76

CHAPTER - III

CONSTITUTIONAL PROVISIONS REGARDING TRADE

AND COMMERCE IN INDIA

3.1. Introduction

A single, national, integrated, domestic market is necessary to make the

Indian economy efficient and competitive. Free flow of trade and commerce

within and across inter-State borders is an important pre-requisite for ensuring

economic unity, stability and prosperity of a country.

Freedom of “trade, commerce and intercourse throughout the territory of

India”, subject to the other provisions of Part XIII,1 is assured and declared by

Article 301 of the Constitution of India. The object of this freedom is to disallow

barriers between the States and within the boundaries of States and make India a

single unit with a view to creating an environment, conducive to trade and

commerce. Economic unity is essential for the stability and progress of the

country. Regional aspirations and apprehensions may persuade the State

Legislatures to adopt measures solely intended to benefit local interests, the

combined effect of which may be disastrous to the national economy and when it

so happens, the States will also suffer because they are part of the whole.2

1 Infra, note 38.

2 Sharma Brij Kishore, Introduction to the Constitution of India, Sixth Edition, 2011, PHI Learning

Private Limited, New Delhi, p.313.

77

Explaining the purpose of enacting Article 301 of the Constitution of

India the Supreme Court has observed:

The provision contained in Article 301 guaranteeing the freedom of trade,

commerce and intercourse is not a declaration of a mere platitude, or the

expression of a pious hope of a declaratory character; it is not also a mere

statement of a directive principle of a state policy, it embodies and

enshrines a principle of paramount importance that the economic unity of

the country will provide the main sustaining force for the stability and

progress of the political and cultural unity of the country.3

In the present chapter, an attempt has been made to discuss in detail, the

nature scope and extend of freedom of trade provided under Article 301 of the

Constitution of India and judicial interpretation to the same. A comparative

enquiry is made into the question how successfully free trade provisions of the

Constitution of India works, in practice.

3.2. Analysis of Freedom of Trade under Article 301

The Article 301 secures freedom of trade against the State action,4

legislative as well as executive5 and it is a limitation on the exercise of legislative

3 Justice Gajenderagadkar in Atiabari Tea Company v. State of Assam, AIR 1961, SC 232 at 247 in

support of his view the learned Judge quoted the following words of Justice Cordozo said with reference

to Clause 3 of Section 8 of Article 1 of the Constitution of the United States in Charles H. Baldwin v.

G.A.F. Seeling, 294 US 511, 523:

This part of the Constitution was framed under the dominion 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. 4 That is the Union of India and the States.

78

and executive powers by the State and that a Court may enforce it, if violated.

The more important point for determination is the extent of the limitation and

when it is violated. This requires an analysis and interpretation of the words of

Article 301.

For the convenient and comprehensive analysis, Article 301 may be

broken into three phrases, namely:

3.2.1. “Subject to the other provisions of this Part” (Part XIII)

The opening words of Article 301 “Subject to the other provisions of this

Part” suggest that trade, commerce and intercourse throughout the territory of

India are not absolutely free but are subject to other provisions of Part XIII6

provided in Article 302 to 307.7

The legislative power conferred on Parliament as well as State Legislature

under Articles 245 and 2468

could be exercised so as to interfere with trade,

commerce and intercourse. The inclusion of free trade clause in Article 301,

prevents them from doing so. It imposes a general limitation on the legislative

powers found in the Seventh Schedule of the Constitution. This limitation is not

5 The third organs of the State, namely, the judiciary has no power to interfere with the freedom and

therefore its mention is unnecessary. 6 Infra, note 17.

7 Infra, note 38.

8 Article 245

deals with the extent of legislative Jurisdiction of Parliament and State Legislatures and

makes it subject to the provisions of the Constitution. Thus a law made by a competent legislature can be

declared invalid if it contravenes any other provision of the Constitution. Article 246 defines their

jurisdiction and deals with the matters with respect to which they have power to make laws which have

been enumerated in the three lists of the Seventh Schedule.

79

an absolute limitation. The opening words „subject to the other provisions of this

part‟ show that the limitation imposed on the legislative power by Article 301 is

further qualified by other provisions of Part XIII.9 This phrase has also been used

in Article 24510

and Article 246(3)11

of the Constitution of India. The opening

words of Article 245 „subject to the provisions of this Constitution, suggest that

the legislative powers of the Union and the State should be read subject to

limitations provided anywhere in the Constitution. In the same way, the opening

words of Article 301 suggests that the limitation imposed on the legislative

powers of the Union and the State should be read subject to the clarification

provided in other provisions of Part XIII.12

In the absence of this opening phrase, the limitation would have become

an absolute limitation. At the same time as it is difficult to reconcile the grant of

legislative power by Article 246 with the limitation imposed on the same power

by Article 301, the opening phrase „subject to the other provisions of this Part‟

makes it clear that both the Centre and the State can exercise their legislative

powers in the manner prescribed under Article 302 to 305.13

9 Supra, note 38.

10 Article 245 (1) read as: Subject to the provisions of this Constitution, Parliament may make laws for

the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole

or any part of the State.

(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-

territorial operation. 11

Article 246(3) read as: Subject to clauses (1) and (2), the Legislature of any State has exclusive power

to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in

the Seventh Schedule (in this Constitution referred to as the “State List”). 12 Supra, note 38. 13 Ibid.

80

Hence, Article 30214

or Article 304(b)15

cannot be regarded as a fresh source

of power for the Parliament and the State Legislature to impose restrictions on the

freedom of trade, commerce and intercourse. This provisions put forth only the

conditions and the procedural requirement which the legislature has to satisfy while

legislating a law consistent with the freedom of trade, commerce and intercourse

guaranteed under Article 301. Similarly Article 304(a)16

clarifies the manner in

which a State Legislature is to exercise its taxing power affecting freedom of trade

and commerce.

Justice Hidayatullah had made a general observation17

regarding the meaning

of these opening words. He has observed that the curbs on freedom of trade and

commerce are primarily to be found in Part XIII. It is submitted that what is found in

Part XIII, is the manner in which the legislature is to exercise its law making power

in enacting a law affecting freedom of trade, commerce and intercourse throughout

the territory of India.

Justice Gajendragadkar has observed in Atiabari case18

that Article 301 is not

subject to other provisions of the Constitution but only to the other provision of Part

XIII. It is submitted that the freedom guaranteed under Article 301 is subject to

Article 302 to 305. Article 302-305 are subject to the other provisions of the

14 Article 302 read as: Parliament may by law impose such restrictions on the freedom of trade,

commerce or intercourse between one State and another or within any part of the territory of India as may

be required in the public interest. 15 Article 304(b) read as: Impose such reasonable restrictions on the freedom of 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. 16 Article 304(a) read as: impose on goods imported from other States or the Union territories any tax to

which similar goods manufactured or produced in that State are subject, so, however, as not to

discriminate between goods so imported and goods so manufactured or produced. 17 Automobile Transport Private Limited v. State of Rajasthan, AIR 1962 SC1406, 1437. 18

Atiabari Tea Company v. State of Assam, AIR 1961 SC 232 at 249.

81

Constitution. Hence, logically, Article 301 becomes subject to other provisions of

the Constitution. 19

3.2.2. “Trade, commerce and intercourse throughout the territory of India”

Article 301 of the Constitution of India provides freedom to those activities

which falls under the categories of trade,20

commerce21

and intercourse.22

Any

activities not regarded as trade, commerce and intercourse falls outside the purview

of the freedom provided under Article 301. Activities which are criminal or

undesirable would not be protected by Article 301 of the Constitution of India.23

Article 301 of the Constitution of India guarantees freedom of trade

throughout24

the territory of India.25

The Constitution of America26

and

Australia,27

use the words „among the states‟. In Australia, the draft provisions of

19

Mishra Manjusree, Freedom of Trade and Commerce, 1999, Mittal Publication, New Delhi, p.69. 20

Supra, Chapter II, pp.28-30. 21

Ibid, pp.30-31. 22

Ibid, pp.31-35. 23

Justice Das in State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699, enunciated the theory

of ‘Extra-commercium’, by which he meant that all those activities which are criminal or undesirable

would not be protected by Article 301 of the Constitution of India. He pointed out that the activities like

hiring goondas to commit assault, house-breaking or selling obscene pictures, trafficking in women are

extra-commercium, although the external forms, formalities and instruments for trade may be employed. 24

In Automobile Transport Limited v. State of Rajasthan, AIR 1962 SC 1406 at p. 1429 it was held that

the term “throughout” means „each and every part‟. The use of this phrase brings out the idea that for the

purpose of the freedom declared, the whole country is one unit. 25

According to the Article 1(3) of the Constitution of India, the “territory of India” comprises (a) the

territories of the States; (b) Union territories specified in the first Schedule to the Constitution of India

and (c) such other territories as may be acquired. 26

Constitution of United States of America in Article I, Section 8, Clause 3 which vest Congress with the

power of regulation of commerce with foreign nations and among the several States and with the Indian

Tribes. 27

Section 92 of the Constitution of Commonwealth of Australia, read as: (1) On the imposition of

uniform duties of customs, trade, commerce, and intercourse among the states, whether by means of

internal carriage or ocean navigation, shall be absolutely free. (2) But notwithstanding anything in this

Constitution, goods imported before the imposition of uniform duties of customs into any State, or into

any Colony which, whilst the goods remain therein, becomes a State, shall, on thence passing into another

State within two years after the imposition of such duties, be liable to any duty chargeable on the

importation of such goods into the Commonwealth, less any duty paid in respect of the goods on their

importation.

