Deduction-at-source on works contracts held unconstitutional where it captures transactions beyond the State's taxing power.

A State deduction-at-source provision for works-contract payments was unconstitutional because it compelled deduction without distinguishing transactions outside the State's sales-tax power, including inter-State sales, outside sales, and sales in the course of import. Applying earlier rulings on materially similar provisions, the Court held that such an unchannelled deduction mechanism exceeded legislative competence and could require deduction even where no State tax was ultimately leviable. The challenge to the invalidity finding failed, and the refund order for amounts collected under the invalid provision was confirmed.

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Issues: Whether section 35 of the Chhattisgarh Vanijyik Kar Adhiniyam, 1994, which required deduction at source from payments made to works contractors, was constitutionally valid.

Analysis: The provision was examined in the light of earlier decisions striking down materially similar deduction-at-source provisions in other State sales tax enactments. Those decisions held that a provision compelling deduction from bills for works contracts, without regard to whether the underlying transactions involved inter-State sales, outside sales or sales in the course of import, exceeded the State Legislature's competence because such transactions were outside the State's taxing power. The Court also noted that the impugned provision operated without adequate canalisation and could require deduction even where no State tax was ultimately leviable.

Conclusion: Section 35 was correctly held to be constitutionally invalid, and the challenge to that finding failed.

Final Conclusion: The appeal failed, and the order directing refund of the amount collected under the invalid provision stood confirmed.

Ratio Decidendi: A State deduction-at-source provision relating to works contracts is unconstitutional if it compels deduction without distinguishing transactions on which the State has no power to levy sales tax.

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