1954 (4) TMI 30 - HC - VAT and Sales Tax

Madras Tax Act Amendment Ruled Unconstitutional

Gannon Dunkerley & Co. (Madras) Ltd. Versus The State of Madras

Gannon Dunkerley & Co. (Madras) Ltd. Versus The State of Madras - [1954] 5 STC 216 (Mad), AIR 1954 Mad 130 Issues Involved:1. Constitutional validity of the Madras General Sales Tax Amendment Act (XXV of 1947).2. Taxability of turnover from works contracts.3. Taxability of food-grains supplied to workmen.Detailed Analysis:1. Constitutional Validity of the Madras General Sales Tax Amendment Act (XXV of 1947):The primary issue was whether the inclusion of 'works contracts' within the ambit of the Madras General Sales Tax Act by the Amendment Act of 1947 was constitutionally valid. The court examined the legislative competence of the Provincial Legislature under the Government of India Act, 1935, specifically under Section 100, sub-section (3), and item 48 in List II of the 7th Schedule. The court noted that the corresponding item in the Constitution of India is item 54, which pertains to 'taxes on the sale or purchase of goods other than newspapers.'The court emphasized that the term 'sale of goods' had a well-defined legal meaning, both in England under the Sale of Goods Act, 1893, and in India under the Sale of Goods Act, 1930. The court concluded that the legislative power to tax sales of goods did not extend to taxing works contracts, which do not involve a transfer of property in goods as understood in law.2. Taxability of Turnover from Works Contracts:The court examined whether the turnover from works contracts executed by the assessees could be subjected to sales tax. The court analyzed the nature of building contracts, which involve labor, work, and materials, and concluded that such contracts are entire and indivisible. The property in the materials used in the construction does not pass to the owner by virtue of a sale but because they are fixed in pursuance of the contract to build. The court cited various legal precedents to support the view that building contracts do not constitute contracts of sale of goods.The court held that the legislative power to tax sales of goods did not extend to taxing works contracts under the guise of an inclusive definition of sale. Therefore, the imposition of sales tax on the turnover from works contracts was deemed ultra vires of the Provincial Legislature's powers.3. Taxability of Food-Grains Supplied to Workmen:The court considered whether the supply of food-grains to workmen by the assessees could be subjected to sales tax. The court referred to the definition of 'dealer' in the Madras General Sales Tax Act, which means any person who carries on the business of buying or selling goods. The court emphasized that 'business' in this context must be understood in a commercial sense, involving activities designed to earn profit.The court found that the assessees supplied food-grains to the workmen for their convenience and welfare, without any profit motive. As such, this activity did not constitute carrying on the business of selling goods. The court concluded that the assessees were not liable to pay sales tax on the value of the food-grains supplied to the workmen.Conclusion:The court allowed the revision petition, holding that the levy of sales tax on the turnover from works contracts and the supply of food-grains to workmen was not justified in law. The court directed that these items be deleted from the turnover of the assessees and awarded costs to the assessees.