Holding

State notifications granting tax exemptions to specified manufacturers are a valid exercise of legislative power and do not contravene Articles 301, 304, 14 or 19 of the Constitution.

Summary

The Supreme Court examined several writ petitions challenging state notifications that granted sales‑tax exemptions to new manufacturing units in Uttar Pradesh, Punjab and other states. The petitioners, dealers of imported cinematographic and electronic goods, claimed the exemptions discriminated against them in violation of Articles 301, 304, 14 and 19 of the Constitution. The Court held that the power to grant exemptions is inherent in a State's taxing legislation, that the exemptions do not create a direct or immediate restriction on inter‑State trade, and that the rates of tax on locally manufactured and imported goods remain substantially equal. Consequently, the notifications were held constitutional and the petitions were dismissed.

Issues considered

The constitutional validity of state notifications granting sales‑tax exemptions to new manufacturers under Sections 4A of the Uttar Pradesh Sales Tax Act and Section 8(5) of the Central Sales Tax Act.
Whether such exemptions violate Article 301 (free trade) and Article 304(a) (non‑discrimination) of the Constitution.
Whether the differential tax rates amount to prohibited discrimination under Article 14 and Article 19(1)(g).
The nature of a notification: whether it constitutes ‘law’ within the meaning of Article 304.

Legislation cited

Central Sales Tax Act, 1956s. 8(5)
Constitution of Indias. Article 14, s. Article 19(1)(g), s. Article 301, s. Article 303, s. Article 304, s. Article 305, s. Article 38, s. Article 39
Punjab General Sales Tax Acts. 5
Uttar Pradesh Sales Tax Act, 1948s. 48, s. 4A, s. 5A

Subjects

sales taxtax exemptiondiscriminationArticle 301Article 304Article 14Article 19economic unityfree tradestate taxationconstitutional validityUttar PradeshPunjabCentral Sales Tax Act

Judgment

VIDEO ELECTRONICS PVT. LTD. AND ANR. ETC. ETC.
A
:r v.
STATE OF PUNJAB & ANR. ETC. ETC .

. DECEMBER 22, 1989

[SABYASACHI MUKHARJI, CJ., S. RANGANATHAN AND B
J.S. VERMA, JJ.]

U.P. Sales Tax Act, 1948-Sections 4A, 5A and 48 and Notifica-

~
. lion dated January 29, 1985 and December 26, 1985-Constitutional
validity of Manufacturers of goods in stat,,__No liability to pay tax-
Dealers selling goods imported from outside stat,,__liable to pay tax-
c
whether discriminatory, legal and permissible.

Constitution of India 195~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. D

A common question of law having arisen for determination in
these petitions flied under Article 32 of the Constitution, they are
disposed of by a Common Judgment, though the petitionerr-dealers
-7
are different and carry on their business in different states and have
challenged the respective provisions of law by which their cases are E
governed.

The petitioners in WP 803/88 carry on the business of selling
cinematographic films and other equipments like projector, sound
recording and reproducing equipments, X-Ray films etc. in the State of
U.P. and in Delhi. The petitioners receive these goods from their F
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 G
in the Act in respect of the various goods for different periods ranging
from 3 to 7 years, from payment qf 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 Ri>spondent under section SA of H

:--. 731
732 SUPREME COURT REPORTS [ 1989] Supp. 2 S.C.R.

A 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 with-
out 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
B under the Central Sales Tax Act. Their contenton, 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 provisions of Articles
301 to 305 of part III of the Constitution as also Articles 14 and 19 of the
Constitution.

c The Respondents counter the assertion of the petitioners. Accord-
ing 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 Constitution making; the state which was technically and economi-
D cally weak in 1950 cannot be allowed to remain in the same state of
affairs. The state has to give subsidy and grant exemptions/conscessions
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.

E Dismissing the petitions, this Court,

HELD: Sales Tax Laws in all the States provide for exemption.

