A) ABSTRACT / HEADNOTE

The Supreme Court in Messrs Mohanlal Hargovind Das, Bidi Merchants, Jabalpur (M.P.) v. The State of Madhya Pradesh & Another ([1955] 2 SCR 509) addressed the constitutional limitations placed on a State’s power to impose taxes on inter-State trade. The case arose from the levy of purchase tax by the Madhya Pradesh Sales Tax authorities on tobacco imported by the petitioners from Bombay for manufacturing bidis that were subsequently exported outside Madhya Pradesh. The petitioners, registered under the Central Provinces and Berar Sales Tax Act, 1947, challenged the imposition under Article 32 of the Constitution, alleging violation of Article 286(2). The State defended its position asserting intra-State sales due to the registration of both parties under the same legislation. However, the Court held that the true nature of the transaction involved inter-State movement of goods and not merely intra-State sales. Therefore, the imposition contravened Article 286(2). The judgment reinforced constitutional safeguards ensuring free inter-State commerce and clarified the interpretation of taxing powers in the context of Article 286. The Court thus restrained the Respondents from enforcing the tax and provided a significant precedent on jurisdictional taxation under Indian constitutional law.

Keywords: Article 286(2), inter-State trade, sales tax, Central Provinces and Berar Sales Tax Act, constitutional taxation, Supreme Court of India, tobacco import, bidis manufacturing.

B) CASE DETAILS

i) Judgement Cause Title: Messrs Mohanlal Hargovind Das, Bidi Merchants, Jabalpur (M.P.) v. The State of Madhya Pradesh & Another

ii) Case Number: Petition No. 67 of 1955

iii) Judgement Date: 20th September 1955

iv) Court: Supreme Court of India

v) Quorum: S.R. Das (Acting C.J.), Bhagwati J., Jagannadha Das J., Jafer Imam J., Chandrasekhara Aiyar J.

vi) Author: Bhagwati J.

vii) Citation: [1955] 2 SCR 509

viii) Legal Provisions Involved:

• Article 286(2) of the Constitution of India

• Section 4(6) and Section 12A of the Central Provinces and Berar Sales Tax Act, 1947

• Rule 26(II) of the Central Provinces and Berar Sales Tax Rules, 1947

ix) Judgments overruled by the Case: None

x) Case is Related to which Law Subjects:
Constitutional Law, Taxation Law, Inter-State Commerce, Administrative Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The issue in this landmark judgment revolved around the imposition of purchase tax on goods forming part of inter-State trade and commerce. The petitioners, engaged in bidi manufacturing in Madhya Pradesh, imported processed tobacco from Bombay and contested the legality of the tax levied by Madhya Pradesh Sales Tax authorities. This was challenged under Article 32, alleging breach of fundamental rights by violating the embargo under Article 286(2), which restricts States from taxing inter-State sales. The judgment gave pivotal interpretations to Article 286 and tested the interplay between tax powers and federal commercial freedom, especially post the Constitution (First Amendment) Act, 1951.

D) FACTS OF THE CASE

The petitioners operated a large-scale bidi business headquartered in Jabalpur, Madhya Pradesh. Their operations included importing tobacco in bulk from Bombay, where it was blended using indigenous processes before being sent to Madhya Pradesh. This finished tobacco was then rolled into bidis and exported to other States, notably Uttar Pradesh. The petitioners and their Bombay suppliers were registered under the Central Provinces and Berar Sales Tax Act, 1947. The Sales Tax authorities demanded returns detailing purchases made from outside the State and threatened criminal action if not complied with. Although the petitioners submitted the returns under protest, they disputed the State’s power to impose purchase tax on inter-State trade, invoking Article 286(2). The State’s counter was that since both dealers were registered under the same Act, the sales were internal, falling outside Article 286’s ban. The petitioners sought relief via a writ of mandamus.

E) LEGAL ISSUES RAISED

i. Whether transactions involving import of tobacco from Bombay to Madhya Pradesh constituted inter-State commerce and thus attracted the constitutional protection of Article 286(2).

ii. Whether the registration of suppliers under the Madhya Pradesh Sales Tax Act converted the transaction into intra-State sales.

iii. Whether Section 4(6) of the Central Provinces and Berar Sales Tax Act, 1947 applied in this context.

iv. Whether declarations under Rule 26(II) for use of tobacco within Madhya Pradesh could estop the petitioners from denying intra-State transaction liability.