82

Section 92 included the words „throughout the Commonwealth‟, but Mr. Isaacs28

in the Adelaide Session of the Convention Debates, pointed out that, instead of

the above words, the words „among the states‟ was better. This suggestion was

agreed upon at the Melbourne Session.29

Article 301 does not refer specifically to inter-State or intra-State trade

and commerce; it says merely „throughout the territory of India‟. Absence of the

words „inter-State or intra-State‟ in Article 301, led the High Courts to interpret

the Article differently. In State of Uttar Pradesh v. Ram Charan,30

where the

State Legislature restricted intra-State movement of wheat, it was held that an

order regulating trade and commerce within the State would not come within the

purview of Article 301. It is submitted perhaps, that the above view is not

correct. Article 302 uses the words „between one State and another or within any

part of the territory of India. A question has been raised whether Parliament

should have power to regulate intra-State commerce and whether or not this

matter should belong exclusively to the States. The Sarkaria Commission has

justified the present position in the following words.31

“The need for empowering Parliament to place restrictions on trade

and commerce even within a State is obvious. Ours is a vast

country with varying economic potentiality and considerable

differences in regard to existing levels of development. The

28

CD (Adelaide Session 1897), p. 875 (later Isaacs J.) 29

CD (Melbourne Session 1898) p, 1014. 30

AIR 1962 SC 359. 31

Sarkaria Commission Report, (1988), p. 502, para 18.3.13, downloaded from http://interstatecouncil.

nic.in/Sarkaria/CHAPTERXVIII. pdf, retrieved on 20-09-2015, time 10.40 pm.

83

Union‟s responsibility in respect of certain matters may, therefore,

entail regulating trade and commerce even within a State for

achieving national objectives. For example, there is the need to

protect the interests of the weaker sections of our community like

the tribal people, etc. Indiscriminate exploitation of natural

resources in one State, for example, denudation of forests, may

have far reaching implications for other States which may be

affected by floods, silting up of reservoirs, etc. Such situations may

require imposition of restrictions on trade even within the State.

The importance of Parliamentary control over intra-State trade is

also significant where centers of production of certain commodities

are situated entirely within a State but the centers of consumptions

are located outside the State.”

Which means that Parliament cannot, only restrict freedom of inter-State

but also intra-State trade and commerce, provided it is in the public interest. The

words „within any part...‟ extends the freedom from inter-State to intra-State

trade and commerce. Further, the words „with or within that State, in Article 304

(b) make it clear the framers of the Constitution wanted to give a wider scope to

the freedom of trade, commerce and intercourse. In Automobile Transport Ltd.

v. State of Rajasthan,32

the Supreme Court held that Part XIII applies to both

inter-State and intra-State trade and commerce.

32

Supra, note 17, at 1423.

84

The best solution to the controversy is provided by Singh M.P.33

by saying

that the words „trade, commerce and intercourse throughout the territory of India

should be read as a composite expression to understand the true nature, scope and

application of Article 301. The word „throughout‟ implies movement from one

place to another and it is this aspect of trade which comes under the protection of

Article 301.

3.2.3. “Shall be free”

Article 301 of the Constitution of India provides that the trade, commerce

and intercourse throughout the territory of India shall be free. A question arise

what the word „free‟ means. The meaning of the word “free” may occasion, as it

has already done, maximum controversy in relation to Article 301.34

The reason

is that the word “ „Free‟ in itself is vague and indeterminate.”35

Neither a

dictionary can help in knowing its scope and application in Article 301 nor any

conceptual study of it, because it shall have different meanings in different

contexts.36

33 Supra, note 19, p.80.

34 Singh M.P., Freedom of Trade and Commerce in India, 1985, Deep & Deep Publication, New Delhi,

p.119. 35

Justice Subba Rao in the Automobile Transport Limited v. State of Rajasthan, AIR 1962 SC 1406 at p.

1430. 36

For example, “entry is free” will mean, in the context of a friend‟s house, entry without permission

while in the context of a theatre it will mean entry without charges. Similarly “free food” means free from

charges while “free speech” means free from restrictions. These are simple examples of the use of “free”

but there may be cases where its use may not admit uniform answers as it may be amenable to several

meanings. Suppose, it is stated that “every man in India shall be free”. Free from what? Is not susceptible

of one answer in this case unless something more is added to this statement such as “to do anything” or

“to go anywhere” or “from legal restraints”. It may be said that the statement in the present form is

incomplete and if it is to be given a meaning in the present form then it must mean free from everything.

85

Article 301 is a part of a large instrument, namely the Constitution and its

opening words37

establishes a direct relationship with other provisions of Part

XIII. Hence, the Constitution in general and Part XIII in particular38

form the

context to determine the meaning of the word “free” in Article 301.

37

Subject to the other provisions of this Part. 38

Since freedom is subject to the other provisions of Part XIII, it is necessary to read those provisions to

ascertain the meaning of “free”. They supply the guidance as to what is that from which freedom is

intended. The freedom of inter-State trade in the Constitution of India comes under Part XIII of the

Constitution entitled „ Trade, Commerce and Intercourse within the territory of India.‟ Part XIII originally

consisted of six Articles. The first, Article 301, is the key Article, which provides that “subject to the

other provisions of this Part, trade, commerce intercourse throughout the territory of India shall be free.”

This may be called the free trade clause. To this clause there are certain exceptions in Part XIII itself.

Article 302 relaxes the general limitation imposed by Article 301, in favour of Parliament. It

allowed Parliament to put such restrictions on the freedom of trade and commerce as may be required in

the „public interest.‟ Thus, if the restriction is in the public interest, then the freedom declared by Article

301 can be restricted by Parliament.

Article 303(1) deals with one kind of restriction contemplate by Article 301. It forbids

discriminatory or preferential legislation by Parliament or the State Legislature, passed by virtue of any

entry, relating to trade and commerce in any of the lists in the Seventh Schedule of the Constitution.

Article 303(2) provides an exception to Article 303(1), which allows only Parliament to pass

discriminatory or preferential laws to meet a scarcity of goods. No such concession is made in favour of

the States.

Article 304 is another exception to the general declaration of freedom of trade and commerce in

Article 301. It allows under Article 304(a), the imposition of a tax imposed on similar home produced

goods to be imposed on imported goods, from other states, provided that there is no preference or

discrimination. Article 304(b) allows the State Legislatures to impose restrictions on the flow of trade,

commerce and intercourse provided that they satisfy three conditions. Firstly, the restrictions should be

reasonable; secondly, they should be in the public interest; and lastly, the law must have received the

previous sanction of the President or has subsequent assent under Article 255. The opening words of

Article 304, are “notwithstanding anything in Article 301 or Article 303,” this means that Article 304 is

not only an exception to Article 301 but also to Article 303. Thus the State Legislature can pass a

discriminatory or preferential law coming within the scope of Article 303 (1), if it satisfies three tests in

Article 304(b).

Article 305 saves „existing laws‟ from the provisions of Article 301 and 303, except in so far as

the President may by order otherwise direct. In 1955, the Constitutions (Fourth Amendment) Act, made a

further exception to Article 301. It provides that any law passed before the Amending Act relating to the

carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business,

industry or service whether to the exclusion, complete or partial, of citizen or otherwise will not come

within the purview of Article 301.

Article 306 allowed the States specified in Part B of the First Schedule to impose restrictions on

trade and commerce under their existing laws for a period not exceeding ten years, by agreement between

the Government of India and of that State, subject to modification at the end of five years, according to

the report of the Finance Commission. The majority of the States in Part B of the First Schedule agreed to

abolish internal customs duty with effect from 1.4. 1955. Further, on the reorganisation of States and

86

Justice Shah took the widest view39

of the freedom guaranteed under

Article 301, “freedom from prohibition, control, burden or impediments in

commercial intercourse, it means freedom of trade, commerce and intercourse in

all its series of operations from all barriers, restrictions or regulations.” This view

was rejected by the majority as being based on textual interpretation of Part XIII.

Justice Das speaking for the majority held in Automobile Transport

Limited v. State of Rajasthan,40

that, if the widest view was accepted then there

would be for all practical purposes, an end of State autonomy even within the

powers allotted to them under the scheme of the Constitution. Freedom does not

mean freedom from all restrictions. It must be understood in the context of an

orderly society and it recognizes the need of some regulatory control.

3.2.3.1. Freedom may be absolute or relative

Freedom may be absolute or relative. Literally “absolute freedom” means

freedom with no restriction of any sort, while relative freedom or freedom-in-law

pre-supposes some sort of control. “Absolute Freedom” might have been

appropriate in the age of laissez-faire, when individualism was an acceptable

goal. But in the Welfare State or the socialistic pattern of society, absolute

abolition of Part B states as a separate category, the Constitution (Seventh Amendment) Act, 1956,

repealed the above Article.

Article 307, the final Article of Part XIII, authorises Parliament to establish an authority similar

to the inter-State Commerce Commission of the United States of America. 39

In Atiabari Tea Company Limited v. State of Assam, AIR 1961 SC 232 at p. 260. 40

Supra, note 17, at p. 1421.