Power to grant exemption is inherent in all taxing Legislations.
Economic unity is a desired goal. Development on parity is one of the
F commitments of the Constitution. Directive Principles enshrined in
Articles 38 and 39 mmt be hannonNld with economic unity as well as econ<>-
mic development of developed and under-developed areas. [756H; 757A-BI

Taxes may sometime amount to restrictions but it is only such taxes
as directly and immediately restrict trade that would fall within the
G 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] 1SCR491.

H The taxes which do not directly and immediately restrict or
VIDEO ELECTRONICS v. STATE OF PUNJAB 733
~
interefere with trade, commerce and intercourse throughout the terri-
A
tory 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 t.rade 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 B
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. 30 I.
~ 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]
c
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 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 le2islative heads in List III of the D
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 E
the locally made goods. [753C]

It is not that with changing times the meaning changes but chang-
ing 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. [757B-C] F

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 G
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; In,dia
Cement & Ors. v. State of Andhra Pradesh & Ors., [1988] 1 SCC 743;
Weston Electroniks & Anr. v. State of Gujarat & Ors:, [1988] 2 SCC H
734 SUPREME COURT REPORTS [ 1989} Supp. 2 S.C.R.

A 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] l 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
B of Orissa & Ors., [1966] l SCR 865; Bharat General & Textiles Indus-
tries Ltd. v. State of Maharashtra, 72 STC 354; Ii. Anraj v. Govern-
ment of Tamil Nadu, [1986] l 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. San-
e jeeviah, [1967] 2 SCR 361; Kai/ash Nath & Anr. v. State of U.P. &
Ors., AIR 1957 SC 790 at 791; State of U.P. & Ors. v. Renusagar
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 Associated Tanners Vizianagram
A.P. v. C. T.O., Vizianagram, Andhra Pradesh & Ors., [1986} 1 SCR
D 969, reffered to.

ORIGINAL JURISDICTION: Writ Petition No. 665 of 1988
etc.

E (Under Article 32 of the Constitution oflndia).

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 Petitioners.

F Raja Ram Agarwal, S.C. Manchanda, G.L. Sanghi, A.S. Namb- 1
iar, 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 Respondents.

G.L. Sanghi, Ms. Vrinda Grover, Miss Seita Vaidialingam,
G 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
H different States in the Union of India to legislate llnd/or give ..
VIDEO ELECTRONICS v. STATE OF PUNJAB [MUKHARJl, CJ.) 735

appropriate directions within the parameters of the subjects in list II of
A
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 provisions of exemption, encouragement/incen-
tives given by different States to boost up or help economic growth and
development in those States, and in so doing the attempt of the States
to give preferrential treatment to the goods manufactured or produced B
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. c
Petitioner No. I in W.P. No. 803/88 is a partnership firm carry-
ing on business in New Delhi. Petitioner No. 2 is its partner and
petitioner No. 3 is another partnership business carrying on business at
Kanpur i11 U.P. consisting·of petitioner No. 4 and other partners. The D
petition challenges the constitutional validity of notification No. ST-II-
7558/X-9(208)-1981 U.P. Act XV-48 order 85 dated 26th December,
1985 issued by Utiar Pradesh Govt u/s 4A of the Uttar Pradesh Sales
Tax Act, 1948. A prior notification No. ST-Il/604-X-9(208)-1981 U.P.
Act XV-48-0rder 85 dt. 29th January, 1985 was superseded by the
aforesaid notification dt. 26th December, 1985. It also challenges the E
constitutional 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 pro- F
ceedings taken by the respondent u/s 5A of the said Act. The respon-
dents 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 G
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 Hindus-
, tan Photo Films Mfg. Co. Ltd., a Government of India undertaking. In H
736 SUPREME COURT REPORTS [ 1989] Supp. 2 S.C.R.

U.P. there is a single point levy of sales tax. The State 0f U.P. had
A 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
B 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 industrial unit, which is a new
unit as defined in the aforesaid Act of 1948 established in
c 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 pay-
able by the manufacturer thereof on the turnover of sales
D 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."

