1955 (10) TMI 24 - HC - VAT and Sales Tax

Whether in a works contract which has as its object the construction of a building as such, the contractor could be said to have sold any goods or materials used in the building in order to bring them within the power of taxation conferred on a State by Entry 54 of List II of Schedule VII of the Constitution. Whether a building contractor is doing a business or occasionally transacting the business of buying, selling or supplying of goods to the person with whom he has contracted to build a building or structure or repair of building or structure? Held that - Petition allowed. Where a works contract is undertaken the materials which make up the finished product or building, are generally purchased from an outside agency, unless the builder or manufacturer is himself the producer of the material so used, and are not sold to the person for whom the building is being built or article is made for profit. In this view of the matter also the assessee cannot be said to be a dealer within the meaning of the Hyderabad General Sales Tax Act as to be taxed on the materials used in the works contract - direct the issue of a writ of mandamus prohibiting respondents 1 and 3 from collecting sales tax.

Issues Involved:
1. Legality of taxing the turnover of a works contract under the Hyderabad General Sales Tax Act, 1950.
2. Definition and inclusion of a Public Works Department (PWD) contractor as a "dealer" under the Act.
3. Validity of the Sales Tax Officer's assessment and the Commissioner's rejection of the revision.
4. Applicability and interpretation of Entry 54 of List II of Schedule VII of the Constitution.
5. Legality of Rule 5(3) of the Hyderabad General Sales Tax Rules.

Detailed Analysis:

1. Legality of taxing the turnover of a works contract under the Hyderabad General Sales Tax Act, 1950.
The petitioner, a building and construction contractor, was assessed for sales tax on the turnover of works contracts for building a maternity hospital and repairing a tank. The petitioner challenged this assessment, arguing that the Sales Tax Officer had incorrectly included the entire amount tendered for repairs in the taxable turnover. The court examined whether the Sales Tax Act's provisions authorizing the levy of sales tax on the turnover of materials used in construction were within the legislative power conferred by Entry 54 of List II of Schedule VII.

2. Definition and inclusion of a Public Works Department (PWD) contractor as a "dealer" under the Act.
The petitioner contended that a PWD contractor does not fall under the definition of "dealer" as per the Act. The court noted that for the purposes of the charging sections, all materials used in the works contract would be included in the turnover of a building contractor, treated by the Sales Tax Department as either a dealer or a casual trader. However, the court highlighted that the term "dealer" requires continuous or periodical activities in the year of assessment with a view to earn profit, which was not applicable in the case of the petitioner.

3. Validity of the Sales Tax Officer's assessment and the Commissioner's rejection of the revision.
The petitioner argued that the Sales Tax Officer had incorrectly assessed the turnover by including the entire amount tendered for repairs, despite the Executive Engineer's certificate showing a lesser amount for the work done. The court found that the Sales Tax Officer failed to exercise his jurisdiction properly by not calling for the contracts from the PWD to furnish the necessary basis for assessment. The court declared the orders of both the Sales Tax Officer and the Commissioner ultra vires.

4. Applicability and interpretation of Entry 54 of List II of Schedule VII of the Constitution.
The court examined whether the State Legislature had the power to levy sales tax on materials used in a works contract under Entry 54, which pertains to "tax on the sale or purchase of goods." The court referred to previous judgments, including the Madras High Court's decision in Gannon Dunkerley's case and the Nagpur High Court's decision in Pandit Banarsi Das's case. The court concluded that the legislative power to tax the sale of goods does not extend to taxing materials used in a works contract, as these are not sold separately but as part of the finished product.

5. Legality of Rule 5(3) of the Hyderabad General Sales Tax Rules.
The petitioner argued that Rule 5(3), which prescribes the ratio between the material used and the labor spent in construction for different contracts, was arbitrary and illegal. The court agreed, citing the Nagpur High Court's decision in Pandit Banarsidas v. State of Madhya Pradesh, which held that such artificial determination of the price of goods is beyond the powers conferred by the Constitution to levy a tax on the sale of goods. Consequently, the court declared Rule 5(3) ultra vires.

Conclusion:
The court directed the issuance of a writ of mandamus prohibiting the respondents from collecting sales tax on the two transactions involving the building of a maternity hospital and the repairs of the tank at Rudrur. The petitioner was awarded costs assessed at Rs. 100. The petition was allowed.

← Previous Next →