G. K. Krishnan etc. v The State of Tamil Nadu and Another etc. (1974)

Part XIII of the Constitution declares that trade, commerce and intercourse throughout India shall be free, and Article 304(b) lets a State restrict that freedom only by a law carrying the President's previous sanction. Every State tax on vehicles, goods or trade therefore raises the same question: is this tax a "restriction" at all? If it is, the State must meet Article 304(b); if it is not, Article 301 is never engaged.

G. K. Krishnan is the case that explains in usable terms what a compensatory tax is and why it is not a restriction. It applies the Automobile Transport (Rajasthan) test to a road tax, gives you the working test ("rough approximation, rather than mathematical accuracy"), and adds the burden-of-proof and presumption rules that decide most such challenges in practice. It is also a leading illustration that the motive behind a tax does not make it colourable if the power to tax exists. It was later among the decisions placed before a larger Bench when the compensatory-tax doctrine was reconsidered.

Under s. 4 of the Madras Motor Vehicles Taxation Act 1931, the State Government may by notification direct that a tax be levied on every motor vehicle using a public road, at rates not exceeding the maxima in Schedule II.

The Government of Tamil Nadu enhanced the vehicle tax on omnibuses (contract carriages) from Rs. 30 to Rs. 100 per seat per quarter. An earlier enhancement, whose avowed object was to avoid unhealthy competition of omnibuses with regular stage carriages, had been quashed by the Madras High Court as a device to eliminate contract carriages. The Government then issued a fresh notification in 1971 enhancing the tax to the same figure. Writ petitions against it were decided by the Madras High Court by judgments of 14 February 1972.

The omnibus owners came to the Supreme Court in civil appeals by special leave, and others filed writ petitions directly. Stage carriages paid tax at a lower rate per seat but also paid a surcharge on the fare collected. The owners said the real aim was to eliminate competition with stage carriages run by the Government.

1. Was the notification not a tax at all but a device to eliminate the competition of omnibuses with Government-run stage carriages?
2. Was the tax a restriction on the freedom of trade, commerce and intercourse under Article 301, which, being imposed by a Government notification and not by a law passed with the President's previous sanction, could not be saved by Article 304(b)?
3. Was the tax excessive, so as to be an unreasonable restriction on the right to carry on business?
4. Was the higher rate on contract carriages than on stage carriages discriminatory under Article 14?

The writ petitions and appeals were dismissed, without costs.

1. Motive is immaterial where the power exists

The tax was imposed under s. 4 of the 1931 Act. Since the State Legislature was competent to pass the Act and the Government was authorised under s. 4 to levy the tax, "the question of the motive with which the tax was imposed is immaterial." The Court put it plainly: "there can be no plea of a colourable exercise of power to tax if the Government had power to impose the tax and the fact that the imposition of the tax was for the purpose of eliminating competition would not detract from its validity."

2. A compensatory tax is not a restriction under Article 301

The Court read the majority in the Automobile Case (Automobile Transport (Rajasthan) Ltd v State of Rajasthan) as holding that regulatory measures and compensatory taxes fall outside Article 301 and need not comply with Article 304(b): "the effect of the majority decision in the Automobile Case is that a compensatory tax is not a restriction upon the movement part of trade and commerce."

• Freedom is not freedom from regulation. "The word 'free' in Article 301 does not mean freedom from regulation." "If the tax is compensatory or regulatory, it cannot operate as a restriction on the freedom of trade or commerce."
• What makes a tax compensatory. "What is essential for the purpose of securing freedom of movement by road is that no pecuniary burden should be placed upon it which goes beyond a proper recompense to the state for the actual use made of the physical facilities provided in the shape of a road." Road users stand in a special and direct relation to roads and derive a special and direct benefit from them, so it is not unreasonable that they make a special contribution to their maintenance.
• The limit. "If, however, a charge is imposed, not for the purpose of obtaining a proper contribution to the maintenance and upkeep of the road, but for the purpose of adversely affecting trade or commerce, then it would be a restriction on the freedom of trade, commerce or intercourse"
• No precise matching required. Following the Automobile Case, a tax is not non-compensatory merely because the precise amount collected is not spent on the facilities; the working test is whether traders have the use of facilities for the better conduct of their business and are not paying patently much more than what is required. "Rough approximation, rather than mathematical accuracy, is all that is required."
• Burden and method. The amount and method of collection are primarily for the State, "although they must be reasonable and fixed according to some uniform, fair and practical standard." Nor is a separate fund or express allocation of money necessary to prove the compensatory purpose, when that purpose is proved by other evidence.
• On the facts. The State's counter-affidavit showed road expenditure of Rs. 19.51 crores in 1970-71 against vehicle-tax receipts of Rs. 16.38 crores. The objection that the cost of constructing new roads had been included in "road costs" failed: even excluding it, receipts would not meet the cost of maintaining old roads.

The Court concluded that "the tax imposed by the notification is compensatory in character and could not, therefore, restrict the freedom of trade and commerce according to the decision in Automobile Case (supra)."

3. Not excessive

There was no material to show that the tax was confiscatory. Being compensatory, it could not be an unreasonable restriction, "for, the very idea of compensatory tax is service more or less commensurate with the tax levied." "No citizen has a right to engage in trade or business without paying for the special services he receives from the state."

4. No discrimination under Article 14

Contract carriages are free to run on any route at any time, while stage carriages are tied to fixed routes, time schedules and a limit on miles, so contract carriages can run more miles and wear the roads more. Classification on that basis is not unreasonable. The Court stressed that "There is always a presumption that a classification is valid, especially in a taxing statute." and that the person challenging a classification must prove it. Since the petitioners had not discharged that burden, "we hold that the levy of an enhanced rate of vehicle tax on contract carriages was not hit by Article 14."

A tax that is compensatory — a fair recompense, by rough approximation, for the use of facilities such as roads provided by the State — is not a restriction on the freedom of trade, commerce and intercourse under Article 301, and so needs no law with the President's previous sanction under Article 304(b). Where the power to tax exists, the motive behind its exercise is irrelevant. A person who says a tax is excessive, or that a classification in a taxing measure is unreasonable, bears the burden of proving it.

• Direct question: What is a compensatory tax? Is it a restriction on freedom of trade under Article 301? Set out Articles 301, 302, 304(b); state the Automobile Case position; use G. K. Krishnan for the working test, the "rough approximation" standard and the burden of proof.
• Problem question: a State sharply raises a road tax on one class of vehicles, and operators say the aim is to protect State-run buses. Answer: motive is immaterial if the power exists; ask whether the tax is compensatory on the evidence of road expenditure; the challenger bears the burden; a classification based on greater road use survives Article 14.
• Short note: Colourable legislation and motive in taxation — use the Court's holding that there can be no plea of colourable exercise of power where the power to tax exists.
• Critical answer: use the open questions the Court itself flagged (tax vs restriction in Article 304; the "movement" limitation) to show why the compensatory-tax doctrine was sent to larger Benches.