Works contract deductions cannot be denied to a contractor when the work is assigned to a registered sub-contractor.

Under the Tamil Nadu General Sales Tax Act, a contractor who assigns a works contract to a registered sub-contractor cannot be denied deduction merely because the sub-contractor's turnover was not shown in the sub-contractor's return. The Court applied Article 366(29-A)(b) and the definitions of taxable turnover and total turnover to hold that, once the work is assigned, the contractor no longer executes that portion of the contract and the taxable transfer arises in the sub-contractor's hands. Payments made to the sub-contractor were therefore excluded from the contractor's total turnover, and the proviso was read down to that extent, leaving the Revenue free to proceed against the sub-contractor if tax remained unpaid.

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Issues: Whether the condition in the proviso to Section 3-B(2) of the Tamil Nadu General Sales Tax Act, 1959, requiring inclusion of the sub-contractor's turnover in the sub-contractor's return, could be applied to deny deduction to a contractor who had assigned the works contract to a registered sub-contractor.

Analysis: The scope of taxable turnover and total turnover under Sections 2(p) and 2(q) of the Tamil Nadu General Sales Tax Act, 1959 was considered along with Article 366(29-A)(b) of the Constitution of India, which treats transfer of property in goods involved in execution of a works contract as a taxable transfer. Once the contractor assigns the work to a registered sub-contractor, the contractor ceases to execute that part of the works contract, and the transfer of property in goods occurs in the hands of the sub-contractor. The authoritative principle applied was that payments made to a sub-contractor are not to be included in the contractor's total turnover for the relevant levy. On that basis, the statutory condition insisting on inclusion of the amount in the sub-contractor's return could not be used to fasten liability on the contractor when the sub-contractor is a registered dealer, though the Revenue was left free to proceed against the sub-contractor if tax had not been paid.

Conclusion: The impugned proviso was read down to the extent that the disputed condition would not apply to a contractor who had assigned the work to a registered sub-contractor, and the challenge succeeded in favour of the assessee.

Ratio Decidendi: In a works contract assigned to a registered sub-contractor, the contractor cannot be denied deduction or made liable on the footing that the sub-contractor's turnover was not shown in the sub-contractor's return, because the taxable transfer arises in the hands of the sub-contractor and payments made to the sub-contractor do not form part of the contractor's total turnover.

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