1958 (4) TMI 48 - SC - VAT and Sales Tax

Supreme Court ruling on sales tax in construction contracts: no tax on indivisible contracts

Pandit Banarsi Das Bhanot and Others Versus The State of Madhya Pradesh and Others

The Supreme Court held that the imposition of sales tax on materials used in construction works under the Central Provinces and Berar Sales Tax Act, 1947, ... Whether the Provincial Legislature had authority under Entry 48 of List II, Schedule VII, of the Government of India Act, 1935, to impose tax only on sale of goods, that the supply of materials in works contracts was not a sale within that entry, and that the provisions of the Act, which sought to impose a tax thereon treating it as a sale, were therefore ultra vires? Held that:- On our finding on the first question that the impugned provisions of the Act are ultra vires the powers of the Provincial Legislature under Entry 48 in List II in the Seventh Schedule, we should set aside the orders of the Court below, and direct that the respondents be restrained from enforcing the provisions of the Central Provinces and Berar Sales Tax Act, 1947, in so far as they seek to impose a tax on construction works. It should be made clear, however, in accordance with what we have already stated, that the prohibition against imposition of tax is only in respect of contracts which are single and indivisible and not of contracts which are a combination of distinct contracts for sale of materials and for work, and that nothing that we have said in this judgment shall bar the Sales Tax Authorities from deciding whether a particular contract falls within one category or the other and imposing a tax on the agreement of sale of materials, where the contract belongs to the latter category. Appeal allowed. Issues Involved:1. Validity of imposing sales tax on materials used in construction works.2. Authority of the Provincial Legislature under Entry 48 of List II, Schedule VII, of the Government of India Act, 1935.3. Constitutionality of the notification dated September 18, 1950, under section 6(2) of the Central Provinces and Berar Sales Tax Act, 1947.Issue-Wise Detailed Analysis:1. Validity of Imposing Sales Tax on Materials Used in Construction Works:The appellants challenged the validity of the Central Provinces and Berar Sales Tax Act, 1947, which imposed sales tax on materials used in construction works. The High Court of Nagpur upheld the validity of the Act, stating that the expression 'sale of goods' in Entry 48 was broad enough to cover transactions where property in movables passed for money. However, the Supreme Court, referencing its decision in Civil Appeal No. 210 of 1956 (State of Madras v. Gannon Dunkerley & Co.), held that in a building contract, there is no sale of materials as such, making it ultra vires for the Provincial Legislature to impose tax on the supply of materials. The Court emphasized that the term 'sale of goods' in Entry 48 should be interpreted as it is in the Sale of Goods Act, 1930.2. Authority of the Provincial Legislature under Entry 48 of List II, Schedule VII, of the Government of India Act, 1935:The appellants contended that the Provincial Legislature had no authority to impose a tax on the supply of materials in works contracts under Entry 48, as such supply could not be considered a sale. The Supreme Court agreed, reiterating that in a building contract, there is no sale of materials as such. However, it acknowledged that there could be contracts consisting of distinct agreements for the sale of materials and for work and labour. In such cases, it would be within the State's power to impose tax on the sale of materials. The Court directed the authorities to determine whether a particular contract was a combination of an agreement to sell and an agreement to work and to impose tax accordingly.3. Constitutionality of the Notification Dated September 18, 1950:The appellants argued that the notification amending Item 33 in Schedule II, which withdrew the exemption for goods sold to the Government, was unconstitutional. They contended that this constituted an unconstitutional delegation of legislative authority. The Supreme Court, however, upheld the validity of the notification, stating that it was within the authority conferred by the statute. The Court noted that it is not unconstitutional for the Legislature to delegate the power to determine details relating to the working of taxation laws to the executive. The Court also clarified that section 6(1) and section 6(2) of the Act form integral parts of a single enactment, and an exemption granted under section 6(1) is subject to modifications under section 6(2). Therefore, the impugned notification was intra vires and not open to challenge.Separate Judgment:Bose, J., while agreeing with the majority judgment, preferred not to express an opinion on the validity of the power conferred on the State Government by section 6(2) of the Act to amend the schedule. He chose to leave this issue open for future decision.Conclusion:The Supreme Court allowed the appeals, setting aside the orders of the lower court. It restrained the respondents from enforcing the provisions of the Central Provinces and Berar Sales Tax Act, 1947, insofar as they sought to impose a tax on construction works. The Court clarified that this prohibition applies only to single and indivisible contracts and not to contracts that are combinations of distinct agreements for the sale of materials and work. The parties were directed to bear their own costs throughout.