Rai Ramkrishna and Others vs The State Of Bihar

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 16 and 17 of 1962

Decision Date: 11 February 1963

Coram: P.B. Gajendragadkar, K.N. Wanchoo, M. Hidayatullah, K.C. Das Gupta, J.C. Shah

In this case, the Supreme Court of India delivered its judgment on 11 February 1963 in the matter of Rai Ramkrishna and others versus the State of Bihar. The judgment was authored by Justice P. B. Gajendragadkar, and the bench comprised Justices P. B. Gajendragadkar, K. N. Wanchoo, M. Hidayatullah, K. C. Das Gupta and J. C. Shah. The petitioner was Rai Ramkrishna and others, and the respondent was the State of Bihar. The citation for the decision is reported as 1963 AIR 1667 and 1964 SCR (1) 897, with subsequent citations appearing in various law reports such as 1964 SC 925, 1966 SC 764, 1968 SC 1138, 1968 SC 1227, 1970 SC 169, 1972 SC 2455, 1973 SC 1034, 1974 SC 436, 1976 SC 182, 1976 SC 997, 1980 SC 271, 1984 SC 1194, 1985 SC 921, and 1988 SC 191. The statutory context involved a taxing statute that imposed a tax on passengers and goods carried by public‑service motor vehicles, and it raised issues of retrospective operation, validity, unreasonable restrictions, infringement of fundamental rights, and the State’s power of taxation under the Constitution of India, particularly Articles 19(1)(f) and 19(1)(g), 19(5), 19(6), 304(b), and the Seventh Schedule, List II, Entry 56.

On 30 March 1950, the Bihar Legislature enacted the Bihar Finance Act, 1950, which levied a tax on passengers and goods transported in public‑service motor vehicles within the State. The appellants challenged the validity of that Act, and the Supreme Court struck down certain provisions. In response, the State issued Bihar Ordinance No. 11 of 1961 on 1 August 1961, which validated the previously struck‑down provisions of the 1950 Act and made them retrospectively effective from the date the 1950 Act was intended to commence. The substantive provisions of that ordinance were later incorporated into the Bihar Taxation on Passengers and Goods (Carried by Public Service Motor Vehicles) Act, 1961. Consequently, the material provisions of the 1961 Act were deemed to have taken effect from 1 April 1950, the original commencement date of the 1950 Finance Act.

The appellants again challenged the validity of the 1961 Act, but the High Court dismissed their writ petitions, holding that the entire Act was valid. The appellants then obtained special leave to appeal before this Court. During the hearing, the appellants conceded that the prospective operation of the 1961 Act was valid, and they accepted that section 23(a), which validated actions taken under the 1950 Act, was constitutionally sound. Their remaining contention concerned section 23(b); they argued that the portion of that section dealing with proceedings that had been commenced under the 1950 Act but not completed before the 1961 Act came into force was invalid.

It was submitted that the retrospective effect prescribed by section 1(3) of the Act and a portion of section 23(b) altered the nature of the tax that was to be recovered retrospectively. The appellants argued that this alteration created a serious defect in the legislative competence of the Bihar Legislature, and that the retrospective operation was so unreasonable that it could not be upheld either under article 304(b) or under articles 19(5) and 19(6) of the Constitution of India.

The Court held that when a taxing statute falls within the competence of the legislature that enacted it, as shown by the appropriate entry in the legislative list, its essential character does not change merely because it is given retrospective effect. Consequently, the retrospective operation does not place the provision outside the legislative competence of the Bihar Legislature. Accordingly, the challenge to the validity of the Act’s retrospective operation on the ground that it exceeded the legislature’s competence was rejected.

The Court further observed that the restriction imposed on the appellants’ fundamental rights under article 19(1)(f) and article 19(1)(g) by the Act’s retrospective operation was reasonable within the meaning of articles 19(5), 19(6) and article 304(b). The length of the period covered by a retrospective provision, by itself, cannot be treated as a decisive test of reasonableness. The Court explained that where the legislature is empowered to enact a valid law, it may provide for both prospective and retrospective operation of the material provisions of that law. The legislative power includes a subsidiary or auxiliary power to validate a law that is found to be invalid. If a law is struck down by the courts, the appropriate legislature may pass a validating law to make the earlier provisions effective from the date of their original enactment.

Finally, the Court affirmed that the power to tax persons and their property is an essential attribute of government, and the government may legitimately exercise this power to the fullest extent it deems necessary, provided that the objects taxed fall within the legislature’s competence. The quantum of tax, the conditions attached to its levy, and the manner of its recovery are all matters within legislative competence. The Court cited precedents such as Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 S.C.R. 809, The Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1963] 1 S.C.R. 491, United Provinces v. Mst. Atiqa Begum [1940] F.C.R. 110, State of West Bengal v. Subodh Gopal Bose [1954] S.C.R. 587, and The Express Newspapers (P) Ltd. v. Union of India [1959] S.C.R. 12, confirming the principle that taxation within legislative competence is constitutionally permissible.

