1966 (9) TMI 97 - SC - VAT and Sales Tax

Whether Parliament can enact a law imposing tax on the supply of materials used in building contracts? Held that - Appeal allowed. We consider that the orders of assessment of sales tax made by the respondent for the two assessment years 1960-61 and 1961-62 are illegal in so far as the hire-purchase transactions are included in the computation of the taxable turnover of the appellant. We accordingly hold that these appeals should be allowed and a writ in the nature of certiorari should be granted for quashing the orders of assessment made by the respondent for the two assessment years in question and that a writ in the nature of mandamus should be issued ordering the respondent to make fresh assessments in accordance with law

Summary

Issues:
1. Whether the levy of sales tax on hire-purchase transactions under the Kerala General Sales Tax Act, 1125 is legal.
2. Whether the imposition of surcharge under the Kerala Surcharge on Taxes Act, 1957, as amended by Act 12 of 1960, is discriminatory and violates Article 14 of the Constitution.

Analysis:

Issue 1:
The appellant, a dealer in cars, trucks, and radios, challenged the assessment made by the respondent for the years 1960-61 and 1961-62, contending that hire-purchase transactions were not taxable under the Kerala General Sales Tax Act, 1125. The respondent had assessed the appellant on a turnover that included disputed amounts from hire-purchase transactions. The appellant argued that explanation (1) to section 2(j) of the Act, deeming hire-purchase transfers as sales, was beyond the State Legislature's competence. The Court held that a hire-purchase agreement involves both bailment and a potential sale, with the sale occurring only upon the buyer's exercise of the purchase option. The Court relied on precedent to conclude that the State Legislature cannot tax transactions as sales when property does not pass from seller to buyer, as in hire-purchase agreements. Therefore, the explanation deeming hire-purchase as sales was held invalid, and the assessment orders were deemed illegal.

Issue 2:
The appellant also challenged the imposition of surcharge under the Kerala Surcharge on Taxes Act, 1957, as amended by Act 12 of 1960, alleging discrimination and violation of Article 14 of the Constitution. The Act imposed a surcharge on dealers with turnovers exceeding a specified amount. However, the appellant failed to provide sufficient particulars and materials to support the Article 14 challenge in the writ petitions. Ultimately, the appellant chose not to press this argument during the proceedings. The Court did not delve into this issue further due to the lack of proper pleading and supporting materials. Consequently, the Court did not address the discriminatory nature of the surcharge under the Act.

In conclusion, the Supreme Court allowed the appeals, quashed the assessment orders for the years 1960-61 and 1961-62, and directed the respondent to conduct fresh assessments excluding hire-purchase transactions from taxable turnover. The Court did not award costs for the appeals.