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On the basis of the Joint Committee’s Report, the Government of India Act, 1935 was
passed which introduced federal form of Government and recognises three lists namely;
federal list, provincial list and concurrent list and the residuary power was vested to the
Governor-General. In this Act, trade and commerce was given to provinces under Entry
27 of List II. But, none of the list provided for the power over inter-provincial trade and
commerce and it could be regulated by the Governor-General under his residuary powers,
vested under Section 104. Further, Section 297 of the 1935 Act imposed limitation on the
legislative as well as the executive power of the provincial government in two ways –

1) It prohibited the provinces from imposing trade barriers on the entry and export of
goods and

2) It also prohibited them from levying taxes which discriminated between goods
manufactured and produced in the province and goods not so manufactured and

In this context, in the case of Atiabari Tea Co. vs, State of Assam, the validity of the
Assam Taxation (on Goods Carried by Roads or Inland Waterways) Act, 1954 was
challenged on the ground that it violated Article 301 of the Constitution and was not
saved by Article 301 of the Constitution and was not saved by Article 304 (b). The
petitioner carried on the business of growing tea and exporting it to Calcutta via Assam.
While passing through Assam the tea was liable to tax under the said Act. The Supreme
Court held that the impugned law undoubtedly levied tax directly and immediately on the
movement of goods and therefore held void.

The Court held that taxes may or do amount to restriction if they directly or immediately
restrict trade. In the instant case, the tax undoubtedly affected the free-flow of trade and
such taxes could only be levied if previous sanction of the President has been obtained
under 304(b). Therefore, imposition of a duty or tax to every case would not amount per
se to infringement of Article 301. Every case must be judged on its own facts and in its
own setting of times and circumstances.

Further, in a landmark judgment in Automobile Transport Ltd vs. State of Rajasthan,

the Supreme Court affirmed the Atiabari’s direct and immediate effect with a clarification
that regulatory measures imposing compensatory tax do not come within the purview of
the restrictions contemplated in Article 301 and therefore such measures need not comply
with the requirement of provisions of Article 304(b).
1. Article 301 assures freedom of inter-state as well as intra-state trade, commerce and

2. Trade, commerce and intercourse have the widest connotation and take in movement
of goods and persons.

3. The freedom is not only from laws enacted in the exercise of the powers conferred by
the legislative entries relating to trade and commerce or production, supply and
distribution of goods, but also to all laws including tax laws.

4. Only those laws whose direct and immediate effect to inhibit or restrict freedom of
trade and commerce will come with the mischief of Article 301.

5. Laws which are merely regulatory or which impose purely compensatory taxes, and
hence intended to facilitate freedom of trade, are outside the scope of Article 301.