87

freedom is unattainable. It is through law that man enjoys his freedom. There is

no freedom without control or regulation. In the International Federation none of

the free trade Charters provides for absolute freedom of trade.41

Even Britain,

which followed free trade policy of hundred years, later on abandoned it.42

Putting restraint on the freedom of wrong-doing of one person is really securing

the liberty of the intended victims. If he is allowed to enjoy freedom absolutely,

then there will be chaos in the society. Thus, there cannot be any such thing as

absolute freedom or freedom from any sort of restrictions as this would lead to

nothing but anarchy and disorder.

Section 92 of the Constitution of Commonwealth of Australia, when was

under discussion in the Adelaide Session of the Convention Debates,43

Sir

George Turner expressed the fear that absolute freedom might have a wider

interpretation than was meant. Even at the final drafting Isacs44

pointed out that

the words “absolutely free” is extremely wide and therefore required

modification. But the tussle between the free trade and protection policies of

Eastern and Western Australia resulted in the question being left open. It was

41

Lambrindis J.S., The Structure, Function and Law of A free Trade Area, Preager, New York, (1965)

pp. 6-8 42

Lipsy R.G., Economic Unions (London) International Encyclopedia of The Social Sciences, 1968,

Vol. 7, Edited by D.L. Sillis, p. 542. 43

CD (Adelaide Session, 1891), Col. 875. 44

CD (Melbourne Session, 1898), vol. 11, Col. 2367.

88

only later that the judiciary45

pointed out that the word “absolutely” added

nothing; it was inserted merely to add emphasis. Professor Colin Howard46

rightly observes:

“To read it as saying that inter-State trade can be made subject to

no legal restraint at all is to convert it (Constitution) into an

instrument of chaos.”

Though the Constitution of India, like the Constitution of Australia uses

the words „trade, commerce and intercourse‟, it purposely omits the word

„absolutely‟ before the word „free‟, which indicates that the Constitution framers

did not want „free‟ to mean „absolutely free‟. Even Dr. B.R. Ambedkar,47

while

discussing the scheme of Part XIII, observed that the provision contained in this

Part, is not the intention to make trade and commerce absolutely free.

Article 301 simply says that “trade, commerce and intercourse throughout

the territory of India shall be free”; it does not say what trade and commerce are

to be free from. The main reason for this is that it is impossible to enumerate all

the measures which are deemed to impair the freedom. Moreover, the concept of

trade and commerce is a dynamic concept, which may require different

interpretations at different times. So it was left to the judiciary to decide what

amounted to infringement of the freedom guaranteed in Article 301.

45

James v. Commonwealth, (1936) 55 CLR 1. 46

Australian Federal Constitutional Law, Sweet and Maxwell Ltd., (1968) p. 211. 47 CAD (1949) Vol. IX, p. 1131.

89

3.2.3.2. Direct and immediate restriction

In Atiabari48

case, it was said that restrictions on freedom which are

guaranteed by Article 301, were such restrictions as directly and immediately

restricted the free flow or movement of trade. This concept of „direct and

immediate effect‟ has been taken from Australia. The Privy Council applied it in

Commonwealth v. Bank of New South Wales,49

where Lord Porter observed as

follows:

“[S]ection 92 is violated only when a legislative or executive act operates

to restrict such trade, commerce and intercourse directly and immediately,

as distinct from creating some indirect or consequential impediment,

which may be fairly regarded as remote.”

If the restriction is directed against the flow of trade and commerce

instead of being merely regulatory, or the restriction or imposition is excessive,

the interference may be said to be direct. Thus, if a law directly and immediately

affects the free movement of trade, it would be restriction on the freedom

guaranteed in Article 301. But a law which may have only indirect and remote

repercussions on the said freedom would not come within the inhibition of

Article 301.50

In this connection, reference may be made to Emperor v. Munna

48

Supra, note 18, at p. 254. 49

(1949) 79 CLR 497. 639 (PC) 50

Supra, note 17.

90

Lal,51

a decision under Section 297 of the Government of India Act. In that case,

the validity of the U.P. Sugar Factories Control Act, 1938, was questioned as

contravening Section 297 (1) of the Government of India Act, 1935. Justice, Das

delivering the judgment for the court, observe as follows:

“Economic planning of agriculture and industry nowadays is a part

of regulation of agriculture and industry and very often in

circumstances prevailing in a Province requires price control or

collective marketing or expropriation of goods at the necessity to

adopt these schemes may arise to preserve agriculture and industry

from extinction or to aid the growth of industry or agriculture.”

He further pointed out:

“These measures, invariably, in some way interfere with the liberty

of the subject to deal with their goods according to their wish and

they may directly and as a remote consequence affect export from

or import into a Province...the interference contemplated by the

Constitution is direct interference and not an indirect interference.”

Though the above observations were made with reference to Section 297

(1) of the Government of India Act, 1935, they lay down a general principle,

which is applicable to Article 301 of the Constitution of India, held in the case of

Atiabari Tea Company v. State of Assam,52

51

AIR 1942 Allh. 156, 163.

52

Supra, note 48.

91

The proposition that, in order to constitute a restriction on the freedom of

trade, commerce and intercourse, the restriction must be the direct effect of the

impugned law does not mean that, according to the distribution of legislative

powers in the three legislative Lists, such legislation must fall in pith and

substance within an entry which in terms relates to trade and commerce. List I,

entry 42 - „Inter-State trade and commerce‟, List II, entry 26 -„Trade and

commerce within the State‟. The reason is that Article 301 applies to laws passed

by Union or States Legislature, irrespective of its head of powers.53

The same

rule applies in the Constitution of Australia, where all the legislative power of the

Commonwealth under the different placita of Section 51, are subject to Section

92.54

Thus it seems that merely because, in pith and substance, a law does not fall

under a legislative entry, which specifically contains the word “trade and

commerce”, it cannot be argued that the effect of such law on the freedom of

trade and commerce must necessarily be indirect and remote. What is important

is the direct legal effect of the impugned restriction and not the legislative source

of such restriction. Once it is proved that the measure directly and immediately

affects the free movement of trade, it is immaterial whether the impugned

legislation was enacted under a taxation power or a trade and commerce power.55

53

Supra, note 17, at p.1433. 54 James v. Commonwealth, (1936) AC 578. Commonwealth v. Bank of New South Wales, (1949) 79

CLR 497. 55

Supra, note 53.

92

Further, in ascertaining the effect of impugned restriction, it is not

necessary to show that the total volume of trade and commerce is affected by the

imposition complained of. In Commonwealth v. Bank of New South Wales,56

it

was argued that, if the same volume of trade flowed from State to State before as

after the interference, then the freedom of trade among the States remained

unimpaired. But Lord Porter,57

who delivered the judgment of the Court, rejected

this contention, on the ground that the test of total volume was „unreal

unpractical and unpredictable.‟

Such an argument was raised before the Supreme Court of India in Saghir

Ahmad v. State of Uttar Pradesh,58

where Justice Mukherjee, left the question

open. The Automobile Case59

also does not comment on the effect of the

impugned restriction upon the volume of trade.

It is now, therefore, the settled law that a restriction on the freedom of

trade, commerce and intercourse means a restriction operating directly upon that

freedom.60

56

(1949) 79 CLR 497. 57

Ibid. p. 635. R.V. Vizzard ex parte Hill. (1933) 50 CLR 30. 58

Infra, note 130. 59

Supra, note 17. 60

Jindal Stainless Steel Limited v. State of Haryana, AIR 2006 SC 2550.

93

3.2.3.3. Regulatory and compensatory measures

In Atiabari Tea Co. Ltd. v. State of Assam,61

the Supreme Court took the

view that all measures, which directly and immediately restrict or impede the

flow or movement of trade would come within the inhibition of Article 301. But

later on the Supreme Court realised that such an interpretation might seriously

affect the legislative power of the State Legislatures, which were conferred

plenary powers with regard to subject in List II, item 26, „Trade and commerce

within the State‟, and held that regulatory or compensatory measured did not

affect the freedom of trade and commerce.62

A compensatory tax is a tax

imposed for the purpose of supplying trading facilities. Justice Das, in the

Automobile Case,63

pointed out certain examples of compensatory taxes. The

collection of a toll or a tax for the use of a road or for the use of a bridge or for

the use of an aerodrome does not come within Article 301 at all. In evolving this

notion of a compensatory tax, the Court seems to have followed the Australian64

and the American65 precedents, which maintain that fair compensations or re

compensations or reasonable compensations, are not hit by the free trade clause.

The Court has devised its own technique for exempting patent and palpable

interference with the freedom of trade and commerce. 61

Supra, note 18, at p. 254. 62

Supra, note 17. 63

Ibid. 64

Hughes & Vale Private Ltd. v. State of Bank of New South Wales, (1955) 93 CLR 127, 169. 65

Mann v. Illinois, (1877) 94 US (SC) 113, 134.

94

3.2.3.4. Fiscal and non fiscal measures

Article 301 of the Constitution of India nowhere says what measures

would come within its scope. The question arises whether fiscal and non-fiscal

measures come within the purview of the said Article. Fiscal measures are those

which are passed, in exercise of taxation power, such as, taxes on the entry of

goods, taxes on goods and passengers, while non-fiscal measures include those

which impinge on the free flow of trade, like licensing laws, laws regarding

commodity control, which have a direct effect on the free flow of trade.66

The free trade clause of the Constitution of Dominion of Canada is

included in the Part VIII entitled “Revenue; Debts; Assets; Taxation.” In Gold

Seal Limited v. Dominion Express Co.,67

it was held that Section 121 of the

Constitution, which states that all articles of the growth, produce or manufacture

of any one of the Provinces shall, from and after the Union, be admitted free into

each of the other Provinces, provides a safeguard against tariff walls only.

