1996 (11) TMI 355 - SC - VAT and Sales Tax

Payment and recovery of tax in works contract - Held that - Appeal allowed. Notwithstanding anything contained in sub-rule (2), any contractor who pays tax regularly in accordance with the rules, shall be entitled to payment of the full contract amount without any deduction by the awarder, if he produces a certificate issued by the assessing authority to the effect that no tax is due from him. All these provisions are designed to ensure due realisation of the tax due. No exception can be taken thereto. The attack upon rule 30A is equally untenable. It merely provides the procedure according to which the option to come under the alternate method of taxation provided by sub-section (7) or (7A) of section 7 is to be exercised. The Division Bench was, therefore, in error in declaring the said rules as invalid.

Issues Involved:
1. Validity of sub-sections (7), (7A), (7B), (11), and (12) of section 7 of the Kerala General Sales Tax Act.
2. Validity of rules 22A and 30A of the Kerala General Sales Tax Rules.
3. Compliance with clause (29A) of article 366 of the Constitution.

Issue-wise Detailed Analysis:

1. Validity of Sub-sections (7), (7A), (7B), (11), and (12) of Section 7 of the Kerala General Sales Tax Act:

The Supreme Court examined the validity of these sub-sections, which were challenged on the grounds of being violative of clause (29A) of article 366 of the Constitution. The High Court had struck down these provisions, reasoning that they levied tax on the entire contract value rather than just the value of goods transferred during the execution of the works contract. The High Court held this method as beyond the legislative competence of the State Legislature.

The Supreme Court, however, disagreed with the High Court's reasoning. It emphasized that the alternate method of taxation provided by sub-sections (7) and (7A) was optional, allowing contractors to choose between the normal method under section 5(1)(iv) and the simplified method under sub-sections (7) and (7A). The Court highlighted that this method was a "rough and ready" approach designed to simplify tax assessment and was beneficial for contractors who opted for it voluntarily.

The Court also noted that the alternate method was akin to the composition schemes upheld in other contexts, such as the levy of entertainment tax. The provisions were seen as a practical solution to avoid the complexities of detailed tax assessments, and the Court found no constitutional infirmity in them. The judgment referenced the principle that economic legislation should be viewed with greater latitude, allowing for "play in the joints" and "trial and error" by the Legislature.

2. Validity of Rules 22A and 30A of the Kerala General Sales Tax Rules:

The Supreme Court addressed the challenge to rules 22A and 30A, which were struck down by the High Court. Rule 22A dealt with the payment and recovery of tax in works contracts, while rule 30A provided the procedure for opting into the alternate method of taxation under sub-sections (7) and (7A).

The Court clarified that rule 22A did not mandate deduction of tax at source in a manner akin to section 194-C of the Income-tax Act, 1961. Instead, it required the awarder to withhold tax due from the contractor and remit it to the assessing authority. This rule applied to all contractors, whether they opted for the alternate method or not, ensuring due realization of tax.

Rule 30A was found to be procedural, detailing how contractors could opt for the alternate method of taxation. The Supreme Court found no fault with these rules, emphasizing that they facilitated the implementation of the alternate taxation method and ensured tax compliance.

3. Compliance with Clause (29A) of Article 366 of the Constitution:

The Supreme Court examined whether the impugned provisions complied with clause (29A) of article 366, which includes tax on the transfer of property in goods involved in the execution of a works contract. The High Court had held that the provisions taxed the entire contract value, including non-taxable components like labor and services, contrary to clause (29A).

The Supreme Court, however, found that the alternate method of taxation was a simplified approach to ascertain tax liability, which contractors could opt for voluntarily. This method did not violate clause (29A) as it aimed to achieve the same objective as section 5(1)(iv) but through a different, simplified route. The Court reiterated that the Constitution allowed the Legislature to devise such practical methods for tax assessment, provided they were optional and beneficial for the assessees.

Conclusion:

The Supreme Court set aside the High Court's judgment declaring sub-sections (7), (7A), (7B), (11), and (12) of section 7 and rules 22A and 30A as unconstitutional. The Court upheld the validity of these provisions, emphasizing their optional nature and practical benefits for contractors. The appeals were allowed, and the writ petitions filed in the High Court were dismissed. The respondents were ordered to pay consolidated costs of rupees twenty thousand.

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