State tax deduction on works contracts cannot reach inter-State or other -competence sales; provision struck down as unconstitutional.

Section 57B of the Gujarat Sales Tax Act, which required tax deduction at source from payments to works-contract contractors, was held beyond State legislative competence because it operated on transactions outside the State's taxing field, including inter-State sales, outside sales and sales in the course of import. Although Article 366(29A) expanded the meaning of sale to cover goods involved in works contracts, that enlargement did not extend the State's taxing power beyond entry 54 of List II, subject to entry 92A of List I. The Court held that a machinery provision cannot be used to collect tax in advance on non-taxable transactions, and that the provision was colourable legislation. Section 57B was declared unconstitutional and void.

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Issues: Whether section 57B of the Gujarat Sales Tax Act, 1969, which required deduction of tax at source from payments made to contractors executing works contracts, was beyond the legislative competence of the State Legislature because it operated even on inter-State sales, outside sales, and sales in the course of import.

Analysis: Article 366(29A) of the Constitution of India enlarged the concept of sale to include transfer of property in goods involved in execution of a works contract, but the State's taxing power remained confined by entry 54 of List II and was subject to entry 92A of List I. The impugned provision obliged the payer to deduct 2 per cent of the bill amount unless the contractor produced a certificate from the Commissioner, and the Court held that this machinery could not be used to collect tax in advance on transactions which were, in law, outside the State's taxing field. Section 87, and the definitions of 'sale' and 'sale price', could not enlarge legislative competence. The Court further held that the provision effectively assumed all transactions under the works contract to be intra-State sales and therefore operated as an indirect attempt to tax inter-State and other non-taxable sales. Such a provision was not merely procedural but formed part of the substantive charge and amounted to colourable legislation.

Conclusion: Section 57B was held unconstitutional and void for want of legislative competence, and the petition succeeded.

Ratio Decidendi: A State cannot, by a tax-deduction-at-source machinery provision, collect tax in advance on transactions that lie outside its legislative field; a provision that in substance authorises such collection is beyond competence and invalid.

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