Section 297 (I) (a) of the Government of India Act. 1935,68

is also confined in its

application to laws made by virtue of certain specified entries in the Provincial

66

Supra, note 17. 67

(1922) 62 DLR 62 at 89/ The Constitution of Canada, 1867, downloaded from http://laws-lois. justice.

gc.ca/eng/Const/, retrieved on 20-09-2015, time 10.15 pm. 68

Section 297(1)(a) Government of India Act,1935 read as: By virtue of the entry in the Provincial

Legislative List relation to trade and commerce within the Province, or the entry in that list relating to the

production, supply, and distribution of commodities, have power to pass any law or take any executive

action prohibiting or restriction the entry into, or export from, the province of goods of any class or

description.

95

List, viz., those relating to trade and commerce within the Province,69

and to

production, supply and distribution of commodities.70

The Federal Court71

held

that any law, which was not passed in exercise of the said powers, would not get

protection in Section 297 (I) (a).

The High Courts in India were of divided opinion on this point. The High

Courts of Assam,72

Allahabad,73

and Mysore74 expressed the view that Article

301 did not affect tax laws. In H.P. Barua v. State of Assam,75

Justice Ram

Labhaya, pointed out as follows :

“[T]he two parts of the Constitution i.e. Part XII and Part XIII are

independent of each other. Part XII deals with finance, including

taxation; Part XIII deals with freedom of trade, commerce and

intercourse. This freedom is freedom from restrictions other than

those that may be imposed by permissible taxation under Article

246 read with relevant entries… The only Article in Part XIII

which deals with taxation is Article 304 (a). The existence of this

solitary provision relating to taxation is not enough to give the

whole Part an overriding effect over Part XII.”

69

Item 27. 70

Item 29. 71

Bhola Prasad v. Emperor, AIR 1942 FC 17. 72

H.P. Barua v. State of Assam, AIR 1955 Ass. 249, 270 (SB) 73

Ram Transport v. State of Uttar Pradesh, AIR 1957 Allh. 448. 74

Balwant Raj v. South K. Market, AIR 1952 Mys. 29. 75

Supra, note 72.

96

The Supreme Court in State of Bombay v. United Motors (India) Ltd.76

where the Bombay Sales Tax Act, 1952, was successfully challenged as ultra

vires, pointed out that the principle of freedom of inter-State trade and commerce

declared in Article 301 is expressly subordinated to the State power of taxing

goods from sister States, provided that no discrimination is made in favour of

similar goods of local origin.77 However the High Courts of Rajasthan

78 and

Bombay took the view that taxation might violate the freedom of trade and

commerce. In State of Bombay v. R.M.D. Chamarbaugwala,79 the State of

Bombay levied a tax on entries for prize competitions, and it was challenged on

the grounds that it violated the freedom guaranteed in Article 301. It was

contended that Article 301 dealt with restrictions other than taxation, and that

taxation did not fall within the ambit of Article 301 at all. Chief Justice Chagla,80

delivering the majority judgment, pointed out as follows :

“We find it rather difficult to understand how it could be said that

trade or commerce is free between Bombay and the State of

Mysore, if Bombay imposes tax on goods coming from Mysore or

on any other activity carried on in Mysore with the residents of

76

AIR 1953 SC 252. 77

Ibid., p. 257 78

Automobile Transport (Rajasthan,) Ltd. v. State of Rajasthan, AIR 1958 Raj. 114 (P.B);Surajmal v.

State of Rajasthan, AIR 1954 Raj. 260 DB. 79

AIR 1956 Bom. I. (DB) p.14. 80

Ibid., p. 15.

97

Bombay. It seems to us that implicit in the conception of free trade

is freedom from taxation.”

It is submitted that the latter view is more in accordance with provisions

of the Constitution. It is not correct to say that Part XII, which deals with tax

laws, is a self-contained code. The power to levy taxes is to be found in Article

245 read with the corresponding legislative entries in Schedule VII. Article 245,

which deals with the extent of laws made by Parliament and by the Legislatures

of the States, begins with the words “subject to the provisions of this

Constitution.” In other words, the power of Parliament and the State Legislatures

to make laws including tax laws is subject to the constitutional limitations.

Article 301 being a constitutional limitation, will apply to non-tax laws and tax

laws as well. Again Article 304 (a) was not the only Article in Part XIII which

dealt with taxation; Article 306, now omitted by the Constitution (Seventh

Amendment) Act, 1956, clearly suggested that the levy of customs duties was a

fetter on such freedom. If the first interpretation is accepted, it will frustrate the

object of incorporation of Part XIII, such as, avoiding tariff walls.

Thus, it seems that, as there is no exception which exempts a tax law from

the operation of Article 301, except Article 304(a) which allows non-

discriminatory taxes by the State, so taxes, not saved by Article 304 (a) will

come within the inhibition of Article 301.

98

Once it is accepted that tax laws come within the bounds of Article 301,

then the question arises whether or not taxation per se comes within the purview

of that Article. The observations of the Bombay High Court, in State of Bombay

v. Chamarbougwala,81

seem to suggest that every form of taxation touching

inter-State trade and commerce will be ipso facto an infringement of the freedom

of trade, commerce and intercourse conferred by Article 301. In supporting this

view the Bombay High Court pointed out that there were observations in the

judgment of the Supreme Court in the Sales Tax Act case,82

which clearly

suggested that Article 301 was an overriding Article both with regard to

restrictions and taxation. In Atiabari Tea Co. Limited v. State of Assam,83

the

facts were that the appellants carried on the business of growing tea and

exporting them to Calcutta via Assam. While passing through Assam, the tea was

liable to pay the tax levied by the Assam Taxation (on goods carried by Road or

Inland Water-ways) Act, 1954, on certain goods carried by road or inland

waterways in the State of Assam. The majority of the Supreme Court held that

the levy offended against Article 301. Justice Shah, in concurring with the

majority opinion of the Court, pointed out that taxation on commercial

81

Id. 82

State of Bombay, v. United Motors, AIR 1953 SC 252. 83

Supra, note 18.

99

intercourse, even imposed as a measure for collection of revenue, was hit by

Article 301.84

If the above interpretation is accepted, the effect will be that all taxes,

whatever its effect on trade and commerce may be, will be subject to the

provision of Article 301. Thus, a building tax or a wealth tax which has an

indirect effect on freedom of trade and commerce will also come within the

inhibition of the free trade clause. In Automobile Transport Ltd. v. State of

Rajasthan,85

the Rajasthan Motor Vehicles Taxation Act 1951, levied taxes on

vehicles plying to and from places within that State. The petitioners were

required to pay such taxes in respect of their vehicles operating on certain routes

Nazirabad to Deoli; both places being in the State of Ajmer, but passing through

the State of Rajasthan. Unless they paid the taxes, they could neither operate

their vehicles through that State nor keep them at any place in the State. Justice

Das, delivering the opinion of the Court, rejected the wider view expressed by

Justice Shah, in the Atiabari case,86

and spoke as follows :87

“If the widest view is accepted, then there would be for all practical

purposes, an end to State autonomy, even within the field allotted

84

Ibid, at p. 260. 85

Supra, note 17. 86

Supra, note 84. 87

Supra, note 17, at p. 1421.

100

to them under the distribution of powers envisaged by our

Constitution.”

He further pointed out :88

“For the tax to become a prohibited tax, it has to be a direct tax, the

effect of which is to hinder the movement part of trade.”

This position has also been accepted in Australia89 and the United States

of America,90 that a tax simpliciter does not come within the inhibition of the free

trade clause. It seems that only those taxes which directly and immediately

restrict the free flow of trade and commerce will come within the purview of

Article 301. Justice M. Ramaswamy,91

has rightly pointed out that it is not every

taxing measures that comes within the purview of the commerce clause, so broad

a conception would spell disaster to the States and would bring the governmental

machinery to a halt.

The above considerations will also apply to non-fiscal measures. The

opening words of Article 301 are “subject to the other provisions of this Part”,

while Article 245, which is the source of the legislative powers of the Union and

State legislatures begins with the words “subject to the provisions of this

88

Ibid., p.1420. 89 Lane P.H., Australian Constitutional Law, Edition, 1964, Law Book of Australia, Sydney, pp. 205-214. 90 Schwartz B., The Constitution of United States, 1963, Vol.1, Part I, Mac-Millan Company, New

York, pp. 290-291. 91 Ramaswamy M., The Commerce Clause in The Constitution of The United States, 1948, Long Ran‟s

Green, New York, pp. 449-50.