E 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 divided in 2 categories, one in
case of units with capital investment 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
F 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 initially feel the
adverse effects or discrimination on account of these notifications.
G Petitioners point out that the manufacturers covered by the said notifi-
cation 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
H become liable to pay sales tax on their sales at 12 % + 10% surcharge .,
... _
VIDEO ELECfRONICS v. STATE OF PUNJAB [MUKHARJI, CJ.] 737
":'
(13.2%) under the U.P. Sales Tax Act on photographic and graphic
A
arts material and @ 8% + 10% surcharge (8.8%) on medical x-ray
films and chemicals arid 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 empugned notifications. Thus the petitioners contend that the
goods sold by them became costlier by 8.8% to 13.2% depending on B
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 discrimination and their
business was crippled and wanted to sustain the said contention by
referring to a chart showng gross sale prices of the products in diverse
States. ln the premises the petitioners challenge these provisions as
ultra vires of the Constitution of India, the rights guaranteed under
c
part XIII as also under articles 14 & 19( l)(g) of the Constitution.

The question is, are· these notifications valid, proper and sustain-
able in the light of part XIII of the Constitution of India judged in the
background of the said articles. Appearing in support of the petition, D
Mr. San jay Parikh in writ petitions Nos. 790, 665 and 1939-40/88, Mr.
C.S. Vaidynathan 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 E
elaborate submissions. These petitions have been heard together.

Apart from the submission that the provisions impugned violate
articles 19(1)(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 30 I to 305 F
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 territory of India was en-
joined to be free. Article 302 of the Constitution empowers the Parlia-
ment by law to impose such restrictions on the freedom .of trade,
commerce or intercourse between one State and another or within any G
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, anq stipu-
lates that, notwithstanding anything contained in article 302, neither
Parliament nor the legislature of the· States shall have power to make
It any law giving or authorising the giving of any preference to one State H
~
738 SUPREME COURT REPORTS [1989] Supp. 2 S.C.R.

A over another or making or authorising the making of any discrimina-
tion 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 prefer-
ence or making, or authorising the making of, any discrimination ifit
B 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.-
c
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
D Union territories any tax to which similar goods manu-
factured 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
E 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."
F

Article 305 saves certain existing laws and laws providing for
State monopolies.

Our attention was drawn to the decision of this Court in Atiabari
G 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
H passed after obtaining the previous sanction of the President as
VIDEO ELECTRONICS v. STATE OF PUNJAB [MUKHARJI, CJ.] 739
~
~

required by art. 304{b), it was ultqi. vires. The respondent therein had
A
urged that taxing Jaws 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 inter-
course. Gajendragadkar, Wanchoo and Das Gupta, JJ. held that the
Act violated art. 301 and since it did not comply with the provisions of B
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. According 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
c
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 D
required by art. 304{b) nor was it validated by the assent of the Presi-
., dent 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 ourselves, as was said in
James v. Commonwealth of Australia, (1936] AC 578 at 613, that the E
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 report, rightly in
our opinion, posed the problem as follows:
F
"In construing Art. 301 we must, therefore, have regard to
the general scheme of our Constitution as well as the
particular provisions in regard to taxing laws. The construe-
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 G
mind the essential 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. 301
must be judged accordingly. Besides, it is not irrelevant to
~·
remember in this connection that the Article 23 are con-
F struing imposes a constitutional limitation on the power of H
~
740 SUPREME COURT REPORTS [1989] Supp. 2 S.C.R.
~
the Parliament and State Legislatures to levy taxes, and
A generally, but for such limitation, the power of taxation
would be presumed to be for public good and would not be
subject to judicial revie'IV or scrutiny. Thus considered we
think it would be reasonable and proper to hold that res-
trictions freedom from which is guaranteed by Art. 301,
B would be such restrictions as directly arid 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 v
fall within the purview of Art. 30 I. The argument that all
taxes should be governed by Art. 301 whether or not their
impact on trade is immediate or mediate, direct or remote,
c 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 legislative enactment prescribing
the minimum wages to industrial employees may fall under
Part XIII because in an economic sense an additional wage
D bill may indirectly affect trade or commerce. We are,
therefore, satisfied that in determining the limits of the
width and amplitude of the freedom guaranteed by Art. ,-
30 I a rational and workable test to apply would be: Does the
impugned restriction. operate directly or immediately on
trade or its movement?"
E
It is in that light we must examine the impugned provision. 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, how-
ever, rightly reminded us that regulatory measures or measures impos-
F ing compensatory taxes for using trading facilities do not come within I
the purview of restrictions contemplated under art. 301. Here, it is
necessary to refer to the decision of this Court in the Automobile
Transport (Rajasthan) Ltd. v. The State of Rajasthan & Ors., [1963] I
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
G Taxation Act, 1951. Sub-section (I) 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 -tb.e
time allowed. The appellants therein were carrying on the business of
plying stage carriages in the State of Ajmer. They held permits and
'Y
-
H plied their buses on diverse routes. There was one route which lay
'
VIDEO ELECTRONICS v. STATE OF PUNJAB [MUKHARJI, CJ.] 741

