Jharkhand Finance Act Section 25-A(1) and 1993 Notification Unconstitutional; Tax Collection Prohibited from 2004 Onwards.

The HC struck down Section 25-A(1) of the Jharkhand Finance Act, 2001, and the notification dated June 19, 1993, as unconstitutional. The State and authorities were prohibited from collecting tax under Section 25-A from the assessment year starting April 1, 2004. Amounts collected would be adjusted in assessments, with excess refunded promptly. Writ petitions were allowed.

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Issues Involved:

1. Legislative Competence and Validity of Section 25-A of the Bihar Finance Act, 1981.
2. Adaptation of Section 25-A by the State of Jharkhand.
3. Introduction of the Third Proviso to Section 25-A.
4. Res Judicata and the Challenge to the Third Proviso.
5. Workability and Constitutionality of Section 25-A(1) and Related Notifications.

Summary:

1. Legislative Competence and Validity of Section 25-A of the Bihar Finance Act, 1981:

The petitioner challenged Section 25-A of the Bihar Finance Act, 1981, which mandates the advance recovery of tax on works contracts. The Patna High Court in [2000] 117 STC 41 (Larsen and Toubro Ltd. v. State of Bihar) declared that Section 25-A was ultra vires entry 54 of the State List read with entry 92A of the Union List and Article 286 of the Constitution of India, to the extent it related to inter-State trade or commerce, sales outside the State, import transactions, and "declared goods" under the Central Sales Tax Act. The provision was also held ultra vires concerning deductions for labour charges and other services.

2. Adaptation of Section 25-A by the State of Jharkhand:

Post the Bihar Reorganisation Act, 2000, the State of Jharkhand adopted the Bihar Finance Act, including Section 25-A. The petitioner contended that since Section 25-A was struck down by the Patna High Court, there was no valid section for Jharkhand to adopt.

3. Introduction of the Third Proviso to Section 25-A:

Jharkhand introduced a third proviso to Section 25-A via the Jharkhand Finance Act, 2001, aiming to exclude transactions outside the State's taxing power. The proviso aimed to rectify the issues identified by the Patna High Court by excluding sales under the Central Sales Tax Act, payments to sub-contractors, and certain other components from tax deductions.

4. Res Judicata and the Challenge to the Third Proviso:

The respondents argued that the challenge to Section 25-A was barred by res judicata due to the previous decision in [2000] 117 STC 41. However, the court held that the introduction of the third proviso presented a new context, and the challenge was not barred by res judicata. The court emphasized that only matters heard and finally decided could operate as res judicata.

5. Workability and Constitutionality of Section 25-A(1) and Related Notifications:

The petitioner argued that the third proviso did not resolve the issues identified by the Patna High Court, such as the lack of a mechanism to assess excluded components at the pre-assessment stage. The court found that the notification dated June 19, 1993, which directed deductions on the gross value of contracts, was incompatible with the third proviso. The court concluded that Section 25-A(1) of the Act, read with the notification, remained arbitrary and unworkable.

Judgment:

The court struck down Section 25-A(1) of the Jharkhand Finance Act, 2001, and the notification dated June 19, 1993, as unconstitutional. The State and authorities were restrained from collecting tax under Section 25-A from the assessment year commencing April 1, 2004. Any amount collected would be adjusted during assessments, with excess amounts refunded without delay. Writ petitions were allowed.

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