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

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

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, ... Sale of goods - works contract - single and indivisible contract versus separable contract for sale and work - tax on materials used in construction works - exemption and executive amendment of statutory schedule - delegation of legislative power to executive in taxation particularsSale of goods - works contract - single and indivisible contract versus separable contract for sale and work - tax on materials used in construction works - Whether the Provincial Legislature could, under Entry 48 of List II, impose sales tax on materials supplied in works contracts - HELD THAT: - The Court held that the expression 'sale of goods' must be given the meaning it bears in the Sale of Goods Act, 1930, and that in an ordinary building or works contract there is no sale of the materials as such. Applying the principle laid down in the decision in Gannon Dunkerley's case, the impugned provisions of the Central Provinces and Berar Sales Tax Act, 1947, insofar as they sought to impose a tax on construction works taken as single and indivisible contracts, were beyond the legislative competence of the Provincial Legislature. The Court, however, recognised that some contracts may, on true construction, comprise distinct agreements - one for sale of materials and another for work and labour - and in such cases the tax may legitimately be imposed on that part which is a contract of sale. Determination whether a particular contract is indivisible or separable was left to the Sales Tax authorities to decide in the exercise of their statutory functions.The provisions of the Act imposing tax on construction works are ultra vires insofar as applied to single indivisible works contracts; Sales Tax Authorities may, however, assess and tax the portion of a contract which on its true construction is a contract for sale of materials.Exemption and executive amendment of statutory schedule - delegation of legislative power to executive in taxation particulars - Validity of the notification of September 18, 1950, amending the exemption in Schedule II under the Act by executive notification - HELD THAT: - The majority held that the power conferred on the State Government to amend the Schedule under the statutory provision was a permissible delegation of authority to determine details of the working of the taxation law. The two sub sections granting exemption and authorising executive amendment were read as integral: an exemption granted by the Schedule is conditional and may be modified under the delegated power. The majority therefore upheld the notification as intra vires. A separate judgment (Bose, J.) declined to express an opinion on the validity of the executive amendment and left that question open for future decision.The notification amending the Schedule was, by majority, held intra vires and valid; one judge reserved opinion on that point.Final Conclusion: Appeals allowed. The Court set aside the orders below and restrained enforcement of the Sales Tax Act insofar as it seeks to impose tax on single indivisible construction contracts; Sales Tax Authorities remain competent to determine and tax any separable contract for sale of materials. The executive notification amending the exemption was upheld by the majority; parties to bear their own costs. 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.