mainly in A jmer State but it crossed narrow strips of the territory of
the State of Rajasthan. Another route, Ajmer to Kishangarh, was A
substantially in the Ajmer State, but a third of it was in Rajasthan.
Formerly, there.was an agreement between the Ajmer State and the
former State of Kishangarh, by which neither State charged any tax or
fees on vehicles registered in Ajmeror Kishangarh. Later, Kishangarh
became a part of Rajasthan. On the passing of the Rajasthan Motor B
Vehicles Taxation Act, 1951, and the promulgation 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 immediate restric-
tion on the movement of trade and commerce with and within c
Rajasthan inasmuch as motor vehicles which carried 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 Constitution and was not saved by Art. 304(b) inasmuch as
the proviso to Art. 304(b) was not complied with, nor was the Act o
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 E
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 con-
text of an ordinary society and as part of a Constitution which en-
visaged a distribution of powers between the States and the Union,
and if so understood, the concept must recognise the need and legiti- F
macy 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. 301 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 G
hand, promoted, by regulations creating conditions for the free move-
ment 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, H
742 SUPREME COURT REPORTS [1989] Supp. 2 S.C.R.

subject to the proviso mentioned therein. Laws of taxation were not
A 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 thats. 4(1) of the Rajasthan Motor
Vehicles Taxation act, 1951 offended art. 301 of the Constitution, and
as resort to the procedure prescribed by art. 304(b) was not taken it
B 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 vehicles came from and not legislation in
respect of inter-State trade or commerce. A tax which is made the
condition precedent of the right to enter upon and carry on business is
a restriction on the right to carry on trade and commerce within art.
301 of the Constitution. The tax levied under the Act was not truly a
c fafr recompense for wear and tear of roads but a restriction which art.
301 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. 512 of the report, where he observed
that in evolving an integrated policy on this subject our Constituton-
D 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
E arise in any part of India. At p. 523 of the report, it was reiterated that
for the t:ix 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:

F "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 restric-
tions, from all regulation, and the only qualification that is
to be found in the article is the opening clause, namely,
G subject to the other provisions of Part XIII. This in actual
practice will mean that if the State Legislature wishes to
control or regulate 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
H without the previous sanction of the;President. The practi-
VIDEO ELECl'RONICS v. STATE OF PUNJAB IMUKHARJI, CJ.] 743

cal effect would be to stop or delay effective legislation
which may be urgently necessary. Take, for example, a A
case where in the interests of publiic 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 Presi- B
dent. Even such legislation as imposes traffic regulations
would require the sanction of the President. Such an in-
terpretation 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 c
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 remotely D
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. E
Reliance was placed on. the observations of Mr. Justice Raghubar
Dayal, J. in Finn A.T.B. Mehtab Majid & Co. v. State.of Madras &
Anr., [1963] 2 Suppl. SCR 435 but the context in which the said obser-
vations were made has to be examined. That case dealt with a·petition
under art. 32 of the Constitution. The petitioners therein were dealers
in hides and skins in the State of Madras. The impugned sales tax F
assessment related to turnover of sales of tanned hides and skins which
had been obtained from outside the State of Madras. The main conten-
tion 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 G
offended art. 304 of the Constitution. The contentions of the respon-
dents therein were that sales tax did not come within the purview of art.
304(a) as it was not a tax on the import of goods at the point of entry,
that the impugned rule was not a law made by the State legislature,
that the impugned 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 H
744 SUPREME COURT REPORTS [ 1989] Supp. 2 S.C.R.
·f
be levied; and that the impugned rule was not made with an eye on the
A 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 compen-
satory taxes or regulating measures.

