1958 (7) TMI 36 - HC - VAT and Sales Tax

Summary

Issues:
1. Whether the Bihar Legislature has the constitutional authority to impose sales tax on the supply of materials used in building contracts.
2. Whether the contract between the parties is a lump sum contract or a combination of two agreements, i.e., an agreement to sell and an agreement to work.

Analysis:
1. The petitioner, a limited company, received a tender request from Tata Iron and Steel Company Limited to construct 90 bungalows. The petitioner submitted a tender, which was accepted, and construction commenced. However, the Superintendent of Commercial Taxes issued a notice under the Bihar Sales Tax Act, leading to an assessment imposing sales tax and a penalty. The petitioner sought to quash the proceedings, arguing that the Bihar Legislature lacked the authority to impose sales tax on building contracts. The petitioner relied on the decision in State of Madras v. Gannon Dunkerley and Company, emphasizing the distinction between materials supply and service agreements in determining tax liability.

2. The assessment was based on the assumption of a building contract where the cost of labor was excluded from the taxable amount. However, the absence of the formal contract between the parties complicated the assessment. The court highlighted the possibility of distinct and separate contracts within a single instrument, allowing the state to tax the sale of goods separately from service agreements. Referring to the judgment in State of Madras v. Gannon Dunkerley and Company, the court emphasized the need to establish the nature of the contract to determine tax liability accurately.

3. The court decided to quash the assessment order and directed a fresh investigation by the Sales Tax Authorities. The authorities were instructed to examine the formal contract and other relevant documents to determine if the contract was a lump sum agreement or a combination of separate agreements for sale of goods and services. The court's decision aligned with the approach taken by the Supreme Court in Pandit Banarsi Das Bhanot v. State of Madhya Pradesh, emphasizing the need for a thorough examination of facts to ascertain the true nature of the contract for proper tax assessment.

In conclusion, the court allowed the application, set aside the assessment order, and directed a reevaluation of the case by the Sales Tax Authorities to determine the tax liability based on the true nature of the contract. The judgment underscored the importance of distinguishing between material supply and service agreements in assessing sales tax on building contracts.