1957 (1) TMI 23 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Legality of treating materials supplied in construction contracts as "sale of goods."
2. Legislative competence of the Provincial and State Legislatures under the Government of India Act, 1935, and the Constitution of India.
3. Validity of the assessment orders and the rules prescribed for calculating the sale price of materials in construction contracts.
4. Delegation of legislative power to the State Government.

Issue-wise Detailed Analysis:

1. Legality of Treating Materials Supplied in Construction Contracts as "Sale of Goods":
The petitioner, a builder and contractor, argued that the materials supplied in the execution of construction contracts should not be considered as "sale of goods" under the Bengal Finance (Sales Tax) Act, 1941. The Commercial Tax Officer had assessed the petitioner to tax on materials supplied in various construction contracts, treating them as sales. The court examined whether these transactions could be considered sales under the existing law. It was concluded that in a building contract, the property in the materials passes to the owner by accession when affixed to the building, not by sale. Thus, such supply does not constitute a sale of goods.

2. Legislative Competence of the Provincial and State Legislatures:
The court analyzed the legislative competence of the Provincial Legislature under the Government of India Act, 1935, and the State Legislature under the Constitution of India. Both legislations allowed taxation on the sale of goods but did not grant exclusive rights to legislate on the sale of goods, which is a concurrent subject. The court held that the Provincial or State Legislature could not declare a transaction as a sale of goods if it was not so under the Sale of Goods Act, without obtaining the requisite assent under section 107 of the Government of India Act, 1935, or Article 254 of the Constitution.

3. Validity of the Assessment Orders and the Rules Prescribed for Calculating the Sale Price:
The court scrutinized the method prescribed by the Act and the rules for calculating the sale price of materials in construction contracts. The rule required the dealer to produce evidence showing the cost of materials and labor, and in its absence, used an arbitrary formula. The court found this method to be arbitrary and not mathematically accurate, leading to the inclusion of consideration for work and labor in the sale price, which was beyond the Legislature's competence. Consequently, the provisions of the Act and the rules were declared ultra vires and void.

4. Delegation of Legislative Power to the State Government:
The court also addressed the issue of delegation of legislative power to the State Government. It was argued that the State Legislature had no power to delegate the function of laying down the principle of calculation to the State Government. Given the finding that the rule itself was arbitrary and ultra vires, the court did not delve deeply into this issue but implied that such delegation was improper.

Conclusion:
The court held that the provisions of the Bengal Finance (Sales Tax) Act, 1941, treating materials supplied in construction contracts as sales of goods, were ultra vires and void. The assessment orders dated 11th May 1954 and 24th November 1954, based on these provisions, were quashed. The rule prescribed for calculating the sale price was also declared ultra vires. A writ of certiorari was issued quashing the assessment orders and the certificate filed. The respondents were directed to reassess the petitioner for the relevant years in accordance with the law. A certificate was granted under Article 132 of the Constitution for the respondents to appeal to the Supreme Court.