101

Constitution.” Thus, Article 301 constitute a limitation on the legislative powers

of Parliament and the State Legislatures.92

So non-fiscal measures, which directly

and immediately affect the free flow of trade, would be hit by the provisions of

Article 301. In Chhotabhai v. State of Madhya Pradesh93

the Madhya Pradesh

Tendu Patta (Vyapar Viniyam) Adhiniyam, 1964, which banned the transport of

imported tendu leaves within the State, was held invalid as violative of Article

301. It may be noted that not all non-fiscal measures come within the inhibition

of Article 301; where, in order to prevent the use of denatured spirituous

preparations as intoxicating liquor, a State law required each person dealing in

such Articles to have a permit, the law was held to be regulatory. In delivering

the opinion of the Court in that case, Chief Justice Shelat,94

pointed out that it

was possible that a trader, concerned in inter-State trade in those Articles, might

find the necessity of obtaining a license or pass somewhat irksome, but that did

not constitute an impediment in the way of such trade and commerce.

Thus, non-fiscal measures, which are merely regulatory and do not

impede the freedom of trade and commerce, are not hit by the freedom declared

by Article 301.95

92

Supra, note 17, at p. 1422. 93

AIR 1968 MP127. 94

Chandulal v. State of Gujarat, AIR 1964 Guj. 59, 72. 95

Supra, note 92.

102

3.3. Restrictions by Parliament on Freedom of Trade

The expression “free” in Article 301 cannot mean absolute freedom or that

each and every restriction on trade and commerce is invalid. It is observed that

freedom of trade and commerce guaranteed under this Article is freedom from

such restriction as directly and immediately restrict or impede the free flow or

movement of trade.96

Thus, restriction which is indirect or inconsequential on

trade, commerce or intercourse is not hit by Article 301.

Although Article 301 is positively worded, in effect, it is negative as

freedom correspondingly creates general limitations on all legislative power to

ensure that trade, commerce and intercourse throughout India shall be free.

Article 301, therefore, refers to freedom from laws which go beyond regulation

which burden, restrict or prevent the trade movement between States and also

within the State.97

Article 302 is in the nature of an exception to the freedom of trade and

commerce guaranteed by Article 301.98

It says that, notwithstanding the

protection conferred by Article 301, Parliament may by law impose such

restrictions on the freedom of trade, commerce and intercourse between one State

96 Supra, note 18, at para 32. 97

Jindal Stainless Limited (2) v. State of Haryana, AIR 2006, SC 2250. 98

Basu D.D., Commentary on the Constitution of India, 8th

Edition, 2007 Reprint, 2012, Vol. 8,

LexisNexis Butterworths Wadhwa, Nagpur, p.9780.

103

and another or within any part of the territory of India as may be required in the

public interest.

3.3.1. Restrictions on the ground of public interest

According to Ramaswamy M.,99

the constitutional validity of laws coming

within the scope of Article 302 is a question for Parliament to determine; for

public interest in the economic sphere, raises issues of so complex and debatable

a character that a court can hardly be the appropriate forum to discuss and reach

final decisions on them. Even in Atiabari Tea Co. Ltd. v. State of Assam,100

Justice Gajendragadkar, said obiter that the question of public interest could not

be justiciable and was a matter for Parliament to decide.

„Public interest‟ being a wider expression, refers to the interest of the

general public.101

In the Constituent Assembly, Pandit Thakur Das Bhargava

suggested the inclusion of the words „in the interest of the general public‟ in

Articles 302 and 304 instead of the words „in the public interest‟. It was pointed

out that these phrases had the same meaning, and so the suggestion was not

adopted.102 The words „in the public interest‟ do not mean that it should be „in

99

Indian Constitutional Provisions Against Barriers To Trade And Commerce. 2 Journal of Indian Law

Institute, 1960. p. 385. /Joshi G.N., Aspects of Indian Constitutional Law, University of Bombay,

Bombay (1965) p. 164. 100

AIR 1961 SC 232 at 254 ,for similar remarks-Davis H.O. Divisions of Powers with Respect to Trade

and Commerce. Constitutional Problems of Federalism in Nigeria, Edi. L. Bratt (1961) p. 97 where he

says : a declaration by the Union Government that public interest is involved would be conclusive under

Constitution of India.‟ 101

Glass Chatons Assso. v. Union of India, AIR 1961 SC 1514 (1516). 102

CAD (1949) Vol. IX, p. 1126, 1141.

104

the interests of the public of the whole of the Republic of India‟.103

It may well be

that legislation affecting a limited class of persons or a limited area is in the

public interest, though the public of other parts of India may not be directly

affected by such legislation.104

If a purpose is in the interest of the general public,

it is immaterial that it only affects the interests of particular individuals or causes

hardship to particular individuals.105

What is required by Article 302 is that the restriction should not be

imposed for a private interest. Even Article 302 does not speak of „reasonable‟

restrictions, yet it has been observed by the Supreme Court in Prag Ice Mills106

that -

“[a]lthough Article 302 does not speak of reasonable restrictions yet it is

evident that the restrictions contemplated by it must bear a reasonable

nexus with the need to serve public interest.”

In several cases,107

where the constitutional validity of a law imposing

restrictions under Article 302 has been challenged, the Supreme Court has

applied the test of reasonableness to uphold the validity of those restriction.

Therefore, the concept of reasonableness has been impliedly introduced into

Article 302. Further, whenever a restriction is challenged, an additional ground

103

Iswari Prasad v. N.R. Sen, AIR 1952 Col. 273 (P.B.) at 278 104

Kochunni v. State of Kerala, AIR 1960 SC 1080 (1104) 105

Quareshi v. State of Bihar, AIR 1958 SC 731. 106

Prag Rice & Oil Mills v. Union of India, AIR 1978 SC 1296, 1302. 107

Manick Chand Paul v. Union of India, AIR 1984, SC 1249.

105

raised is that it is inconsistent with Article 19(1)(g). This inevitably brings in the

question of reasonableness of the restriction.

Even if the Act “directly and immediately” impedes the movement of the

goods, the statutory provision is saved by Article 302. There is a presumption

that the imposition of the tax is in public interest.108

Similar view have been expressed by the judiciary in the United States

that the Legislature can in the public interest prohibit an inter-State agency which

promotes immorality,109 dishonesty

110or the spread of any evil or harm to the

people of the other States. It is in the public interest if the State exclude from

inter-State trade or commerce, harmful substances e.g. impure food;111

intoxicating liquors;112

lottery tickets,113

or animals or persons having contagious

diseases.114

It is to be noted that the restriction on the freedom of trade and commerce

allowed by Article 302 is confined to Parliament. The additional words „by law‟

in Article 302 shows that the executive cannot impose any restriction upon the

freedom except when authorisd by a law made by Parliament.

108

Ambrit Banaspati Co. Ltd. V. Union of India, AIR 1955, SC 1340, 1343: (1995)3, S.C.C., 335. 109

Hoke v. United States, (1913) 227 US (SC), 308 110

Brooks v. United States, (1925) 267 US (SC), 432. 111

Hippolite Egg Co, v. United States, (1911) 220 US (SC), 45 112

Mugler v. Kansus, (1887)123 US (SC), 623. 113

Champion v. Ames., (1903) 188 US (SC), 321 114

North America Cold Storage v. Chicago, (1908) 211 US (SC), 366.

106

3.3.2. Prohibition of discriminatory and preferential restriction

The power of Parliament to impose restrictions on freedom of trade in the

public interests is not unlimited. The restrictions must not be discriminatory or

preferential. Article 303(1), being an exception to Article 302, provides that

Parliament cannot discriminate between one State and another, or give any

preference to one State over another, by virtue of any entry relating to trade and

commerce in any of the Lists in the Seventh Schedule. If Parliament seeks to

impose a restriction under its legislative power relating to trade and commerce,

such restriction must be non-discriminatory. What is prohibited by Article 303(1)

is giving a tangible advantage in the course of inter-State trade or some material

or substantial benefit of a commercial or trading character to one State over

another, or singling out a Government.

The words „by virtue of any entry relating to trade and commerce‟ in

Article 303(1) make it clear that the prohibition in the said Article applies only in

the case of Parliament exercising its trade and commerce power. The legislative

entries relating to trade and commerce power of Parliament are: entry 41 of List I

- Trade and commerce with foreign countries; entry 42 of List I - Inter-State

trade and commerce and entry 33 of List III - Trade and commerce in the

products of industries where the control of such industries by the Union is

expedient in the public interest. If Parliament incidentally affects trade and

107

commerce in the exercise of the power other than above mentioned it would not

come within the inhibition of Article 303(1).

3.3.3. Restrictions on the ground of scarcity of goods

Although preferential or discriminatory legislation is prohibited under

Article 303(1), it does not mean that, a non-discriminatory law affecting the

freedom of trade and commerce will be necessarily valid. Such a law, in order to

be valid will have to satisfy the condition in Article 302.

Article 303(2) allows Parliament to impose restrictions on freedom of

trade, even though preferential or discriminatory, in case of scarcity of goods in

any part of the territory of India. The reason for such an exception in favour of

Parliament is that in case of famine or other emergency the Centre should be able

to meet the necessities of different regions. If the individual States were allowed

to adjust their demand and supply of necessities, in such circumstances, the result

might be that some States would have plenty of goods, while the people of the

neighbouring States would starve. In order to prevent such situations arising,

Parliament is allowed to take preferential or discriminatory measures. Article

303(2) allows those restrictions which are forbidden to be imposed by Article

303(1), if it is necessary to do so for the purpose of dealing with a situation

arising from scarcity of goods in any part of India.

