Deduction at source on works contracts upheld as a tax-collection mechanism, not a charging provision.

Section 35 of the M.P. Commercial Tax Act, 1994 operates as a machinery provision for collection of tax on works contracts, not as a charging provision. The charging incidence remains under section 9, while the statutory definitions and exclusions continue to govern taxable turnover and exempt transactions. Deduction at source is therefore an advance collection mechanism, adjustable against the contractor's assessed liability, and harsh operation in particular cases does not by itself invalidate the provision. The provision was treated as within State legislative competence and constitutionally valid, with the challenge failing because it did not enlarge the charging scheme or transgress the Act.

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Issues: Whether section 35 of the M.P. Commercial Tax Act, 1994, providing for deduction at source from payments under works contracts, was ultra vires the Constitution or the Act on the ground that it treated non-taxable components such as labour charges and exempt sales as subject to deduction and imposed an unreasonable restriction on trade.

Analysis: Section 35 was held to be only a machinery provision for collection of tax and not a charging provision. The incidence of tax continued to be governed by section 9, while section 2(w) defined taxable turnover and section 79 excluded inter-State, outside-State, and import/export transactions from tax. The Court distinguished cases where the charging provision itself was enlarged beyond legislative competence. It treated the deduction at source as an advance collection mechanism, subject to final adjustment against the contractor's assessed liability, and noted that harsh operation in some cases did not invalidate the provision. Support was drawn from the legislative competence of the State under entry 54 of List II, the constitutional scheme relating to sales tax on works contracts, and analogous deductions upheld under section 194-C of the Income-tax Act, 1961. The notification issued under section 17 was noticed as a mitigating machinery, though not treated as the foundation of validity.

Conclusion: Section 35 was held to be intra vires and constitutionally valid. The challenge failed, as the provision did not transgress legislative competence or alter the charging scheme.

Ratio Decidendi: A deduction-at-source provision relating to works contracts is valid where it operates only as a machinery for collection of tax and leaves the charging section and final tax liability intact.

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