1989 (3) TMI 356 - SC - VAT and Sales Tax

Constitutional Validity Confirmed: States' Tax Powers Limited under 46th Amendment

Builders Association of India and Others Versus Union of India and Others (and connected writ petitions and appeals)

The court upheld the constitutional validity of the Constitution (Forty-sixth Amendment) Act, 1982, confirming due ratification by the required number of ... Constitutional validity of the Constitution (Forty-sixth Amendment) Act, 1982 challenged by which the Legislatures of the States were empowered to levy sales tax on certain transactions described in sub-clauses (a) to (f) of clause (29-A) of article 366 of the Constitution Whether the power of the State Legislature to levy tax on the transfer of property in goods involved in the execution of works contracts referred to in sub- clause (b) of clause (29-A) of article 366 of the Constitution is subject to the restrictions and conditions contained in article 286 of the Constitution? Held that:- As declared that sales tax laws passed by the Legislatures of States levying taxes on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract are subject to the restrictions and conditions mentioned in each clause or sub-clause of article 286 of the Constitution. We, however, make it clear that the cases argued before and considered by us relate to one specie of the generic concept of 'works contracts'. The case-book is full of the illustrations of the infinite variety of the manifestation of 'works contracts'. Whatever might be the situational differences of individual cases, the constitutional limitations on the taxing-power of 'the State as are applicable to 'works contracts' represented by 'building contracts' in the context of the expanded concept of 'tax on the sale or purchase of goods' as constitutionally defined under article 366(29-A), would equally apply to other species of 'works contracts' with the requisite situational modifications. Thus civil appeals filed against the orders of the High Courts, however, shall be placed before the appropriate Bench hearing tax matters to decide the other questions raised in them including the validity of any statutory provision or rule in the light of this judgment. Issues Involved:1. Constitutional validity of the Constitution (Forty-sixth Amendment) Act, 1982.2. Applicability of Article 286 and the Central Sales Tax Act, 1956 to the power of State Legislatures to levy tax on works contracts.Detailed Analysis:Issue 1: Constitutional Validity of the Constitution (Forty-sixth Amendment) Act, 1982The first contention raised was regarding the constitutionality of the 46th Amendment, based on the assumption that the Legislatures of not less than one-half of the States had not ratified the Bill before the President gave his assent. The court examined the Memorandum dated January 31, 1982, signed by the Secretary-General of the Rajya Sabha, which confirmed that the Bill had been ratified by the Legislatures of twelve States. The court concluded that there had been due compliance with the provisions of the proviso to Article 368(2) of the Constitution. Therefore, the first contention was rejected.Issue 2: Applicability of Article 286 and the Central Sales Tax Act, 1956The second major contention was whether the States could ignore the provisions contained in Article 286 of the Constitution and the Central Sales Tax Act, 1956, while levying sales tax on the turnover relating to works contracts. The petitioners argued that the 46th Amendment did not enlarge the power of the States to levy sales tax beyond the existing constitutional restrictions, including those in Article 286 and the Central Sales Tax Act, 1956.The court held that the 46th Amendment, which introduced clause (29-A) in Article 366, did not alter the location of the sale or confer power on the States to tax sales outside the State, inter-State sales, or sales in the course of import. It merely deemed certain transactions, including works contracts, as sales for the purpose of levying sales tax. Therefore, the States were still bound by the restrictions and conditions mentioned in Article 286 and the Central Sales Tax Act, 1956.The court emphasized that the expression 'tax on the sale or purchase of goods' in Article 286 should be read as including the transfer of goods referred to in sub-clause (b) of clause (29-A) of Article 366, which is deemed to be a sale. Consequently, the restrictions and conditions in Article 286 applied to such deemed sales as well. The court stated that the power to tax a transaction deemed to be a sale under Article 366(29-A) should be subject to the same restrictions and conditions as the power to tax an ordinary sale.The court rejected the States' argument that sub-clause (b) of clause (29-A) of Article 366 should be read as an independent entry in the State List, enabling the States to levy tax on sales and purchases independent of entry 54. The court reiterated that the power of the States to levy taxes on sales and purchases of goods, including deemed sales under clause (29-A) of Article 366, is to be found only in entry 54 and not outside it.Conclusion:The court declared that sales tax laws passed by the States levying taxes on the transfer of property in goods involved in the execution of works contracts are subject to the restrictions and conditions mentioned in Article 286 of the Constitution. The court also noted that the constitutional amendment in Article 366(29-A) read with the relevant taxation entries enabled the States to exert their taxing power in an important area of social and economic life. However, the court suggested that the States consider appropriate classifications for building activities related to housing projects for the underprivileged and weaker sections of society for appropriate separate treatment.The court disposed of all the writ petitions, allowing the petitioners to approach the authorities under the Sales Tax Act or the High Court for necessary relief. The civil appeals were directed to be placed before the appropriate Bench hearing tax matters to decide the other questions raised, including the validity of any statutory provision or rule in light of this judgment.