F) PETITIONER/ APPELLANT’S ARGUMENTS

i. The counsels for the petitioners, led by M.C. Setalvad and C.K. Daphtary, contended that the transactions clearly involved inter-State movement of goods, which under Article 286(2) of the Constitution could not be taxed by a State Legislature. They emphasized that the movement of tobacco from Bombay to Madhya Pradesh, regardless of supplier registration, rendered the trade inter-State. It was argued that the essence of Article 286(2) was to prevent States from creating fiscal barriers to national commerce. They further submitted that Section 4(6) was invalid as it was inconsistent with Article 286(1)(a) and Article 286(2) which barred taxation on out-of-State sales or inter-State commerce. Moreover, they pointed out that Rule 26(II) declarations did not confer taxing authority if the base transaction was constitutionally immune from tax.

G) RESPONDENT’S ARGUMENTS

i. The counsels for the State of Madhya Pradesh, led by T.L. Shevde, argued that since the Bombay vendors were registered under the Madhya Pradesh Sales Tax Act, the transactions became intra-State sales. The vendors were conducting business habitually in Madhya Pradesh, and thus they fell under the ambit of the definition of “dealer” in Section 2(c) of the Act. Consequently, tax liability was enforceable under Section 4(6) as the petitioners had used the goods for purposes other than declared. The State asserted that tax could be levied on the misuse of Rule 26(II) declarations and that the transaction, by virtue of statutory mechanisms, was sufficiently internal to be taxed.

H) RELATED LEGAL PROVISIONS

i. Article 286(2) of the Constitution of India: Prohibits States from taxing sales taking place in the course of inter-State trade unless authorized by Parliament.

ii. Section 4(6) of the Central Provinces and Berar Sales Tax Act, 1947: Empowers tax imposition if goods are used for purposes different than those declared.

iii. Rule 26(II) of the Central Provinces and Berar Sales Tax Rules, 1947: Requires declarations regarding the end-use of goods to avail certain exemptions.

iv. Section 2(c) of the Central Provinces and Berar Sales Tax Act, 1947: Defines a “dealer.”

I) JUDGEMENT

a. RATIO DECIDENDI

The Court held that since the transactions involved physical movement of goods from one State (Bombay) to another (Madhya Pradesh), they were transactions in the course of inter-State trade or commerce. This movement was the direct result of the contract of sale and hence, the imposition of purchase tax by the State of Madhya Pradesh was unconstitutional under Article 286(2). The fact that the sellers were registered in Madhya Pradesh was immaterial. The constitutional restriction took precedence over statutory declarations and provisions. The essence lay in the “real nature” of the transaction, not formalistic registration or procedural compliance.

b. OBITER DICTA (IF ANY)

Bhagwati J. observed that registration of out-of-State dealers under the local tax act did not ipso facto convert inter-State transactions into intra-State ones. The focus must remain on the origin and movement of goods and the contractual intent behind it.

c. GUIDELINES 

• The Court clarified that State laws cannot override constitutional prohibitions.

• Declaring end-use of goods for tax exemption purposes does not validate an otherwise unconstitutional tax.

• Movement of goods as part of a sale contract is the defining element for determining inter-State trade.

I) CONCLUSION & COMMENTS

This case sets a crucial precedent in the field of inter-State commerce and constitutional tax limits. The judgment emphasized the need to protect commercial freedom and prevent fiscal obstruction by States. It illustrates the judicial commitment to maintaining the integrity of India’s federal economic structure. It also sharply curtailed the misuse of State legislative powers in the garb of administrative formalism, highlighting the supremacy of the Constitution. The ruling preserves the economic unity of the country and strengthens the principle that substance, not form, governs legal interpretation in commerce.

J) REFERENCES

a. Important Cases Referred
i. The State of Bombay v. United Motors (India) Ltd., AIR 1953 SC 252
ii. The Bengal Immunity Company Ltd. v. The State of Bihar, AIR 1955 SC 661

b. Important Statutes Referred
i. Constitution of India, Article 286(1)(a), Article 286(2)
ii. Central Provinces and Berar Sales Tax Act, 1947, Section 4(6), Section 12A, Section 2(c)
iii. Central Provinces and Berar Sales Tax Rules, 1947, Rule 26(II)