The Court noted that it had referred to several earlier authorities, namely Union of India [1959] S.C.R. 12, Kunnathet Thathunni Moopil Nair v. State of Kerala [1961] 3 S.C.R. 77, Raja Jagannaa Baksh Singh v. State of Uttar Pradesh [1963] 1 S.C.R. 220, Tata Iron & Steel Co. Ltd. v. State of Bihar [1958] S.C.R. 1355, M.P.V. Sundararamier & Co. v. State of Andhra Pradesh [1958] S.C.R. 1422, M/s. J.K. Jute Mills Co. Ltd. v. State of Uttar Pradesh [1962] 2 S.C.R. 1, and M/s. Chhotabhai Jethabhai Patel & Co. v. Union of India [1962] Supp. 2 S.C.R. 1. The matter before the Court was the civil appellate jurisdiction in Civil Appeals Nos. 16 and 17 of 1962, which were brought by special leave from the judgment and order dated 5 September 1962 of the Patna High Court in Miscellaneous Judicial Cases Nos. 916 and 918 of 1961. The appellants were represented by counsel consisting of M.C. Setalvad, B.K.P. Sinha, A.Y. Sinha, and B.P. Jha, while the respondent was represented by A.V. Viswanatha Sastri, D.P. Singh, Anil Kumar Gupta, M.K. Ramamurthi, R.K. Garg, and S.C. Agarwala. The judgment, delivered on 11 February 1963 by Justice Gajendragadkar, framed the precise question for determination: whether the retrospective operation of the Bihar Taxation on Passengers and Goods (Carried by Public Service Motor Vehicles) Act, 1961 (No. 17 of 1961), hereinafter referred to as “the Act,” was constitutionally valid. The Court observed that two writ petitions, Nos. 916/1961 and 918/1961, had been filed in the Patna High Court by the appellants—Rai Ramkrishna & others and M/s. Road Transport Co., Dhanbad & others—together with eighteen additional petitioners, invoking Articles 226 and 227 of the Constitution to challenge the entire Act. The High Court had held the Act to be valid both prospectively and retrospectively. In the present appeals, the parties sought special leave not to contest the High Court’s finding that the prospective operation of the Act was valid, but to confine their challenge solely to its retrospective effect. The eight‑plus other petitioners who had originally joined the writs declined to pursue the matter further and did not present appeals before this Court. The Court then proceeded to outline the factual backdrop: on 30 March 1950 the Bihar Legislature enacted the Bihar Finance Act, 1950 (Bihar Act 17 of 1950), which imposed a tax on passengers and goods carried by public‑service motor vehicles within Bihar. Approximately one year after the Act became operative, the appellants instituted Suit No. 60/1951 in the Court of the First Subordinate Judge at Gaya on 5 May 1951, alleging that the provisions of Part III of the Act were unconstitutional and seeking an injunction restraining the State of Bihar from levying and recovering the tax. The suit sought to enjoin the imposition of the tax pending a determination of its constitutional validity.

The respondents, being the State of Bihar, were sought to be restrained from imposing and collecting the tax that had been introduced under the Bihar Finance Act of 1950. The appellants filed a suit, numbered 60/1951, in the Court of the First Subordinate Judge at Gaya on 5 May 1951, requesting that the provisions of Part III of the Act be declared unconstitutional and that an injunction be issued against the State’s levy and recovery of the tax. A second suit, numbered 57/1951, was instituted on behalf of passengers and owners of goods who wished to obtain the same relief against the bus operators; this suit was filed by those passengers and owners in a representative capacity under Order 1, Rule 8. Both suits were subsequently transferred to the Patna High Court for determination. A special bench of that High Court considered the two suits and dismissed them on 8 May 1952, holding that the 1950 Act did not contravene Article 301 of the Constitution and that therefore its validity could not be challenged. The appellants then appealed the High Court’s order to the Supreme Court, filing appeal No. 53/1952. While that appeal was pending, the Supreme Court decided a similar issue in the case of Atiabari Tea Company Ltd. v. The State of Assam. When the appeal before the Supreme Court was finally heard, the respondent conceded that the matter fell within the precedent set by the Atiabari decision and that, in accordance with that judgment, the appeal should be allowed. Consequently, the Supreme Court allowed the appeal, granting the declaration and injunction that the appellants had sought in their original suit. The judgment effecting that relief was pronounced on 12 December 1960.