B Reliance was also placed by Mr. Salve on the observations of
Justice Raghubar Dayal in A. Hajee Abdul Shakoor & Co. v. State of

..
Madras, [1964] 8 SCR 217 at 225. See also the observations in State of
Madras v. N.K. Nataraja Mudaliar, [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. 718 of the report it was reiterated that a
sale tax which discriminates against goods imported from other States
c 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:

D "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
E inter-State sale can do so. Neither tax operates directly or
immediately 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."

F There was a reference in the said judgment to the observations 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
G 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 kin_d 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- ,_
H
VIDEO ELECTRONICS v. STATE OF PUNJAB (MUKHARJI, CJ.] 745

ween the manufacturing centre and the consuming centres
need be treated as a burden, especially where that tax is A
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 B
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 Mudaliar's case (supra) at p. 841 of the
report observed that tax under the Central Sales Tax Act on inter- C
State 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 transfer of docu-
ments of title to the goods during their movement from one State Jo
another. It was contended by Mr. Salve that by exempting the local D
manufacturers from both local and central sales tax, the State Govt.
has clearly made the imposi~on of both local and central sales tax
discriminatory and prejudicial IQ._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 crf a ·local E
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 competition 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 F
of sales .tax levied, it was sought to be emphasised by Mr. Sanjay
Parikh for some of the petitioners. This proposition has been reiterated
by this Court in a large number of cases; according to counsel, and we
were referred t.Q the observations in State of Madhya Pradesh v. Bhai-
lal Bhai & Ors., (1964] 6 SCR 261at268-9 and Mudaliar's case (supra)
where at p. 847 Shah, J. reiterated that imposition of differential rates G
of tax by the same State on goods manufactured or produced in the
State and sii:nllar 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 Pun jab General Sales Tax Act that when a taxing State was
not imposing rates of tax on imported goods different from the rates of H
746 SUPREME COURT REPORTS [ 1989] Supp. 2 S.C.R.
f
tax on goods manufactured or produced, art. 304 had no application.
A 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.,
11988] l 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
B Part XIII of the Constitution. To similar effect are the observations to
which Mr. San jay 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
c Clause'-"This part of the Constitution was framed under the domi-
nion 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
D 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
E plenary power of the State to grant exemptions under the Act because
statutory powers have to yield to constitutional inhibitions and, there-
fore, article 304(a) & (b) being envisaged to safeguard the economic
unity of the country, these must have precedence. It was aJso,contended
that the petitions under art. 301 read with 304(a) are clearly
maintainable.
F
Reliance was placed in Smt. Ujjam Bai v. State of U. P., [1963] 1
SCR 778 at 851 and Coffee Board, Bangalore v. Joint Commercial Tax
Officer, Madras & Anr., I 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. ·-
G
The question as we see is, how to harmonise the construction of
the several provisions of the 1Constitution. It is true that if a particular
provision being taxing provision 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
H borne in mind that art. 301 enjoins that trade, commerce and
VIDEO ELECTRONICS v. STATE OF PUNJAB (MUKHARJJ, CJ.] 747

