Tax deduction at source for works contracts upheld as a valid machinery measure after curing the earlier labour-component defect.

The substituted section 19-A of the Karnataka Sales Tax Act was upheld as a valid machinery provision ancillary to the charging section 5-B. The Court held that the Legislature could require tax deduction at source in works contracts, and that the amended provision cured the defect in the earlier version by excluding labour-only contracts on certification and by allowing only a tentative 25 per cent deduction for the labour or service component in composite contracts. It further held that a pre-assessment machinery provision need not exactly mirror final assessment, and that the tentative deduction was neither arbitrary nor confiscatory. The challenge therefore failed.

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Issues: Whether the substituted section 19-A of the Karnataka Sales Tax Act, 1957, providing for deduction of tax at source on works contracts with a 25 per cent tentative deduction towards labour or service component and a certificate mechanism for labour-only contracts, was constitutionally invalid.

Analysis: The provision was examined as a machinery measure ancillary to the charging provision under section 5-B. The Court held that the Legislature was competent to provide for deduction of tax at source under its taxing power, and that the earlier invalidity identified in the prior version of section 19-A arose because it permitted flat-rate deduction from the full contract amount without any allowance for non-taxable labour or service components. The substituted provision cured that defect by expressly excluding labour-only contracts from deduction on certification and by allowing a tentative 25 per cent deduction in composite contracts. The Court further held that the machinery provision need not be perfect or mirror the final assessment at the pre-assessment stage, and that the tentative nature of the deduction did not make it arbitrary or confiscatory. The reduction in the period for completing assessments was also treated as a mitigating factor against any prejudice to the assessee.

Conclusion: Section 19-A, as substituted, was held to be constitutionally valid and the challenge to it failed.

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