After the Supreme Court’s decision, the respondent issued Bihar Ordinance No. II of 1961 on 1 August 1961. By means of that ordinance, the material provisions of the earlier 1950 Act, which had been struck down by the Supreme Court, were validated and were given retrospective effect from the date the original Act had purported to come into force. The provisions contained in the ordinance were later incorporated into a new Act passed by the Bihar Legislature and received the President’s assent on 23 September 1961. Because of the retrospective operation of this new Act, its material provisions were deemed to have been in force from 1 April 1950, that is, the date on which the original 1950 Act had been enacted. The appellants, together with other petitioners who had filed several petitions in the Patna High Court, challenged the validity of this legislation on a number of grounds. The High Court rejected all of those grounds and held that the Act, taken as a whole, was valid. It observed that although the Act fell within the ambit of Part XIII of the Constitution, it had been passed with the prior sanction of the President and that the restrictions it imposed were reasonable; consequently, the Act was saved by Article 304(b) of the Constitution. The respondent’s contention that the taxing provisions of the Act were of a compensatory character and therefore valid was also rejected by the High Court.

The High Court dismissed the contention that the taxing provisions of the impugned Act were of a compensatory nature and therefore valid. It further held that the doctrine articulated by the majority of this Court in The Automobile Transport (Rajasthan) Ltd. v. The State of Rajasthan shields a statute imposing a compensatory or regulatory tax from invalidity. The High Court decided that this doctrine did not apply to the provisions of the impugned Act. The Court also rejected the argument that the Act was void because it compelled the appellants to serve as agents of the respondent for collecting tax from passengers. It further held that requiring collection from owners of goods without any remuneration did not make the statute invalid. An additional submission that the Act violated Article 199(4) of the Constitution was found unpersuasive by the High Court, which declined to give it any weight. The plea that the disputes between the appellants and the respondent had already been finally decided by res judicata, supported by a citation to [1963] 1 S.C.R. 491, was also considered to lack substance. Consequently, the writ petitions filed by the appellants were dismissed, and the parties have now approached this Court, limiting their challenge solely to the retrospective operation of the Act. The record then requires reference to the substantive provisions of the earlier legislation in order to understand the scheme of the statute now under attack. The Finance Act of 1950, enacted as an amending measure, was introduced by the Bihar Legislature to modify the Bihar Sales Tax Act of 1947 and the Bihar Agricultural Income‑Tax Act of 1948. Section 12 of that Act imposed a tax on passengers and on goods conveyed by public service vehicles and public carriers. Sub‑section 12(1) specified that the tax rate would be half a rupee for every rupee payable as fare or freight to the owners of motor cabs, stage carriages, contract carriages, or public carriers. The tax applied to the transport of the goods and passengers described in the provision. Sub‑section 12(2) addressed situations where fare or freight was charged as a lump sum, either for the carriage of goods, as a contribution towards a season ticket, or by any other similar arrangement. Sub‑section 12(3) mandated that each owner of a public vehicle deposit the full amount of tax due under sub‑sections (1) or (2) into the Government Treasury at prescribed intervals. It also required the owner to file returns on prescribed dates with the designated authority. In 1954, Bihar Act 11 of 1954 was passed as an amendment, and its section 14 introduced an explanatory clause to Section 12 of the 1950 Act. That explanatory clause made every passenger carried in a public vehicle liable to pay to the carrier’s owner the amount of tax payable under the relevant subsections. It also made every person whose goods were transported by a public carrier liable to pay the same amount of tax to the carrier’s owner.

The amendment introduced by the Bihar Act 11 of 1954 added an explanation to section 12 of the 1950 Act, stating that the amounts payable under sub‑sections (1) and (2) of section 12 could be recovered by the owner of the vehicle or carrier from the passenger or the person whose goods were transported. In effect, before the amendment the owners of public vehicles were limited to increasing their fares or freight charges in order to meet the tax imposed by section 12 of the 1950 Act. After the amendment, the owners obtained a statutory right to demand the specific tax amounts directly from the passengers and the owners of goods, rather than merely adjusting the overall fare. The amended Act was subsequently declared unconstitutional by this Court on 12 December 1960. In response, an Ordinance was promulgated, and its provisions were incorporated into the now‑impugned Act, which finally became law in Bihar on 25 September 1961. The Act now comprises twenty‑six sections. Section 1(3) expressly provides that the Act shall be deemed to have come into force on the first day of April 1950. Section 2 offers definitions of various terms, including goods, owners, passenger, and public service motor vehicle. Section 3 is the charging clause, and it delineates the levy of a tax on all passengers and goods carried by public service motor vehicles from the deemed commencement date, specifying the rate of tax and including a proviso that need not be reproduced here.