108

The words „declared by such law‟ in Article 303(2) mean that Parliament,

when enacting discriminatory or preferential legislation to avoid a scarcity of

goods, should make an express declaration of the purpose of the law. If

Parliament takes measures provided in Article 303(2) without such declaration,

the measures so enacted might be held invalid, being contravention of clause

(1) of Article 303.

The difference between Article 302 and Article 303(2) is that, in the case

of legislation coming within the scope of Article 302, it will be open to the

judiciary to examine whether the restriction so imposed is in the interest of the

public, while legislation contemplated by Article 303(2) cannot be examined by

the courts to determine the necessity of the preference or discrimination. If a law

comes within the scope of Article 303(2), it is valid, notwithstanding that it

discriminates or restricts the free flow of trade and commerce.

3.4. Restrictions by States on Freedom of Trade

Article 304(a) provides that, notwithstanding115

the general declaration of

freedom guaranteed in Article 301, the State Legislature may by law impose non-

115

It may be noted that Article 304 (a) begins with the non obstante clause, which says that nothing in

Article 301 and Article 303(1) shall apply to Articles 304 (a) . Article 303 (1) prohibits discriminatory or

preferential measures taken under the exercise of trade and commerce power. Article 304(a) deals with

taxation power of the State, whereas Article 303 (1) is confined to the trade and commerce powers only.

If Article 304(a) were construed literally, it would mean that all non-discriminating laws even though

they directly restrict the free flow of trade and commerce, will be valid. Such a construction would

frustrate the object of the inclusion of Article 304 (b) in Part XIII. Thus, the reference of Article 303(1) to

109

discriminatory taxes on goods imported from other States. Article 304(a) thus

enable the State Legislature to impose taxes on goods imported from other

States, provided similar goods within the State are subjected to similar taxes.

Article 304(b) provides that the State Government may impose reasonable

restriction on the freedom of trade, commerce and intercourse with or within that

State as may be required in the public interest,116

provided that no Bill or

amendment in this regard shall be introduced in the Legislature of a State without

the previous sanction of the President.

3.4.1. Imposition of similar taxes on goods imported from other States

Article 304(a) may be said to have been modeled on the provisions of

Section 297(1)(b)117

of the Government of India Act,1935,which prohibited

discriminatory taxes on imported goods from other States. It may be pointed out

that Section 297(1)(b) was prohibitory, while Article 304(a) enable the State to

levy non-discriminatory taxes.

Article 304 in the non obstante clause may be said to be applicable to Article 304 (b) and not to Article

304 (a). 116

The requirement of public interest in Article 304(b) is the same in Article 302 and it should have the

same meaning here as there. 117 Section 297(1)(b) of the Government of India Act,1935 read as: By virtue of anything in this Act have

power to impose any tax, cess, toll or due which, as between goods manufactured or produced in the

Province and similar goods not so manufactured or produced, discriminates in favour of the former or

which in case of goods manufactured or produced outside the Province, discriminates between goods

manufactured or produced in one locality and similar goods manufactured or produced in another locality.

110

This Article follows American decision to the effect that a State can ask

for a return for anything it has given118

or the protection or benefit conferred by

the State,119

provided that no discrimination is made against the imported goods

by such tax.120

The Courts, in Australia have interpreted Section 92 of the

Constitution, as affording protection against discriminatory taxes. Thus, in Fox v.

Robbins,121

a law of the State of Western Australia, which exacted a higher

licence fee for the sale of wine manufactured from fruits grown in another State

than was imposed for the sale of wine produced from fruits grown within the

State, was held invalid as a contravention of Section 92. Chief Justice

Griffith122

delivering the opinion of the Court, observed:

“This provision (S.92) would be quite illusory if a State could impose

disabilities upon the sale of the Products of other States, which are not

imposed upon the sale of home Products.”

The object of Article 304(a) is to see that the goods produced or

manufactured in a State are not placed in a position of disadvantage as compared

with similar goods produced or manufactured in other State and imported from

118

Wiscosin v. J. C. Penney Co., (1940) 311 US (SC),435. 119

Nelson v. Sears, Roebuck & Co.,(1941) 312 US (SC), 350. 120

Welton v. Missouri, (1875) 91 US (SC), 275. 121

(1909) 8 CLR 115. 122

Ibid.,pp. 119-120.

111

such States. Chief Justice Patanjali Sastri, in State of Bombay v. United Motors

(India) Ltd.123

pointed out as follows:

“By this clause, the principle of freedom of inter-State trade and

commerce declared in Article 301, is subordinated to the State

power of taxing goods imported from sister States provided only

no discrimination is made in favour of similar goods of local

origin. Thus, the States in India have full power of imposing

what in American State Legislation is called the „use tax‟ „gross

receipts tax‟ etc. subject only to the condition that such tax is

imposed on all goods of the same kind of produced or

manufactured in the taxing State although such taxation is

undoubtedly calculated to fetter inter-State trade and commerce.”

In order the tax to be valid under Article 304(a), three conditions must be

satisfied. Firstly, the importation of goods from other States; Secondly, the

manufacture or production of similar goods in the taxing State; Thirdly, the

imposition of similar taxes on the goods manufactured or produced in the State.

If these elements exist, the State Legislature is empowered to impose taxes on the

imported goods.

What is required in Article 304(a) is that, when the imported goods

reaches the taxing State, they should be treated as if it had been produced in that

123

AIR 1953 SC 252 at 257.

112

State. In Laxmi Cotton Traders v. State of Haryana,124

the Punjab General Sales

Tax (Haryana Amendment and Validation) Act, 1967, in Schedule „D‟ provided

that, if cotton was imported by a dealer from outside the State of Haryana or

otherwise received by him in the State of Haryana for sale, the tax had to be

levied on the first sale within the State of Haryana by a dealer liable to pay the

tax under the Act, and if the cotton was purchased in the State of Haryana, the

tax was levied on the first purchase within the State of Haryana. It was held that,

when the rate of purchase tax and the sale tax was the same, primafacie, there

existed no discrimination. The Court further pointed out that Article 304(a) did

not require that same tax should be imposed on the imported and the local goods.

What is required is that, when the imported goods reaches the taxing State, they

should be treated alike.

3.4.2. Restrictions on the ground of public interest

Article 304(a) deals with non-discriminatory taxes, whereas Article 304

(b) deals with „restrictions‟. The question arises whether the word “restrictions”

in this Article includes restrictions imposed by taxing laws on the freedom of

trade and commerce. In H.P. Barua v. State of Assam,125

the Assam Taxation (on

goods carried by Road or Inland Waterways) Act, 1954, levied taxes on goods

carried by road or inland waterways in the State of Assam. It was contended on

124

AIR 1969 Punj. 12. 125

Supra, note 72.

113

behalf of the Petitioners that the imposition of the tax interfered with the freedom

of inter-State trade, commerce and intercourse. But the Court rejected this

contention and pointed out that the power to impose taxes was the subject of Part

XII and the only Article in Part XIII which dealt with taxation was Article 304

(a). This view was followed by the Supreme Court from the case of State of

Bombay v. United Motors (India) Ltd.126

Where Chief Justice Patanjali Sastri,

speaking for the Court, said that the provisions regarding freedom of inter-State

trade do not restrain the State power from imposing any non-discriminatory tax

on goods imported from sister States. This observation was further clarified in a

subsequent case127

where the Court held that, if it is proved that a tax is not

discriminatory, then it will not come within the purview of Article 301, even

though the tax is undoubtedly calculated to fetter inter-State trade and commerce.

This view also finds support in the observation of H. M. Seervai128 that

“Article 304 itself makes a distinction between taxes and

restrictions and correct conclusion to draw from this fact is that

restriction, in Article 304(b) do not include a tax.”

3.4.3. Reasonableness of retroactivity

126

Supra, note 76. 127

Reliance Automobiles v. State of Andhra Pradesh, (1958) 9 Sales Tax Cases, 295(AP) 128

Constitutional Law of India.(1967) p. 1000, Basu D.D. also at first took this view, Shorter Constitution

of India. (3rd

Edition) (1960) p. 542. But now it is seems he does not follow this view. Commentary on

The Constitution of India, S.C. Sarkar & Sons (P) Ltd., Calcutta (Fourth Edition) (1963) Vol. 4.

pp. 485-490.

114

In Khyerbari Tea Co. v. State of Assam,129

the Legislature restricted

freedom of trade with retrospective effect. It was contended that if the State

Legislature was allowed to restrict freedom by imposing restrictions having

retrospective effect, then it would frustrate the scheme of Part XIII. The Court

negatived the contention on the ground that, if the retrospective operation of a

restriction was allowed in Article 19(5), there was no reason why it cannot be

allowed in Article 304(b). If a restriction is reasonable and in the public interest,

it does not cease to be so merely because it is given retrospective effect.

Legislative power to give retrospective operation should not be confused with the

reasonableness of the retrospectivity which may be required of legislation in

Article 304(b). There is no limitation upon the power to enact retroactive

legislation, except Article 20(1), which prohibits retroactive substantive penal

laws.

3.4.4. Reasonable restriction include prohibition

A doubt was expressed in Saghir Ahmed v. State of U.P.130

where the U.P.

Government decided to exclude all private bus owners from plying motor

vehicles and establish a complete State monopoly. Justice Mukherjee, delivering

the majority judgment left the question open.

129

AIR 1964 SC 925. 130

AIR 1954 SC 728.