intercourse throughout the territory of India shall be free. The first
A
question, therefore, which orie has to examine in this case is, whether
the sales tax provisions (exemption etc.) in these cases directly and
immediately restrict the f~ee flow of trade and commerce within the
meaning of art. 301 of the Cons.titution. We have examined the scheme
of art. 301 of the Constitution read with art. 304 and the observations
of this Court in Atiabari's case (supra), as.also the observation& ml!de B
by this Court in Automobile Transport, Rajasthan's case (supra). In
our opinion, Part XIII of the Constih\tion cannot be read in isolation.
It is part and parcel of a single constitutional instrument envisaging a
federal scheme and containing general scheme conferring 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 tpe State
c
must o-btain 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, econo-
mically, politically and socially. The meaning of the expressions used
there must, therefore, be so interpreted that it attempts to solve the D
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 adjudication. Hence, E
the economic development of States to bring these into equality with
all other ~!ates and thereby develop the economic unity1of India is· one
of the major commitments 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.
F
The taxes which do not directly or immediately restrict or in-
terfere 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.
G
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 ..'>ee
also the observations in Mudaliar's case (supra) where at p. 851 it was
obse_rved that a tax on sale would not normally offend art. 301. That H
748 SUPREME COURT REPORTS [ 1989] Supp. 2 S.C.R.

A 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 obser-
vations 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. 301, logically it would not affect the freedom of
B 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 discrimi- ,..
nates 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
C factors including the cost of goods play an important role in the move-
ment of goods from one State to another. Hence the mere fact that
there is a difference in the rate of tax on goods locally manufactured
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
D manifest, art. 304 is an exception to art. 301 of the Constitution. ·.The
need or taking resort to exception will arise only it 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 observa-
tions 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
E consideration 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 1s 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
F various political; economic and social factors~ Prevalence of diffiomtial .
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 framed revenue
from sales tax was reserved for the States.

G In V. Guruviah Naidu & Sons. v. State of Tamil Nadu & Anr.,
[ 1977] l SCR 1065 at 1070 this Court observed as follows:
. I
"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
H and similar goods manufactured or produced within the 'fl!
VIDEO ELECTRONICS v. STATE OF PUNJAB IMUKHARJI, CJ.] 749

State. The object is to prevent discrimination against
imported goods by imposing tax on such goods at a rate A
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 question as to when the ·1evy of t_ax
would constitute discrimination would depend upon a B
variety 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 c
are tanned and are sold locally as dressed hides and skillll,
no levy would be made on such sales as those hides and
skins have already been subjected to bcal tax at the rate of
3 per cent when they were purchased in raw fol11). As
against that, in the case of hides and skins which have been D
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-'h 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 .E
skins compared 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
Legislature, 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 F
. discrimination 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 GI
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 consti-
tute 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 'dlscrimi-
nation' is not used in art. 14 but is used in articles 16, 303 & 304(a). H
750 SUPREME COURT REPORTS [ 1989] Supp. 2 S,C.R.

A When used in art. 304(a), it involves an element of intentional and
purposeful differentiation thereby creating economic barrier and in-
volves an element of an unfavourable 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 Chier Justice Shastri at p. 442 of the report reiterated
B 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
C 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
D and generaiiy 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 Lat'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
E rate described and there is no differentiatiion 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 bys. 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 Constitution was envisaged for preserving the unity of
F 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
G irrespective 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
H and also the fact that the concept of economic unity may not necessa- ¥
VIDEO ELECTRONICS v.-STATE OF PUNJAB [MUKHARJI, Cl.] 751

rily be the same as it was at the time of Constitution making. The result
A
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 granting concessions/exemptions or allowing subsidies etc. for
establishing new industries so as to be economically developed. It was
also submitted that if all the parts of India i.e. to say all the States are B
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 t)l.e petitioner. Economic unity of India is one of the
constitutional aspirations of India and safeguarding the attainment and
maintenance of that unity are objective' of the Indian Constitution. It c
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, economically. Indeed, in the
affidavits of opposition various grounds have been indicated on behalf
of the respondents sugg~sting the need for incentives and exemptions, D
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 E
accepted, it was averred, 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 notifications F
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. 301 will not apply if
art. 301 does not apply.

In the instant case the general rate applicable to locally made G
goods is the same as that on imported goods. Even supposing without
admitting that sales tax is covered by art. 3.01 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 H
goods.
752 SUPREME COURT REPORTS I1989) Supp. 2 S.C.R.