Section 3(2) requires every owner, in the manner prescribed by section 9, to pay the State Government the tax due under this section. Section 3(3) further provides that every passenger carried by a public service motor vehicle and every person whose goods are carried by such a vehicle shall be liable to pay to the owner the amount of tax payable under this section, and that each owner shall recover such tax from the relevant passenger or goods owner, as the case may be. Although there are three additional sub‑sections in section 3, they are not material to the present discussion. The operative effect of section 3 is that liability for the tax is imposed on passengers and on owners of goods, who must pay the tax to the vehicle owner, and the vehicle owner, in turn, must remit the tax to the State Government. Both the levy on passengers and goods and the recovery mechanism operate retrospectively by virtue of section 1(3). Consequently, the tax is effectively levied on the users of the public vehicles, while the statutory scheme channels the collection through the vehicle owners. Section 4 obliges owners of public service motor vehicles to register their vehicles. Section 5 mandates that such owners furnish security, and section 6 requires them to submit returns as prescribed.

Section 7 of the Act explained the procedure that must be followed for the assessment of tax. Section 8 then prescribed that a fixed amount could be paid in lieu of tax, while Section 9 created a provision for the payment of tax as well as for the recovery of tax that had become due. Section 10 dealt with a special mode of recovery, providing that the authorities could use particular methods to recover tax liabilities. Section 11 addressed situations involving the transfer of a public service motor vehicle; it provided that both the person who transferred the vehicle and the person who received it were to be held liable for the tax prescribed by the statute. Section 12 regulated the manner in which refunds of tax could be made, and Sections 13, 14 and 15 respectively set out the procedures for filing an appeal, seeking a revision and applying for a review of a tax decision.

Section 16 empowered, subject to rules that might be made by the State Government, the Commissioner or any other prescribed authority to secure the production, inspection and seizure of accounts and documents, and to conduct searches of premises and vehicles. Section 17 declared that the Commissioner and any prescribed authority were to be considered public servants for the purposes of the Act. Section 18 dealt with offences and the penalties that could be imposed for such offences, while Section 19 provided for the compounding of offences. Section 20 set out the usual bars that applied to certain proceedings, and Section 21 referred to the limitation periods that governed particular suits and prosecutions. Section 22 gave the State Government the power to make rules necessary for the implementation of the Act.

Section 23 was described as an important provision because, in effect, it provided that acts performed under the Bihar Finance Act XVII of 1950 would be deemed to have been done under the present Act. The text of Section 23 read as follows: “Notwithstanding any judgment, decree or order of any Court, tribunal or authority—(a) any amount paid, collected or recovered or purported to have been paid, collected or recovered as tax or penalty under the provisions of Part III of the Bihar Finance Act, 1950 (Bihar Act XVII of 1950), as amended from time to time (hereinafter referred to as the ‘said Act’) or the rules made thereunder during the period beginning with the first day of April 1950 and ending on the thirty‑first day of July 1961, shall be deemed to have been validly levied, paid, collected, or recovered under the provisions of this Act; and (b) any proceeding commenced or purported to have been commenced for the assessment, collection or recovery of any amount as tax or penalty under the provisions of the said Act or the rules made thereunder during the period specified in clause (a) shall be deemed to have been commenced and conducted in accordance with the provisions of this Act, and, if not already completed, shall be continued and completed under this Act.” A proviso to this section existed, but it was noted that the proviso was not relevant for the purposes of the present discussion. Sections 24 and 25 dealt with repeals and savings, and Section 26 provided that if any difficulty arose in giving effect to the provisions of the Act, the State Government could pass an order to address such difficulty, subject to the limitations prescribed by that section. This overall description summarized the scheme of the Act, and it was presented in order to appreciate the merits of the contentions raised on behalf of the appellants.

In this appeal it was necessary to delineate precisely the narrow dispute that existed between the parties. The appellants acknowledged that the statute, insofar as it operates prospectively, is perfectly valid. They also accepted that section 23(a), which validates actions performed under the earlier 1950 Act, is valid. It should be observed that, besides the general retrospective effect created by the provision in section 1(3), section 23 itself contains an explicit retrospective validation clause, and there is no dispute that the actions validated under section 23(a) have been properly validated. Regarding the validation provision in section 23(b), the appellants contended that the portion of this provision that relates to proceedings that were started under the earlier Act but not concluded before the impugned Act came into force is invalid. No challenge was made to the remaining parts of section 23(b). Consequently, it is not contested that, in its prospective operation, the Act was duly enacted by the Bihar Legislature pursuant to its legislative authority under Entry 56 of List II of the Seventh Schedule of the Constitution. The controversy, however, turned on the retrospective operation created by section 1(3) and the part of section 23(b). The appellants argued that this retrospective effect fundamentally changes the nature of the tax that is sought to be recovered retrospectively, thereby creating a serious defect in the legislative competence of the Bihar Legislature. Alternatively, they asserted that the retrospective operation is so unreasonable that it cannot be upheld under Article 304(b) or Articles 19(5) and 19(6). These two specific points formed the precise questions that required determination by the Court in the present appeals.

