2007 (8) TMI 667 - HC - VAT and Sales Tax

Tax on entry of goods into local area - Held that - Tax on entry of goods into local area having the effect of directly impeding the free movement of trade and commerce within the State is not compensatory in nature and falls within the ambit of article 301 of the Constitution of India. Until it is enacted in terms of the provisions of article 304(b), it cannot be said to fall within the legislative domain of the State Legislature. The restriction under article 301 of the Constitution has been found to be a constitutional restriction on the right of legislative competence to enact laws in derogation thereof and saving from that clause has been provided under articles 302 to article 305. When admittedly in the present case requirement of article 304(b) before enacting a law falling within the domain of article 301 has not been followed, the impugned Act must be held to be ultra vires to Chapter XIII of the Constitution in consonance with Atiabari s case AIR 1961 SC 232. Accordingly, this petition is allowed. The Rajasthan Tax on Entry of Goods into Local Areas Act, 1999 is held to be ultra vires article 301. The demand raised against petitioner shall not be enforceable in case not already paid by the petitioner. However, if any amount is collected by the petitioner from its customer as entry tax, the same shall be allowed to be retained by it on proof that the burden thereof has not been passed on to buyers, consumers or users. If the burden has been so passed on to such other persons, the same shall be paid by the petitioner to the State Treasury within a month failing which such amount shall be recoverable from him. Likewise, any amount already paid by the petitioner as entry tax shall be refunded to him on proof of the fact that burden thereof has not been passed on to the users, consumers or buyers of such goods, as the case may be, as aforesaid. The petitioner may lay his claim for refund with required proof before the concerned assessing authority under the Commercial Taxes Department.

Summary

Issues Involved:
1. Constitutional validity of the Rajasthan Tax on Entry of Goods into Local Areas Act, 1999.
2. Whether the impugned tax is ultra vires Article 301 of the Constitution of India.
3. Compliance with Article 304(b) of the Constitution.
4. Nature of the tax: whether it is compensatory or regulatory.

Issue-wise Detailed Analysis:

1. Constitutional Validity of the Act:
The petitioner challenged the constitutional validity of the Rajasthan Tax on Entry of Goods into Local Areas Act, 1999, and the notification issued thereunder, arguing that the tax on entry of goods into local areas impedes the free movement of trade, commerce, and intercourse within the State of Rajasthan, thereby violating Article 301 of the Constitution.

2. Ultra Vires Article 301:
The petitioner argued that the impugned tax directly impacts the movement of trade from any place to a local area within the State of Rajasthan, thus violating Article 301. The respondents contended that the tax is an indirect tax passed on to the end-consumer and does not impede trade, thereby not violating Article 301. The Court referred to precedents like Atiabari Tea Co. Ltd. v. State of Assam and Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan to determine whether the tax directly and immediately restricts trade.

3. Compliance with Article 304(b):
The petitioner argued that the impugned Act was not laid before the President for his assent as required under Article 304(b) of the Constitution, thus not saved from the restrictions imposed under Article 301. The Court noted that for a tax to be saved under Article 304(b), it must be enacted with the President's assent and must be a reasonable restriction in the public interest.

4. Nature of the Tax:
The Court examined whether the tax is compensatory or regulatory. The respondents argued that the tax is compensatory, intended to recoup revenue lost due to the abolition of octroi and to provide financial assistance to local bodies. The Court referred to the principles laid down in cases like Atiabari Tea Co. Ltd., Automobile Transport, and Jindal Stainless Ltd. v. State of Haryana, which distinguish compensatory taxes from general revenue taxes. The Court found that the tax on entry of goods into local areas is primarily for generating general revenue and does not provide specific, identifiable benefits to trade and commerce in a quantifiable measure.

Conclusion:
The Court concluded that the Rajasthan Tax on Entry of Goods into Local Areas Act, 1999, is not compensatory in nature and directly impedes the free movement of trade, commerce, and intercourse, thus falling within the ambit of Article 301. Since the Act was not enacted following the procedure laid down under Article 304(b), it is ultra vires Article 301. The Act was declared unconstitutional, and the demand for entry tax against the petitioner was held unenforceable. Any amount collected as entry tax must be refunded or paid to the State Treasury, depending on whether the burden was passed on to consumers.