Builder-buyer agreement timing and contract terms determine tax liability on construction transactions

Tax under section 5B of the Karnataka Sales Tax Act, 1957 depends on the timing and nature of the builder-buyer arrangement. Liability was treated as arising only where the agreement to construct for the buyer was entered into before construction commenced; where flats or buildings were already under construction or completed and then sold, the same basis for levy did not exist. The contractual terms also mattered: a right to forfeit advance pointed to sale as owner, while a right only to recover the balance amount indicated a contractor relationship. Liability therefore turned on factual verification of agreement timing and the character of the transaction.

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Issues: (i) Whether liability to tax under section 5B of the Karnataka Sales Tax Act, 1957 could arise in respect of flats or buildings sold after construction had already been completed or where the agreement to sell was entered into after construction had started; (ii) Whether the nature of the agreement, including the right to forfeit advance and the right to recover only the balance amount, showed that the assessee acted as owner or merely as a contractor for the prospective buyer.

Issue (i): Whether liability to tax under section 5B of the Karnataka Sales Tax Act, 1957 could arise in respect of flats or buildings sold after construction had already been completed or where the agreement to sell was entered into after construction had started.

Analysis: The decisive factual question was whether the agreements with buyers were executed before the construction commenced or only after construction had begun. Tax under section 5B was treated as attracted only where the agreement preceded commencement of construction and the builder undertook construction for the buyer. Where the building was constructed first and sold thereafter, or where the agreement was entered into after construction had started, the transaction did not present the same basis for levy. The matter required verification of the timing of the agreements and the extent of construction covered by them.

Conclusion: Tax under section 5B was not leviable on buildings constructed before the agreement and sold thereafter, or on agreements entered into after construction had started.

Issue (ii): Whether the nature of the agreement, including the right to forfeit advance and the right to recover only the balance amount, showed that the assessee acted as owner or merely as a contractor for the prospective buyer.

Analysis: The contractual terms had to be read to determine whether the assessee was selling the constructed property as owner or constructing on behalf of the buyer as a contractor. A right to forfeit advance was consistent with ownership and inconsistent with a mere contractor's position, while a right only to recover unpaid construction cost pointed towards a contractor relationship. The character of the transaction therefore depended on the contractual incidents and the nature of the rights created by the agreement.

Conclusion: The matter had to be examined on the basis of whether the agreement conferred a right of forfeiture of advance or only a right to recover the balance amount, as that distinction determined the assessee's liability.

Final Conclusion: The review was accepted in part, the earlier order was modified, and the matter was sent back for factual verification on the scope and timing of the agreements and the character of the transactions.

Ratio Decidendi: Liability under section 5B depends on whether the builder entered into the agreement before construction commenced and acted as owner or, instead, undertook construction as a contractor for the buyer.

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