While addressing the controversy, the Court emphasized several undisputed premises. First, the entries in the Seventh Schedule that confer legislative authority on the respective legislatures must be given their broadest possible meaning, a position that was not contested. Entry 56 of the Second List specifically deals with taxes on goods and passengers that are carried by road or by inland waterways. This entry clearly authorises State Legislatures to levy taxes on such goods and passengers. The entry does not grant a power to tax all goods and passengers indiscriminately; it is limited to those goods and passengers that are transported by road or inland waterways. The phrase “carried by road or on inland waterways” functions as an adjectival clause qualifying the words “goods” and “passengers,” indicating that only goods and passengers fitting this description fall within the scope of the taxation power. Moreover, it is evident that goods themselves cannot physically pay taxes; therefore, any tax imposed on goods must be collected from persons who have a direct or intimate connection with those goods. In the same way, passengers who are carried are the objects of the tax under the entry, but it is usually impractical, if not impossible, to recover the tax directly from the passengers. Consequently, it is logical and convenient for the legislature to devise a mechanism whereby the tax is recovered from the owners of the vehicles that transport the goods or passengers, a point that the appellants did not dispute.

In this discussion, the Court observed that passengers who are carried fall within the entry that authorises taxation, but recovering tax directly from passengers was usually impractical or impossible. Consequently, it was considered more convenient to recover the tax from the owners of the vehicles that carried the passengers. Accordingly, the Court noted that counsel for the petitioner did not dispute that, when a law was enacted under entry 56 to impose tax on passengers carried by road or inland waterways, the legislature was fully competent to design a mechanism that required bus operators or bus owners to pay the tax. The Court further stated that there was no dispute that the legislative power granted to the appropriate legislatures to make laws on matters listed in several entries of the three Lists could be exercised both prospectively and retrospectively. The Court explained that, where a legislature enacted a valid law, it could provide for the immediate operation of the material provisions as well as for a retrospective operation of those provisions. The Court also affirmed that the legislative power included the ancillary authority to validate laws that had been declared invalid. It held that if a court struck down a law for any infirmity, the appropriate legislature could cure that infirmity by passing a validating statute, thereby rendering the earlier law effective from its original date of passage. The Court cited the Federal Court decision in The United Provinces v. Mst. Atiqa Begum as establishing this principle firmly. The Court additionally observed that, although a legislature could enact a law with retrospective effect, it was necessary to examine the impact of such retrospectivity on both the legislature’s competence and the reasonableness of the restrictions imposed. In other words, a party affected by the Act could argue that the retrospective operation altered the character of the tax so substantially that it fell outside the legislative entry’s scope, or alternatively contend that the restrictions were so unreasonable that they violated fundamental rights under Article 19(1)(f) and (g). The Court noted that counsel for the respondent did not dispute this position, referring to the decisions in The State of West Bengal v. Subodh Gopal Bose and Express Newspapers (Private) Ltd. v. Union of India.

In considering the recent decisions of this Court, the counsel for the respondent acknowledged that statutes imposing taxes are not immune from constitutional limitations set out in Articles nineteen and fourteen, as reflected in the authorities cited at (1) [1940] F.C.R. 110, (2) [1954] S.C.R. 587, 626, and (3) [1954] S.C.R. 12, 1390. The counsel further agreed that the test of reasonableness articulated in Article three hundred four paragraph b is a matter that courts may examine. The Court observed that the power to levy taxes on persons and their property is an essential attribute of governmental authority, and that the Government may legitimately exercise this power insofar as it serves the objects for which the tax is intended, to the extent the Government considers it appropriate. The objects that may be subjected to tax, provided they fall within the legislative competence of the legislature, may be taxed according to the demands of the State, because there is no dispute that the State possesses the right to raise revenue through taxation. The amount of tax imposed by a taxing statute, the conditions attached to its imposition, and the method by which the tax is to be recovered all lie within the legislative competence. Consequently, when a citizen alleges that a taxing statute violates Article nineteen, the courts must proceed with caution and circumspection. For example, if a taxing statute appears to be plainly discriminatory, or if it fails to provide any procedural mechanism for assessment and collection, or if it is effectively confiscatory, then the courts would be justified in declaring the statute unconstitutional. In such circumstances, the substantive character of the challenged provisions would be such that the Court could deem the statute to be a mere façade employed by the legislature to achieve confiscatory ends. This principle was illustrated by the decision of this Court in Kunnathet Thathunni Moopil Nair v. State of Kerala, where the taxing statute was struck down because it contained several fatal defects. By contrast, the Court referred to the decision in Raja Jagannath Baksh Singh v. State of Uttar Pradesh, where a challenge to a taxing statute on the ground of unreasonableness was rejected; the Court observed that unless the defects in the impugned statute were of such a serious character as to amount to a colourable exercise of legislative power, the statute would be upheld. Applying these well‑settled principles, which are undisputed between the parties, the Court turned to the submissions of counsel for the petitioner regarding the retrospective operation of the Act. Counsel for the petitioner argued that a plain reading of section three paragraph three demonstrates that the retrospective effect of the provision completely changes the character of the tax.

