1965 (10) TMI 11 - SC - VAT and Sales Tax

Supreme Court rules sales tax on indivisible works contracts invalid

The Supreme Court held that the provisions of the Madras General Sales Tax Act, 1939, taxing indivisible works contracts were ultra vires. The Court ... Ultra vires - works contract - assessment made under this Act - ouster of civil jurisdiction by statutory machinery - refund for payment under a mistake of law - limitation - article 96Works contract - ultra vires - Whether the impugned assessments related to indivisible works contracts and whether the charging provisions insofar as they taxed such indivisible contracts were ultra vires the legislative competence of the State. - HELD THAT: - The plaint and the proceedings were treated throughout on the basis that the appellants entered into lump-sum, indivisible building (works) contracts and the State did not controvert that factual foundation before this Court. This Court reviewed the statutory definitions and rule 4(3) and the decision in Gannon Dunkerley and Co. and held that, as a matter of law, a true indivisible works contract contains no sale of materials strictly so called. The Court thus concluded that the provisions of the Madras General Sales Tax Act and the Rules which operated to tax the turnover of such indivisible building contracts fell outside the constitutional competence of the State legislature and were void to that extent.Assessments in the appeals related to indivisible works contracts; the provisions authorising taxation of such indivisible contracts were ultra vires and void to that extent.Assessment made under this Act - ouster of civil jurisdiction by statutory machinery - refund for payment under a mistake of law - Whether a civil suit for refund of taxes assessed under provisions declared ultra vires is barred by section 18A (bar on suits to set aside or modify assessments made under the Act). - HELD THAT: - The Court analysed the scope of statutory machinery and the principle in Raleigh Investment Co.'s case, and reviewed authorities. It held that an authority or tribunal created by a statute must act under the Act and cannot validly make an assessment by reliance on a provision that is in law void; an assessment founded on an ultra vires charging provision is, to that extent, an act outside the Act. Consequently an assessment made on the basis of a provision declared ultra vires cannot be said to be an assessment 'under this Act' for the purposes of section 18A. Applying that principle, the majority concluded that section 18A did not bar the present suit seeking recovery of amounts collected pursuant to assessments founded on the ultra vires portion of the charging provisions.Section 18A does not bar a civil suit for recovery of taxes collected pursuant to assessments made on the basis of statutory provisions which are ultra vires; the suit was maintainable.Limitation - article 96 - mistake of law - refund - Whether the suit for refund was barred by limitation. - HELD THAT: - The Court applied settled law that an action for recovery of sums paid under a mistake of law is governed by article 96 of the Limitation Act, which prescribes a three year period running from the date when the mistake became known. The plaint alleged-and the respondent did not deny-that the appellants became aware of the legal mistake on April 5, 1954 (the date of the High Court's decision), and the suit was filed within three years thereafter. The suit therefore lay within the prescribed period.The claim for refund was within time under article 96 and not barred by limitation.Final Conclusion: The majority allowed the appeal: the assessments related to indivisible works contracts and the provisions of the Madras General Sales Tax Act insofar as they operated to tax such contracts were ultra vires; a civil suit for refund of amounts collected pursuant to assessments founded on those ultra vires provisions was maintainable; and the suit was within the three year period under article 96. Decree for plaintiffs with costs. Issues Involved:1. Legislative Competence and Constitutionality of the Madras General Sales Tax Act, 19392. Maintainability of the Suit for Refund of Sales Tax3. Limitation Period for Filing the SuitIssue-Wise Detailed Analysis:1. Legislative Competence and Constitutionality of the Madras General Sales Tax Act, 1939The primary issue was whether sections 2(h) and 2(i), Explanation (1)(i) of the Madras General Sales Tax Act, 1939, read with rule 4(3) of the Turnover and Assessment Rules, were ultra vires the legislative competence of the Madras State Legislature. The appellants contended that these provisions, which allowed the State to tax indivisible works contracts, were declared unconstitutional by the High Court of Madras in Gannon Dunkerley and Co. v. State of Madras. The Supreme Court upheld this view, confirming that the provisions were beyond the legislative competence of the State legislature as they attempted to tax transactions that were not sales of goods but indivisible building contracts. The Court emphasized that the term 'sale of goods' in entry 48 of List II in Schedule VII of the Government of India Act, 1935, must be interpreted as having the same meaning as in the Sale of Goods Act, 1930. Therefore, the provisions of the Madras General Sales Tax Act that allowed for the taxation of indivisible works contracts were ultra vires and void.2. Maintainability of the Suit for Refund of Sales TaxThe next issue was whether a suit for the refund of sales tax assessed under the ultra vires provisions of the Madras General Sales Tax Act was maintainable. The appellants argued that since the provisions were declared ultra vires, the assessments made under those provisions were void, and thus, a suit for refund was maintainable. The respondents contended that section 18A of the Act barred such a suit. The Supreme Court held that an assessment made under an ultra vires provision cannot be considered as made 'under the Act' and thus is not protected by section 18A. The Court clarified that a statutory authority cannot question the vires of the statute under which it operates. Therefore, a suit challenging an assessment made under an ultra vires provision is maintainable in a civil court.3. Limitation Period for Filing the SuitThe final issue was whether the suit was barred by the law of limitation. The City Civil Court had held that the suit was governed by article 62 of the Limitation Act, which prescribes a three-year period for suits for money payable by the defendant to the plaintiff for money received by the defendant for the plaintiff's use. However, the appellants argued that the suit was governed by article 96 of the Limitation Act, which applies to suits for relief on the ground of mistake, with a three-year limitation period starting from the date when the mistake became known to the plaintiff. The Supreme Court agreed with the appellants, stating that the suit was filed within three years from the date when the appellants came to know of the mistake, i.e., the date of the Madras High Court's judgment in Gannon Dunkerley and Co.'s case. Thus, the suit was within the limitation period.ConclusionThe Supreme Court allowed the appeal, holding that the provisions of the Madras General Sales Tax Act, 1939, taxing indivisible works contracts were ultra vires. Consequently, the suit for the refund of sales tax assessed under those provisions was maintainable, and the suit was filed within the limitation period. The Court decreed in favor of the appellants, awarding them the refund of the sales tax paid with costs throughout.