Works contract taxation upheld, but assessments required factual enquiry into jurisdictional objections and taxable turnover limits.

The Forty-sixth Constitutional Amendment and the corresponding State amendment bringing works contracts within the sales tax net were upheld because Parliament could enlarge the constitutional concept of sale without violating the basic structure. Section 5(2)(AA)(i) of the Orissa Sales Tax Act was also sustained, but only on a limiting construction: it could apply only to goods and transactions legally exigible to tax, and not to inter-State sales, declared goods beyond permissible limits, or amounts already outside the State's taxing power. Assessment orders made without factual enquiry into these jurisdictional objections were set aside and remitted for fresh reassessment.

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Issues: (i) Whether the Forty-sixth Constitutional Amendment, and the State amendment brought into the Orissa Sales Tax Act to include works contracts within the taxing net, were ultra vires; (ii) whether section 5(2)(AA)(i) of the Orissa Sales Tax Act, governing taxable turnover in works contracts, was invalid or had to be read down so as to exclude non-taxable goods and transactions beyond the State's taxing power; (iii) whether the assessments made under the amended provision could stand without factual enquiry into jurisdictional objections such as inter-State sales, declared goods, double taxation, and absence of transfer of property in goods.

Issue (i): Whether the Forty-sixth Constitutional Amendment, and the State amendment brought into the Orissa Sales Tax Act to include works contracts within the taxing net, were ultra vires.

Analysis: The constitutional amendment was introduced to remove the legal deficiency identified in the earlier works-contract ruling and to enable States to tax the transfer of property in goods involved in the execution of works contracts. Parliament was competent to amend the Constitution so long as the basic structure was not destroyed. The amendment did not alter the federal structure or exceed constituent power merely because it overrode the earlier judicial position. The State amendment operated within the enlarged constitutional definition of sale and did not require a separate amendment to List II.

Conclusion: The challenge to the validity of the Forty-sixth Constitutional Amendment and the corresponding State amendment failed.

Issue (ii): Whether section 5(2)(AA)(i) of the Orissa Sales Tax Act, governing taxable turnover in works contracts, was invalid or had to be read down so as to exclude non-taxable goods and transactions beyond the State's taxing power.

Analysis: The provision was not to be read as authorising tax on matters outside the State's jurisdiction. It had to be harmoniously construed with the Constitution and with the rest of the Act. The expression governing taxable turnover in works contracts was intended as a practical measure for determining the value of goods exigible to tax; where the dealer showed that particular goods were not taxable, such goods had to be excluded. The provision could not be applied to inter-State sales, goods already taxed at an earlier point where the Act so provided, or declared goods beyond the permissible rate. The legislative intent was to tax only the transfer of property in goods involved in the works contract to the extent legally taxable.

Conclusion: Section 5(2)(AA)(i) was upheld subject to the limiting construction that only goods legally exigible to tax under the Act could be included in taxable turnover.

Issue (iii): Whether the assessments made under the amended provision could stand without factual enquiry into jurisdictional objections such as inter-State sales, declared goods, double taxation, and absence of transfer of property in goods.

Analysis: The assessing authority was required to examine objections going to jurisdiction and taxability on the facts of each case. The deeming provision did not dispense with enquiry where the dealer asserted that the transaction was outside the State's taxing power or that the goods were otherwise not taxable. The assessments had been made without keeping the correct legal position in view and without adequate factual findings. Accordingly, the proper course was to set aside the assessments and remit the matters for fresh consideration with reasons and findings on the relevant objections.

Conclusion: The impugned assessments were set aside and the matters were remitted for reassessment after proper enquiry.

Final Conclusion: The writ petitions succeeded in part: the constitutional and statutory challenges were rejected, but the assessment orders were quashed and fresh assessments were directed in accordance with the limiting construction of the taxing provision and the relevant jurisdictional objections.

Ratio Decidendi: A constitutional and statutory amendment enacted to tax the transfer of property in goods involved in works contracts is valid, but the taxing provision must be construed consistently with constitutional limits so that only legally exigible transactions and goods are brought to tax after due factual enquiry.

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