It would be recalled that section 3(3), inter alia, provided that every passenger carried in a public service motor vehicle was liable to pay to the owner the amount of tax payable under that sub‑section, because the scheme of the Act required the passenger to pay the tax to the owner and the owner to remit the tax to the State; both of these provisions were made retrospective. When counsel for the petitioner asked how the owner could recover from the passengers the tax that he was now obligated to pay to the State for passengers carried by the owner between 1 April 1950 and the date on which the Act came into force, the Court recognised that the argument appeared attractive at first glance. However, on a closer examination the Court observed that the difficulty the owner might face in collecting the tax from those passengers did not necessarily alter the character of the tax. The Court noted that if the scheme of section 3 for levying and recovering the tax was valid under entry 56 of List II for future recoveries, it was not easy to conclude that the tax’s character was radically changed in the present circumstances, even though it would be very difficult, if not impossible, for the owner to recover the amount from passengers carried in the past. The Court emphasized that a tax recovered retrospectively, like a tax recovered prospectively, continued to be a tax on passengers and employed the same machinery for recovery both with respect to the past and the future. In this connection the Court warned that the incidence of the tax should not be confused with the procedural mechanism adopted by the statute to collect it. Moreover, the Court pointed out that the owners’ difficulty was likely to be of short duration and significant only for a comparatively limited period. Generally, it could be assumed that from the time the 1950 Act was brought into force, owners were aware that the legislature had imposed a tax on passengers and goods carried by them, and that after the amendment of 1951 they could have adjusted their fares and freight rates to absorb the liability to pay the tax to the State. Apart from such adjustments, the Court concluded that the nature of the tax in the present case remained the same for both prospective and retrospective operations, and therefore it was difficult to entertain the proposition that the tax had ceased to be a tax on passengers and thus fell outside entry 56. Consequently, the Court rejected the argument that the retrospective operation of the Act was beyond the legislative competence of the Bihar Legislature. In reaching this conclusion the Court could not ignore the fact that, prior to the passing of the impugned Act, a similar statute had been in operation since 1 April 1950, which was later struck down as unconstitutional for lack of presidential assent.

The earlier statute was declared unconstitutional because it had not obtained the President’s assent. Although that point must be examined further in relation to the appellants’ claim that the retrospective operation of the present Act imposes a restriction unreasonable under Article 19(1)(f) and (g) as well as Article 304(b), the lack of presidential assent does not affect the question of the Bihar Legislature’s competence to enact the provision.

The Court noted that it has previously considered similar arguments concerning the retrospective operation of various statutes. In those earlier cases, the contention rested on a distinction between direct and indirect taxation. The Court recalled that the economist John Stuart Mill famously distinguished direct from indirect taxes and that this distinction was incorporated in section 92(11) of the British North America Act, which conferred exclusive authority on provincial legislatures to legislate on direct taxation within the province. However, the Constitution’s Seventh Schedule does not support a comparable separation of powers for state legislatures, and consequently the Court found it unnecessary to address any argument based on such a distinction in the present matter.

Nevertheless, the issue of retrospective operation has been raised before this Court on several occasions. In Tata Iron & Steel Co. Ltd. v. State of Bihar, the Court examined the Bihar Sales Tax Act 1947 as amended in 1948. One submission argued that sales tax, ordinarily an indirect tax on the consumer because the seller is expected to shift the burden to the purchaser, became a direct tax on the seller due to the Act’s retrospective effect and therefore was invalid. The Court rejected that contention. A comparable objection to the retrospective operation of the Madras General Sales Tax Act 1939, as applied to Andhra Pradesh by the Sales Tax Laws Validation Act 1956, was dismissed in M.P.V. Sundararamier & Co. v. State of Andhra Pradesh. The Court likewise rejected a similar argument in J.K. Jute Mills Co. Ltd. v. State of Uttar Pradesh, where it was contended that the Uttar Pradesh Sales Tax Act 1948 was fundamentally altered by its retrospective operation. The same line of reasoning was applied to an excise tax issue in Chhotabhai Jethabhai Patel & Co. v. Union of India, where the Court again rejected the claim that retrospective effect transformed the nature of the tax.

These decisions collectively establish a settled position that the mere retrospective operation of a taxing statute does not, by itself, change the character of the tax or place the provision beyond the legislative competence of the enacting legislature.