115

In Australia the Privy Council held that in extreme circumstances

regulation would include prohibition. Lord Porter observed in the Bank

Nationalization case131

as follows:

“[R]egulation of trade may clearly take the form of denying certain

activities to persons by age or circumstances unfit to perform them

or excluding from passage across the frontier of a State creatures or

things calculated to injure its citizens.”

In America it has been recognised that in certain cases a restriction may

take the form of prohibition. The Supreme Court of America has held that inter-

State trade and commerce may be validly prohibited in cases of impure foods and

drugs,132 stolen motor vehicles

133 and transportation of women or girls for

immoral purposes.134

Under Article 19(2)-(6) the words used are „reasonable restriction‟, and

the Supreme Court of India135

held in that, in case of dangerous or noxious

trades, it would be open to the State to prohibit them altogether. This view was

subsequently affirmed in Narendra Kumar v. Union of India,136

where the Non-

ferrous Metal Control Order, 1958, completely eliminated middlemen from

carrying on the business, in order to ensure the supply of such goods to the

131

Commonwealth v. Bank of New South Wales (1949) 2 All. E.R. 755, 772. 132

Hipolite Egg Co. v. US (SC), (1911) 220 US (SC), 45. 133

Brooks v. US (SC), (1925) 267 US (SC), 432. 134

Hoke v. United States (SC), (1913) 227 US (SC), 308. 135

Cooverjee v. Excise Commessioner. AIR 1954 SC 22086. 136

AIR 1960 SC 430.

116

consumers at a minimum price; the order was held valid. Justice Das,137

said that

restriction includes cases of prohibition.

Where a trade is inherently dangerous or noxious its total prohibition

would not be unreasonable restriction.138

But such restrictions in order to be valid

would have to satisfy test provided in Article 304(b). Whether a restriction is

reasonable or not, the Court would examine the nature of the business. In State of

Bombay v. R.M.D. Chamarbaugwala,139

the State of Bombay prohibited prize

competition within the State, it was challenged as invalid on the ground of non-

compliance with Article 304(b). The Supreme Court negatived the contention

and held as follows:

“To control and restrict betting and gambling is not to interfere

with trade, commerce and intercourse as such but to keep the flow

of trade, commerce and intercourse free and unpolluted and to save

it from anti-social activities.”140

A restriction, in order to be reasonable, requires not only that it should be

substantially reasonable, but also it should be procedurally reasonable. In

determining the procedural reasonableness, the Courts are concerned to examine

the procedure or manner of imposing or enforcing the restrictions and to

determine whether they are fair and just or arbitrary. For a restriction to be

137

Ibid p. 436. 138

Cooverjee v. Excise Commessioner. AIR 1954 SC 220. 139

Supra, note 23. 140

Ibid, at p. 721.

117

procedurally reasonable, it has to comply with the principle of „natural justice‟.

Natural justice is an expression of English common law, which means that there

must be no bias on the part of the authority imposing restriction and the party in

point of restriction must be given adequate opportunity of being heard.141

In the

United States the concept of „Procedural due process‟ requires that for a

restriction to be valid, the person to be affected must be rendered an opportunity

to present his objections, on being given a reasonable notice.142

The Supreme Court of India has also held that a procedure which does not

comply with the principles of natural justice must be held to be unreasonable.143

However, in exceptional circumstance non-compliance with the procedure may

be justified. In cases of an emergency, or the maintenance of supplies, it is not

necessary that normal procedure should be followed.144

It should be noted that

vesting of unfettered discretions on administrative authority may make a

restriction unreasonable. But the power conferred cannot be said to be unfettered

where the statute lays down the purpose for which or the policy according to

which it is to be exercised.

141

Local Government Board v. Arlidge. (1915) AC120; 138 142

Mullane v. Central Hanover Trade Co. (1950) 339 US (SC), 306, 314. 143

Mineral Development Co. v. State of Bihar, AIR 1960. SC 468, 472. 144

Surajmal v. State, AIR 1967 Raj. 104.

118

3.4.5. Presidential assent

The proviso to Article 304(b) makes it obligatory that all the State laws

imposing restrictions on the freedom of trade, commerce and intercourse with or

within a State receive the previous sanction of the President, that is, a Bill or

amendment for that purpose cannot be introduced or moved in the State

Legislature except with the previous sanction of the President. Perhaps, failure to

obtain previous sanction of the President may be cured under Article 255(c)145

by

obtaining his subsequent assent.146

A law that does not comply with this

condition is void and unenforceable if any violation of Article 301 is found.147

The Supreme Court in Saghir Ahmed, v. State of U.P.148

followed the

literal meaning, without resort to other provisions of the Constitution, and held

that, if previous sanction was not obtained, sanction obtained after the

introduction of the Bill cannot save the State law. But the attention of the Court

was not drawn to Article 255(c), which curses the defect arising from the absence

of previous assent of the President. Article 255(c) clearly provides that no Act of

Parliament or of the State Legislature shall be invalid by reason only that the

145

The material portion of Article 255 read as: Requirement as to recommendations and previous

sanctions to be regarded as matters of procedure only:- No Act of Parliament or of the Legislature of a

State and no provision in any such Act, shall be invalid by reason only that some recommendation or

previous sanction required by this Constitution was not given, if assent to that Act was given-

(a) ……………..

(b) ……………..

Where the recommendation or previous sanction required was that of the President, by the President. 146

Karnataka v. Corporation, AIR 1981 SC 463. 147

Supra, note 119, p.204. 148

Supra, note 130.

119

previous sanction so required by the Constitution was not given, if the assent to

that was given by the President later on.

It is in the interest of the State Legislature that if the previous sanction is

not obtained, the State Legislature should present it for the President‟s assent

immediately after passing the Bill.

The President can give conditional assent to a Bill or amendment.

Conditional assent means that, the Presidents assent to a Bill, provided certain

conditions are to be fulfilled. In the case of U.P. Sugar (Regulation of Supply and

Purchase) (Amendment) Ordinance, 1959, the President gave assent on the

condition that the proposed rate of cess on supply and purchase of sugar should

not exceed Rs. 10-15 per Maund, and that prior approval should be obtained

from the Government of India for any increase. It should be noted that there is no

provision which restricts the President from giving conditional assent to a Bill.

There were many instances in the past when the President had giving conditional

assents to Bill.149

The sanction of the President is not only necessary in case of Bill which

restricts directly the free flow of trade and commerce, but also in case of an

amendment to a Bill, which comes within the scope of Article 304(b). In Kalyani

Stores v. State of Orissa,150

the Board of Revenue enhanced the excise duty on

149

Andhra Pradesh Sugarcane (Regulation of Purchase and Supply) Bill, 1959- Assent was given on the

condition that cess funds be utilized for research and development of sugarcane. In Case of Assam Tax

(on goods carried by Road or Inland Waterways) Act, 1961 the assent was given on the condition that

mineral ores, petroleum products, tea and other exportable goods be exempted from tax. 150

AIR 1966 SC 1686; followed in State of Mysore v. Sanjeeviah, AIR 1967 SC 1189.

120

liquors from Rs. 40, as levied under the Bihar and Orissa Excise Act, 1915, to

Rs. 70 per L.P. gallon. This additional levy was challenged as contravening the

provisions of Article 304(b). It was held by the majority of the Supreme Court

that the additional levy was not valid, as the constitutional requirements in

Article 304(b) were not complied with.

3.5. Restrictions Imposed by Existing Laws

According to the first part of Article 305151

“Nothing in Articles 301 and

303152

shall affect the provisions of any existing law except in so far as the

President may by order otherwise direct.”An “existing law” as defined in Article

366(10) means “any Law, Ordinance, order, bye-law, rule or regulation passed or

made before the commencement of this Constitution by any Legislature,

authority or person having power to make such a law, Ordinance, order, bye-law,

rule or regulation”. It is clear from the definition that the laws which had been

passed prior to the commencement of the Constitution, that is prior to 26th

151

Article 305 read as: Nothing in Articles 301 and 303 shall affect the provisions of any existing law

except in so far as the President may by order otherwise direct; and nothing in Article 301 shall affect the

operation of any law made before the commencement of the Constitution (Fourth Amendment) Act,

1955, in so far as it relates to, or prevent Parliament or the Legislature of a State from making any law

relating to, any such matter as is referred to in subclause (ii) of clause (6) of article 19. 152

Supra, note 38.

121

January, 1950 are protected under Article 305153

even though they are brought

into operation after such commencement.154

In Surajmal Bhaj v. State of Rajasthan,155

Section 77 of the City of Jaipur

Municipality Act, 1943, gave power to the municipality to frame rules and bye-

laws and to impose octroi duty. After the commencement of the Constitution, the

municipality imposed this duty. It was contended that the imposition of duty

could not be saved under Article 305, as the imposition of duty was effected after

the Constitution came into force. It was held that such imposition of duty would

come within the saving Article 305. Chief Justice Wanchoo,156

pointed out that it

was true that the words „existing law‟ as defined in Article 366(10) included any

law, Ordinance, bye-law passed before the Constitution, but that definition did

not mean that if the law was saved as existing law in Article 305 no bye-law

could be saved, which was passed after the Constitution authorised by the

existing law.

