Works-contract tax deduction mechanism held unconstitutional where collection ignored State taxing competence and Article 286 limits.

A State works-contract tax deduction provision was held unconstitutional because it required deduction from payments to contractors and subcontractors regardless of whether the underlying transaction was an intra-State sale, inter-State sale, sale outside the State, or a sale in the course of import. The constitutional limits in Article 286 and the State's power under Entry 54 of List II do not permit collection beyond the State's taxing competence, and Article 366(29A) expands the field only to the extent of lawfully taxable works contracts. The provision was therefore declared ultra vires, and refund of the deducted tax was ordered.

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Issues: Whether section 10C of the Punjab General Sales Tax Act, 1948, providing for deduction of tax at source from payments made in respect of works contracts, was within the legislative competence of the State and valid under the Constitution of India.

Analysis: The provision required deduction from payments made to contractors and subcontractors on account of transfer of property in goods involved in works contracts, without distinguishing whether the underlying transaction was an intra-State sale, an inter-State sale, a sale outside the State, or a sale in the course of import. The constitutional scheme under Article 286 of the Constitution of India restricts State taxation on sales outside the State and sales in the course of import or export. Entry 54 of List II of the Seventh Schedule to the Constitution of India authorises State taxation only within those constitutional limits, and Article 366(29A) enlarges the field only to the extent of works contracts lawfully taxable by the State. Since the deduction operated irrespective of whether tax was ultimately leviable, and similar provisions had been struck down as being beyond State competence, the section could not be sustained.

Conclusion: Section 10C was held to be ultra vires and beyond the competence of the State Legislature. The refund of the tax deducted from the petitioners was directed.

Final Conclusion: The challenge to the tax deduction mechanism in works contracts succeeded, and the impugned provision was invalidated with consequential refund relief to the petitioners.

Ratio Decidendi: A State provision mandating deduction at source from works-contract payments is unconstitutional if it authorises collection of tax without first ensuring that the underlying transaction falls within the State's taxing competence.

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