In this case, the Court observed that a statute which imposes a tax is validly enacted by the legislature that has the authority to do so under the relevant entry in the Constitution’s distribution of powers. The Court explained that the essential character of a taxing statute does not change merely because the legislation is applied retrospectively. Consequently, the retrospective operation of the statute does not remove it from the legislative competence of the Bihar Legislature. For that reason, the Court held that the challenge to the validity of the Act’s retrospective clause on the ground that it exceeded the Bihar Legislature’s competence must be dismissed.

The Court then turned to the question of whether the restriction placed on the appellants’ rights under Article 19(1)(f) and Article 19(1)(g) by the Act’s retrospective operation is reasonable enough to fall within the scope of Articles 19(5) and 19(6). The same inquiry also arises under the test of reasonableness required by Article 304(b). Counsel for the petitioners, Mr. Setalvad, argued that it is undisputed that the retrospective effect of a tax law is a relevant consideration when assessing its reasonableness. He further submitted that when a retrospective provision extends over a long span, such as ten years, it should be regarded as an unreasonable restriction and therefore must be struck down as unconstitutional. To support this position, Mr. Setalvad cited the observations made by Sutherland in his treatise on statutory construction. Sutherland, he noted, stated that “tax statutes may be retrospective if the legislature clearly so intends. If the retrospective feature of a law is arbitrary and burdensome, the statute will not be sustained. The reasonableness of each retroactive tax statute will depend on the circumstances of each case.” He also quoted Sutherland’s example that a statute imposing a tax on income earned between the adoption of an amendment making income taxes legal and the passage of the income‑tax act is not unreasonable, whereas an income‑tax law that is not retroactive beyond the year of its passage is clearly valid. Sutherland further observed that the longest period of retroactivity that had been upheld was three years, and that, in general, income taxes are valid even if retroactive, provided they affect prior but recent transactions.

Building on Sutherland’s remarks, Mr. Setalvad contended that the Act’s retrospective operation, which covered the period from 1 April 1950 to 25 September 1961, spanned more than ten years and therefore should be considered unreasonable. He urged that the Act be struck down insofar as its retrospective application is concerned. The Court, however, rejected the notion that a simple, mechanical test based solely on the length of the retroactive period can determine the constitutionality of the statute. The Court explained that while it is possible for a retrospective provision—whether in a tax law or another type of law—to create an element of unreasonableness that could invite serious constitutional challenge, the mere fact that the period is long does not, by itself, make the provision invalid. The Court emphasized that each case must be examined on its own facts, and that the length of the retroactive period is only one of many factors to be considered in assessing reasonableness.

The Court observed that the mere length of a statute’s retrospective operation cannot, by itself, serve as a decisive test of its constitutional validity. A law whose retrospective effect extends over a relatively short period may still impose a restriction that creates a serious defect in the retrospective scheme. Conversely, a law whose retrospective reach spans many years does not automatically give rise to an unconstitutional infirmity. To illustrate this principle, the Court referred to the situation involving a validating Act that is enacted after a statute has been challenged. When a legislative enactment is contested in court and ultimately declared invalid, the judicial process may consume a considerable amount of time. During that interval, the legislature may choose to wait for the final judgment before exercising its power to remedy the defect in the original law. If, after the court’s decision, the legislature enacts a validating Act, the retrospective operation of that validating legislation may cover the entire period of the earlier litigation. Nevertheless, it would be inappropriate to deem the validating Act unreasonable merely because its retrospective effect spans a long duration. Accordingly, the Court concluded that the period covered by retrospective operation cannot, by itself, be treated as a conclusive test of reasonableness.

In the present matter, the original Act was enacted in 1950 and became effective on 1 April 1950, authorising the collection of a tax. The tax continued to be collected until a trial court issued injunction orders in two related suits that had previously been mentioned. Those two suits were dismissed on 8 May 1952, but the appellants filed appeals that remained pending before this Court until 12 December 1960. Thus, from 1950 through 1960, judicial proceedings examined the validity of the Act while the legislative body could have awaited the final decision before considering a validating statute. Consequently, the interval between the filing of the suits and their ultimate disposal cannot be invoked as a basis for challenging the reasonableness of the Act’s retrospective effect. The petitioners, however, argued that the retrospective operation of the Act during the period covered by the trial court’s injunction orders should be held unreasonable and therefore struck down. They also maintained that the retrospective operation ought to be struck down for the interval from 12 December 1960, when the earlier Act was set aside, to 1 August 1961, when Ordinance 11 of 1961 was issued. The Court expressed that it would not be appropriate to assess the validity of the retrospective operation by dissecting it into these specific chronological fragments.