153

Article 13(1) provides that all law in force in the territory of India immediately before the

commencement of the Constitution in so far as they are inconsistent with the fundamental rights,

guaranteed in Part III, shall to the extent of such inconsistency, be void. Nevertheless, in Part XIII no

question of inconsistency of the existing laws arises, as they are saved by Article 305 without any

condition. 154

Kitti Keya v State, AIR 1954 Mad. 621. In this case the Madras Commercial Crops Markets Act, 1933

was extended to a new area in 1951. The Court held that it was an existing law even with respect to such

area. 155

AIR 1954 Raj. 260. 156

Ibid., p.261

122

The same question again came up for discussion in Kalyani Stores v. State

of Orissa.157

Section 27 of the Bihar and Orissa Excise Act, 1915, authorised the

State of Orissa to impose duties on import, export, transport and manufacture of

alcoholic liquors at such rate and rates as the State Government may direct.

Under a notification of 1937, a duty of Rs 40/- per L.P. Gallon was fixed, but in

1961 the Board of Revenue made an Order, enhancing the existing rate of duty of

Rs. 40/- to Rs. 70/-. It was contended on behalf of the appellants that the

additional levy of Rs. 30/- violated the provision of Article 304. The Court held

that the additional duty of Rs. 30/- could not be saved under Article 305, any

additional burden in order to be valid will have to satisfy the requirements of

Article 304(b). But Justice Hidayatullah,158

in his dissenting opinion, pointed out

that the notification of 1961 derived its force from Section 27 of the existing law.

If the duty under the notification of 1937 could be sustained, there was no point

in declaring the additional levy invalid. It is submitted that the dissenting opinion

was correct. The Board of Revenue were acting under the authority conferred by

existing law. Moreover Section 27 authorised the Government to levy the duty at

its direction, hence it will come within Article 305. What is required in the said

157

AIR 1966 SC 1686. 158

Ibid., p. 1696.

123

Article authorises the levy must have been passed before the Constitution, it is

immaterial when the relevant provision of the Act is brought into operation.159

The amendment of the pre-Constitution Act after the commencement of

the Constitution fall within the scope of Article 305. Sometimes the Legislature,

when enacting an Act, provides in the Act itself for such amendments as

exclusion of the life of the existing Act, or any explanatory or technical

amendments thereto. These amending Acts do not bring any substantial change

in the character of the existing Acts, so they are still entitled to the protection

under Article 305.160

But if an amendment to the existing law introduces

provisions, making a substantial change, for example, by bringing new persons

or objects within the scope of a taxing statute, it cannot be saved as a „existing

law‟ under Article 305. If the amendment brings substantial changes, it may be

regarded as new legislation, and will not come within the purview of Article 305.

3.6. Restriction Imposed by Nationalisation Laws

The Constitution (First amendment) Act, 1951, amended clause (6) of

Article 19, introducing a new ground of restriction upon the freedom of trade,

profession. It provided that any law relating to the „the carrying‟ on by the State,

or by a corporation owned or controlled by State, of any trade, business, industry

159

Bangalore Mills v. Bangalore Corporation, AIR 1962 SC 562 , Hansraj v. State, AIR 1970 Pat. 59. 160

Hansraj v. State, AIR 1970 Pat. 59.

124

or services, whether to the exclusion complete or partial, of citizens or

otherwise‟, would not come within the purview of Article 19(1)(g). Thus any law

contemplated in Article 19(6) (ii), will not be void by reason of the fact that it

restricts the freedom to carry on any trade or business. But at that time no

corresponding amendment was made to Article 305. In Saghir Ahmed v. State of

U.P.161

Justice Mukherjee, pointed out that an Act providing for a State monopoly

exempted under Article 19(6) (ii) would have to satisfy the test under Article

304(b), in order to be valid, as no corresponding provisions were provided in

Article 305. In order to make good this deficiency, the Constitution (fourth

Amendment) Act, 1955, was passed. The effect of the amendment is that, laws

coming within the scope of Article 19(6) (ii) are exempted from attack on the

ground of contravention of Article 301.

It may be pointed out that Article 305 begins with the words „Nothing in

Article 301 and 303 shall effect the provisions of any existing law while the

opening words of the amended part of Article 305 says „nothing in Article 301

shall affect the operation of any law made before the commencement of the

Constitution (Fourth Amendment) Act. 1955.‟ The existing law coming within

the scope of Article 305 are exempted from the provisions of Articles 301 and

303. The laws coming within the scope of Article 19(6) (ii) are only exempted

161

Supra, note 130, at p. 742.

125

from the purview of Article 301. Legislative power of Parliament or the State

Legislature relating to the matters in Article 19(6) (ii) is defined in entry 21 of

List III of the Seventh Schedule, which confers concurrent power on Parliament

and the State legislature to make laws relating to „commercial and industrial

monopolies‟. Article 303(1) restricts the legislative powers of the Union and the

State Legislatures relating to trade and commerce in any of the List in the

Seventh Schedule. As the power to legislate on monopoly trading is not derived

from any entry, relating to trade and commerce, the question of the application of

Article 303(1) does not arise. Further, if the amended Part of Article 305 is made

subject to the provisions of Article 303(1), it will frustrate the very object of the

amendment. The statement of objects and reasons reads as follows:162

“[T]he law might have to be justified before the Courts as being „in

the public interest‟ under Article 302 or as amounting to a

„reasonable restriction‟ under Article 304(6). It is considered that

any such question ought to be left to the final decision of the

Legislature.”

As the amendment was effected to exempt judicial review of laws on

matters set out in Article 19(6) (ii), Parliament could not have thought that the

provisions of Article 303(1) were applicable to the above matters.

162 The Statement of Objects and Reasons for the Constitution (Fourth Amendment) Act, 1955, downloaded from http://indiacode.nic.in/coiweb/amend/amend4.htm retrieved on 07-11-2015, time 11.35

pm.

126

Article 305 saves from the operation of Article 301 any law relating to

matters coming within Article 19(6) (ii). Article 19(6) (ii) allows the State either

to compete with any private traders or to create a monopoly in favour of itself

without being called upon to justify its action in any court as „reasonable‟.163

The

exclusion of citizens from the trade into which the State enters may be

„complete‟ or „partial‟. Thus the State by entering into business of road transport,

may take over only a particular service. It must be noted that there is nothing in

Article 19(6)(ii) which requires that the trade or business must be carried by the

State itself. The words by a „Corporation owned or controlled by State‟ in Article

19(6)(ii) imply that a trade may be carried on by an agent on behalf of the State

and not on behalf of itself. Article 305 further provided that the law coming

within the scope of Article 19(6) (ii) is saved from the challenge under Article

301, provided it is made before the commencement of the Constitution (Fourth

Amendment) Act, 1955. Thus if the State Legislature has taken any measure

provided in Article 19(6)(ii) before the year 1956, which restricted the free flow

of trade and commerce‟ it would be saved in Article 305.

It is submitted that the provision protecting State monopoly adds almost

nothing to Article 302 and adds little to Article 304(b) but its greatest

163

Naravanappa v. State Mysore, AIR 1960 SC 1073.

127

achievement is that it completely absolves certain laws from judicial review and

makes the legislative decision final.164

3.7. Conclusion

From the above analysis it is seen that the Article 301, if read as a whole,

postulates the free flow of goods inter-State as well as intra-State, so that goods

produced in any State may be freely marketed in every other State, and so that

nothing can lawfully be done to obstruct or prevent such marketing. The Article

301 may be infringed by hostile action within the State of origin of the goods or

at the border by means of prohibitions upon exit or entry, or by laws preventing

or prohibiting sale or exchange within that State to the markets of which the

commodities are destined. The freedom of trade declared under Article 301

covers goods which are consigned to the market as well as goods which have

been already sold, and are in the course of delivery, in this sense, that

consignment and delivery, being part of commercial intercourse, cannot be

prevented or obstructed by State legislation.

It is seen that freedom guaranteed under Article 301, is freedom from

prohibition, control, burden or impediments in commercial intercourse, it means

freedom of trade, commerce and intercourse in all its series of operations from all

164

In R.C.Cooper v. Union of India, AIR 1970 SC 564 the Petitioners contended that the Banking

Companies (Acquisition and Transfer of Undertakings) Act, 1969 also violated Article 301. While the

majority did not consider it necessary to express any opinion on the point but the minority observed that

the law was covered by Article 305.

128

barriers, restrictions or regulations. On the other hand, the expression “free” in

Article 301 cannot mean absolute freedom or that each and every restriction on

trade and commerce is invalid. It is observed that freedom of trade and

commerce guaranteed under this Article is freedom from such restriction as

directly and immediately restrict or impede the free flow or movement of trade.

Thus, restriction which is indirect or inconsequential on trade, commerce or

intercourse is not hit by Article 301. Perhaps, there are certain legitimate

exceptions to this freedom provided under the Constitution of India.

It is seen that Article 301 puts a general limitation on the State action.

Both the Centre and the State Legislatures cannot enact law so as to restrict the

freedom guaranteed under Article 301. Article 302 and 304 states the manner and

procedure under which the law making power is to be exercised by both the set

of Legislature so as to reconcile with the guaranteed freedom. The freedom will

not prevent Parliament from making any laws that a complex society in the age

of planning needs. The freedom is also not a very serious limitation on the

powers of State Legislatures. Perhaps, to cross the limitation they will have to

take a clearance from the Union government and also will have to be careful that

the law may ultimately face a battle in the Courts on the ground of

reasonableness of restrictions.