Concept of economic barrier must be adopted in a dynamic sense
r
A
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 exemp-
tions which flow froin the plenary powers of legislative heads in list II
of the 7th Schedule of the Constitution. In a federal polity, all the
B 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 exemp-
tion 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
c 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 either. It
cannot be disputed that it is open to the States to realise tax and
D thereafter remit the same or pay back to the local manufacturers in the
shap~ 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 constitu-
--
tional mandate.
E
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 Gajendragadkar, Wanchoo, J.
and Sikri, J. observed that the restriction on the freedom of trade,
commerce and intercourse throughout the territory of India declared
F by ~rticle 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
G art. 304( a) imposes no ban but lifts the ban imposed by articles 30 I &
303 subject to one condition. That article is enabling and prospective.

Counsel for the respondents drew out attention to ;uticles 38 &
39 of the Constitution. The striving for the attainment of the objects
enshrined in these Articles is enjoined. For.achieving these objects the
H States have necessarily to devlop· themselves economically so as to
VIDEO ELECTRONICS v. STATE OF PUNJAB (MUKHARJI, CJ.] 753
I
' secure economic unity arid to minimise the inequalities and imbalances A
between State and State and region and region. If the power to grant
exemption has been conferred for achieving 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 Cuort in Bharat
•
General & Textiles Industries Ltd. v. State of Maharashtra, 72 STC 354 B
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 aforesaid observations
were made in the context different from art. 304(a) but basically the c
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 several decisions of this
Court, namely, H. Anrajv. Government of Tamil Nadu, [1986] 1 SCC D
414; Indian Cement & Ors. v. State of Andhra Pradesh & Ors.,
(supra); Weston E[ectroniks. v. State of Gujarat, (supra) and West
Bengal Ho~iery 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 bµt the said conclusions were arrived at in the
context of a controversy not in the present form and the question of E
exemption a,s 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 maintaining
the general rate of tax on the goods manufactured by all those pro-
ducers in the State who do not fall within the exempted category at par
with the rate applicable to imported goods as we have read these cases. F
,> 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 unfavourable
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 G
can always be struck down by the courts. That is not the situation in
the instant cases. The aforesaid decisions, therefore, are not auth-
orities for the general proposition that while, maintaining the general
rate at par, special rates for certain industries for a limited period
could not be prescribed by the States.
H
~
754 SUPREME COURT REPORTS [1989] Supp. 2 S.C.R.
I
There was another subsidiary question in these matters as to '
A whether the legislation in the shape of notification is law within the
meaning of art. 304 of the Constitution. The phrase used in the open-
ing p&rt 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
B 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
Upadhya, [1961] 2 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.
c 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 distin-
guished the decision in State of Mysore v. H. Sanjeeviah, [1967] 2 SCR
361 cited on behalf of the petitioner. This Court in Kai/ash Nath &
Anr. v. State of U.P. & Ors., AIR 1957 SC 790 at 791 has held that the
D notification having been made in accordance with the power conferred
by the Statute has statutory force and validity and, therefore, exemp-
tion is as if contained in the Act itself. The U.P. Sales Tax Act bys.
24( 4) confers rule making powers on the State Government. Section 25
confers powers on the State Government to issue notifications with
retrospective effect. Hence, it cannot be disputed that the exemption
E 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 Is
Narinder Chand Hem Raj & Ors. v. Lt. Governor, Administrator,
U. T., Himachal Pradesh & Ors., [1971] 2 SCC 747 at 751 it was held
that the exercise of the power is legislative whether it is by the legisla-
F ture 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 "onfiµed to the facts of that case alone as the said decision had
G 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 contentions, therefore, fail.

Writ petition No. 665188 being Mis Video Electronics Pvt. Ltd. &
H Anr. v. State of Punjab & Anr., deals with the notification issued by '
VIDEO ELECTRONICS, v. STATE OF PUNJAB [MUKHARJI, CJ.] 755

the Punjab Government whereby two different rates of taxes are pro-
A
vid~d. 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 B
pursuaace 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 manufacturing 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
fo% (+ 2 o/~ surcharge) to 1.% while for similar goods manufactured
outside the State and sold within the respondent-State, the rate of c
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 affidavit has D
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 unitshasbeen levied toboost fllls,ffidustry
and to stop the eristing industry shifting to neighbouring States. The
prevailing 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 circumstances and also to attract new entre- E
preneurs from other States and from within the State. It was con-
tended 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, F
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 tickets, and dealt with the G
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 H
756 SUPREME COURT REPORTS (1989] Supp. 2 S.C.R.
/
States) when they are sold within the State of Tamil Nadu as against
A
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
B 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 Constitution. 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
c locally. In that light the decision inAnraj's case has to be understood.