In the present matter the Court declined to assess the constitutionality of the Act’s retrospective effect by isolating the specific intervals cited by counsel for the petitioners. Accordingly, the Court did not accept the contention that the retrospective operation of the legislation should be declared invalid for the period beginning on 12 December 1960, when this Court had struck down the earlier Act, and ending on 1 August 1961, when the Ordinance was promulgated. The Court observed that, in such circumstances, a temporal gap between the declaration of unconstitutionality of an earlier statute and the enactment of a validating retroactive law is inevitable. Moreover, the Court noted that the factual matrix surrounding the injunctions issued by the trial Court could not be disregarded. Counsel for the respondents argued that the two suits‑—one instituted by the appellants and the other by passengers and goods owners—‑were coordinated actions motivated by a common purpose, and the Court found that this allegation could not be dismissed as wholly unfounded. The Court further recorded that, when the injunction was granted against the respondent in the appellants’ suit, the appellants executed a written undertaking to pay the taxes chargeable on fares and freight according to the law, should their suit fail. Since the High Court dismissed that suit on 8 May 1952, the respondent was subsequently entitled to demand payment of the taxes for the period covered by the injunction and to pursue future taxes, because the earlier Act under which such taxes were recovered had been upheld by the High Court. Counsel for the petitioners suggested that the spirit of the undertaking required the respondent to defer any recovery until the ultimate resolution of the dispute between the parties. The Court did not find this argument persuasive, holding that the dismissal of the suit immediately liberated the respondent to enforce the statutory provisions, including recovery of taxes for the period subject to the injunction. The Court further rejected the proposition that the suit’s dismissal could be equated with the final disposal of the appeal before this Court. Considering the nature of the two suits, the character of the injunctions, and the appellants’ undertaking, the Court concluded that it could not sustain counsel for the petitioners’ claim that the Act’s retrospective operation should be held invalid for the duration of the injunctions. In support of this conclusion, the Court indicated that another relevant fact on record would be examined.

In the record, the Court observed that, besides the appellants, other owners of buses had also filed writ petitions challenging the validity of the statute under review. Those petitioners, however, did not seek to bring their matters before this Court, presumably because their individual cases fell within the ambit of section 23(a) of the Act. It appears likely that those owners had already paid the sums that were due, and, since the amounts paid under the earlier legislation are now deemed, by operation of the newer Act, to have been paid under its provisions, those petitioners apparently found no merit in contesting the High Court’s decision before the Supreme Court. Moreover, it is not improbable that several further bus owners similarly made the requisite payments, leaving the appellants to approach this Court precisely because they had not made any payment and consequently their situations did not fall under section 23(a); alternatively, their cases might be covered by section 23(b). Accordingly, the retrospective operation of sections 23(a) and 23(b) applies respectively to instances where payments were actually made under the earlier Act and to cases that were still pending inquiry, whereas the retrospective effect of section 3(3) read with section 1(3) is confined to those persons who failed to pay the tax throughout the entire period or whose matters were not pending. Thus, the appellants represent this narrow class of persons whose interests are before the Court. Considering the rather unusual circumstances that formed the backdrop for the enactment of the impugned statute, the Court could not accept the submission of counsel Setalvad that the retrospective operation of the Act imposes restrictions on the appellants that contravene article 19(1)(f) and (g). In the Court’s view, after weighing all the relevant facts, the restrictions created by the retrospective operation are reasonable, serve the public interest under articles 19(5) and 19(6), and are also reasonable under article 304(b). The Court noted one further point. It had already observed that the High Court rejected the State’s argument that the tax imposed by the Act was of a compensatory or regulatory nature and therefore valid. Counsel Sastri sought to revive that portion of the State’s case before the Court, contending that, pursuant to the majority decision of this Court in Automobile Transport (Rajasthan) Ltd., it is now settled law that “regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by article 301 and such measures need not comply with the requirements of the proviso to article 304(b) of the Constitution.” (see page 1424). In contrast, counsel Setalvad argued that the doctrine of compensatory or regulatory taxation, which is largely derived from Australian jurisprudence, should not be extended to the present matter.

The counsel argued that earlier decisions could not be applied to the case that was presently before the Court, and he maintained that if the doctrine of regulatory or compensatory taxes were interpreted in an overly liberal manner, it would inevitably encompass every tax imposed by the State. He explained that, in a loosely defined sense, all State‑levied taxes could be described as compensatory, even if such a description were stretched to an extreme. By adopting that expansive view, the well‑recognised constitutional distinction between a tax and a fee would disappear, and the constitutional provisions contained in Part XIII would lose all of their significance. The counsel pointed out that Part XIII contains its own self‑contained code, and therefore it is unnecessary to look beyond the provisions of that part when assessing the validity of the tax imposed by the Act. After examining the submissions, the Court concluded that the challenge to the retrospective operation of the Act could not be sustained. Consequently, the Court found no reason to continue examining the matter. In its final order, the Court held that the appeals were dismissed and that the parties were ordered to bear costs. The appeal was thus dismissed.