Mandatory tax deduction on all works-contract payments was struck down as discriminatory and confiscatory without a safeguard mechanism.

Section 13AA of the Orissa Sales Tax Act, 1947 was held unconstitutional because it required tax deduction at source from all works-contract payments without any mechanism to exclude transactions outside the sales tax field. The provision applied even to pure labour or service contracts where no sales tax could arise, and it gave contractors no certificate or other safeguard to prevent excessive deduction. The court contrasted this with section 194C of the Income-tax Act, 1961, which contains a certificate-based protection. The absence of any similar control or remedy made the deduction scheme discriminatory and confiscatory, and the provision was struck down.

---

---

Issues: Whether section 13AA of the Orissa Sales Tax Act, 1947, mandating deduction at source from payments to works contractors without any mechanism to exclude transactions not liable to sales tax, is unconstitutional for violating the equality clause and being confiscatory in effect.

Analysis: The deduction provision applied indiscriminately to all payments under works contracts, including pure labour or service contracts where no sales tax liability could arise. The provision contained no safeguard enabling the contractor to obtain a certificate or otherwise establish that the transaction fell outside the taxing field. In contrast, a comparable deduction scheme under section 194C of the Income-tax Act, 1961, contained an express certificate mechanism protecting against excessive or unnecessary deduction. The absence of any comparable guidance, discretion, or remedial mechanism under the Orissa Sales Tax Act meant that the provision authorised deduction even in cases beyond the State's taxing competence under entry 54 and the constitutional restrictions governing sales tax on works contracts. Such an unchannelled and compulsory deduction was held to be discriminatory and confiscatory rather than a valid tax collection measure.

Conclusion: Section 13AA of the Orissa Sales Tax Act, 1947, was held unconstitutional and struck down.

---