The cases of India Cement & Ors, v_. State ojAndhra Pradesh &
Ors., \supra); Weston Electroniks v. State of Gujarat & Ors.,- (supra)
and West Bengal Hosiery Assn. & Ors. v. State of Bihar & Anr.,
D (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 confer-
ment of exemption without any reason or concession in favour of
indigenous manufactured goods which was not available in respect of
the goods imported into that State. In case, however, of U.P. as well as
E 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 discrimination against goods manufactured outside the
State. In case of Punjab an overwhelmingly large number of local
manufacturers of similar goods are subject to sales tax and, therefore,
the general statement that the manufacturers within the State are
F 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 conditions
set out in the notification.

G 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 incidental power.
Power to grant exemption is inherent in all taxing legislations.
H Economic unity is a desired goal, economic equilibrium and prosperity
VIDEO ELECTRONICS v. STATE OF PUNJAB [MUKHARJI, CJ.] 757

is also the goal. Development on parity is one of the commitments of
A
the Constitution. Directive principles enshrined in articles 38 & 39
must be harmonised with economic unity as well as economic develop-
ment of developed and under-developed areas. In that light on art. 14
of the Constitution, 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 expres- B
sions used can be given effect to only if a particular situation arises. 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 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
c
be 'develped.only ifsome special incentives are granted. If the· incen-
tives in the forin of subsldfosor grant are liiven fo any partor units of 3
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. D
However, this is permissible only if there is a valid reason, that is to
say, if there are justifiable and rational reasons for differentiation. If
there is none, it will amount to hostile discrimination. Judge in this
light, despite the sumbissions of Mr. San jay Parikh and Mr. Vaidyana- ·
than, we are unable to accept the contentions that the petitioners
sought to urge in this application. .E

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 conten-
tions were reiterated for the reasons discussed hereinbefore. We are
unable to accept this petition. It may be relevant to refer to Associated F
' Tanners Vizianagram, A.P: v. C. T.O., 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
rate~ of tax on goods manufactured locally, art. 304 had no applica-
tion. In case an exemption was granted applying the same rate the
resulting tax might be somewhat higher. but that did not contravene the G
equalityi;lau_:;e _c_ontelllpfaieil 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 intervenors, Goa and Pondi-
cheIT)', being__comparatively under-developed in electronic industry, in H
758 SUPREME COURT REPORTS [ 1989] Supp. 2 S.C.R.
)
A our opinion, it cannot be said that there was violation of either Part
XIII of the Constitution or Article 14 of the Constitution. This applica-
tion 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
B the Central Sales Tax Act and the U.P. Act as mentioned hereinbe-
fore. In the state of facts as appearing, this petition also fails. We have
considered the submissions and the statements made by the inter-
venors in these matters. Writ Petition No. 761/89-Weston £/ectroniks
Ltd. & Anr. v. State of Punjab & Anr., dealing with the notifications
issued by the State of Kamataka and writ petition No. 1140/88-M/s
c Survo Udyog Pvt. Ltd. & Anr. v. State of Bihar & Anr., deal with the
same controversy and with similar notification. In view of the aver-
ments made which we have examined in detail on behalf of the con-
cerned State Governments in the light of the principles we have
reiterated before, we are of the opinion that the notifications
impugned cannot be challenged and the petition cannot succeed.
D
We have also considered writ petition No. 1016/88-M/s Disco
Electronics Ltd. & Anr. v. State of U.P. & Others, and in light of the
facts and the circumstances and the averments 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
E having the views of the intervenors and we have considered the sub-
missions 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 circumstances of the case, there will be no .
F order as to costs.
'
Y. Lal Petitions dismissed.

t