  to  Section  4(1)(b)  which  makes  a  

provision for payment of additional one time tax.  It is  

the  levy  of  this  additional  one  time  tax  which  stood  

challenged  before the  High Court.   It  is this  levy of  

additional one time tax which has been struck down by the  

High Court.  Hence, these civil appeals are filed by the  

State of Rajasthan.

The reason for striking down the impugned proviso  

by the High Court is given in para 13 of the impugned  

judgment, which we quote hereinbelow:

“13. In the instant case, the compensation for  use of roads etc. by the vehicle was already  paid by the vendor under Section 4(1)(b) of the  Act of 1951.  He paid the OTT for the life time  of the vehicle.  Keeping this in mind, each of  the  petitioners  purchased  vehicle  from  the  vendor.  Obviously, it carried element of tax in  the  purchase  consideration  of  vehicle.   Thus,  the petitioner has already paid off his share of  tax in the form of purchase price paid to the  vendor.  The object for insertion of the second  proviso  to  Section  4(1)(b)  as  stated  is  to  discourage the transfer of vehicle.  We have not  been able to understand the nexus between the  transfer  of  ownership  and  the  object  of  levy  i.e. compensatory tax.  Thus, in our view, the  impugned additional tax under proviso second to  Section 4(1)(b) of the Act is arbitrary inasmuch  as  it  amounts  to  tax  a  person  merely  on  the  incidence  of  transfer  of  vehicle,  which  is  clearly beyond the legislative competence being  outside  the  scope  of  Entry  57  of  List  II  of  Schedule VII of  the Constitution of India.  The

...4/-

- 4 -  

ratio laid down by the Division Bench of this  Court in East India Hotels Ltd.’s case (supra)  equally  applies  to  the  facts  of  the  instant  cases.   Thus,  the  second  proviso  to  Section  4(1)(b) of the Act is violative of the Article  265  of  the  Constitution  of  India  and  is,  therefore, liable to be struck down.”

On  reading  the  reasoning  of  the  High  Court  for  

striking  down the  impugned proviso,  as quoted  above, it  

shows that according to the High Court the second proviso  

to Section 4(1)(b) violated Article 265 of the Constitution  

and, therefore, was liable to be struck down.

In  the  case  of  Atiabari  Tea  Company  Limited vs.  

State of Assam and Ors. reported in AIR 1961 SC 232, the  

constitutional validity of Assam Taxation (on Goods Carried  

by Roads or Inland Waterways) Act, 1954 was challenged as  

violating  Article  301.   The  Majority,  speaking  through  

Justice  Gajendragadkar,  rejected  the  contention  of  the  

State that the taxation laws are governed only by Part XII  

by  saying  that  “Article  265  itself  inevitably  takes  in  

Article 245 of the Constitution when in substance it says  

that a tax shall be levied by authority of law”.  Hence,  

power of Parliament and the Legislatures of the States to  

make laws including laws imposing taxes is subject to the  

provisions of the Constitution and hence it will come under  

the  purview  of  Article  301.   The  Majority  rejected  the  

conclusion “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 Article 301”.  

Therefore, in each case the court has to find out whether  

the impugned  law puts  a restraint in the form of taxation

...5/-

- 5 -  

on the movement of trade and if so, only then, such law  

falls under Article 301 and it is only in such an event  

that State can take the plea as to the nature of impugned  

levy,  viz.,  that  the  levy  is  compensatory/regulatory  in  

nature and therefore falls outside scheme of Part XIII.   

It is the doctrine of “direct and immediate effect”  

which constitutes the working test propounded vide para 19  

of the judgment of this Court in the case of  Automobile  

Transport (Rajasthan) Limited vs.  State of Rajasthan, AIR  

1962 SC 1406.  Therefore, whenever the law is impugned as  

violative of Article 301, the courts have to examine the  

effect of the operation of the impugned law on the inter-

State and the intra-State movement of goods which has not  

been done in the present case.

In  the  circumstances,  we  set  aside  the  impugned  

judgment of the High Court and remit the cases back to it  

for  de  novo consideration  in  accordance  with  law.   We,  

however, grant liberty to each of the assessees to amend  

the writ petition, if so advised, within a period of four  

weeks  from  today.   If  the  assessee  carries  out  the  

amendment within the said period, the High Court shall then  

consider the matter in accordance with law.  If any of the  

assessee failed to do so within the time so fixed, in that  

event, it would not be open to the assessee to amend the  

writ petition and, in such a case, the consequences have to  

follow.

Accordingly, civil appeals stand disposed of with no  

order as to costs.

...6/-

- 6 -  

All issues are expressly kept open, subject to the  

assessees  making  appropriate  averment  with  regard  to  

violation of Article 301 of the Constitution.

......................J.            [S.H. KAPADIA]

......................J.            [AFTAB ALAM]

New Delhi, November 10, 2009.