Works-contract tax deduction was struck down for arbitrariness and conflict with declared-goods restrictions, while timing of tax incidence was upheld.

Section 25A of the Bihar Finance Act, 1981 was analysed as a works-contract recovery mechanism, but the Court held it invalid because it compelled deduction from bills even for declared goods and lacked a safeguard against double collection contrary to section 15 of the Central Sales Tax Act, 1956. The 7 November 1984 notification was treated as surviving the amendment by virtue of the repeal-and-re-enactment principle. A flat 4 per cent deduction from every bill or invoice was held arbitrary and unreasonable for ignoring the actual taxable component. The contention that no tax arose until completion and handing over of the work was rejected; tax incidence could arise on incorporation of goods.

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Issues: (i) Whether section 25A of the Bihar Finance Act, 1981, as amended in 1990, was ultra vires for conferring unguided, uncanalised and arbitrary power on the executive and for conflict with section 15 of the Central Sales Tax Act, 1956; (ii) whether the notification dated 7 November 1984 continued to operate after the amendment in section 25A; (iii) whether deduction at 4 per cent under section 25A and the notification was arbitrary and unreasonable; (iv) whether no tax was payable during execution of the works contract until completion and handing over of the work.

Issue (i): Whether section 25A of the Bihar Finance Act, 1981, as amended in 1990, was ultra vires for conferring unguided, uncanalised and arbitrary power on the executive and for conflict with section 15 of the Central Sales Tax Act, 1956.

Analysis: The principal reasoning accepted that the Legislature had supplied guidance through section 12 of the Bihar Finance Act, 1981, which prescribed the ordinary rate of tax, permitted variation within defined limits, and made declared goods subject to the restrictions in section 15 of the Central Sales Tax Act, 1956. The amended section 25A was treated as a recovery provision operating in the works-contract field and not as a wholly unguided delegation. However, it was also held that section 25A compelled deduction from bills or invoices even where the goods involved were declared goods taxable at the first point of sale, without any mechanism to prevent double collection at more than one stage. Since the provision mandated deduction irrespective of whether tax was actually payable in a given case, it offended the statutory restrictions governing declared goods.

Conclusion: Section 25A was held to be invalid and struck down, in favour of the petitioners.

Issue (ii): Whether the notification dated 7 November 1984 continued to operate after the amendment in section 25A.

Analysis: The amended provision deleted the earlier maximum-rate language and substituted a notification-based power. The Court held that the amendment amounted to a sufficient legislative change to attract the saving principle applicable to repeal and re-enactment, and that the earlier notification was not displaced merely because a fresh notification had not yet been issued. On that footing, the notification was treated as surviving.

Conclusion: The notification dated 7 November 1984 was held to remain in force.

Issue (iii): Whether deduction at 4 per cent under section 25A and the notification was arbitrary and unreasonable.

Analysis: The Court examined the range of tax rates applicable under the Act, the character of works contracts, and the practical difficulty that deductions were being made from all bills or invoices without any assessment of the actual taxable component. It held that a flat deduction of 4 per cent from every bill or invoice, irrespective of the nature of the contract and the actual tax incidence, lacked a rational basis and became unreasonable after the constitutional and statutory developments affecting works-contract taxation. The absence of a machinery to distinguish taxable from non-taxable components reinforced the arbitrariness.

Conclusion: The 4 per cent deduction was held to be arbitrary and unreasonable, in favour of the petitioners.

Issue (iv): Whether no tax was payable during execution of the works contract until completion and handing over of the work.

Analysis: The Court applied the constitutional concept of deemed sale in works contracts under article 366(29-A)(b) of the Constitution of India and held that property in goods ordinarily passes when the materials are incorporated in the work, unless the contract shows a contrary intention. Taxability therefore does not necessarily await final completion or final billing. The contention that no tax could be deducted until handing over was rejected.

Conclusion: The contention was rejected and held against the petitioners.

Final Conclusion: The writ petitions succeeded overall, and the impugned deduction mechanism under section 25A was set aside, while the separate challenge to the timing of tax incidence during works-contract execution failed.

Dissenting Opinion: Sachchidanand Jha, J. disagreed with the majority on the principal outcome and would have upheld section 25A, holding that section 12 supplied sufficient guidance and that any inconsistency with section 15 of the Central Sales Tax Act, 1956, could be dealt with at the assessment stage by reading down or pro tanto modification.

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