1961 (2) TMI 56 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutionality of the General Sales Tax Act, XI of 1125, and its rules authorizing the levy and collection of sales tax on transfer of goods in works contracts.
2. Violation of Article 14 of the Constitution due to alleged discrimination.
3. Taxation of works contracts in different areas of Kerala State and its compliance with Article 14.
4. Executive powers of the State under Article 162 in relation to the collection of tax on works contracts.
5. Legality of rules framed under the Act after the inauguration of the Constitution.

Detailed Analysis:

Issue 1: Constitutionality of the General Sales Tax Act, XI of 1125
The petitions challenge the constitutionality of the General Sales Tax Act, XI of 1125, specifically the provisions authorizing the levy and collection of sales tax on the transfer of goods in works contracts. The Act, enacted before the Constitution, was saved by Article 372 and continues to be in force. The court referenced the precedent set by the Supreme Court in State of Madras v. G. Dunkerley & Co., which held that the Government of India Act, 1935, did not justify taxing the transfer of goods in works contracts. However, the Travancore-Cochin Legislature had plenary powers before the Constitution, allowing it to enact such legislation.

Issue 2: Violation of Article 14 of the Constitution
The petitioners argued that the Act and its rules are discriminatory and violate Article 14. The court examined whether the provisions satisfied the test of reasonable classification, which requires an intelligible differentia and a rational relation to the object of the legislation. The court found that the distinction between sales of goods and works contracts is well-established and rational. The Act and rules provide a method to separate the cost of materials from the cost of labor in works contracts, which is necessary for taxation purposes. The court concluded that the Act is not vitiated by inequality and is based on rational classification.

Issue 3: Taxation of Works Contracts in Different Areas of Kerala State
The petitioners contended that works contracts could not be taxed in the Malabar area of Kerala State, leading to discrimination against residents of other areas, violating Article 14. The court held that territorial classification is permissible and does not violate Article 14. The inequality arises from constitutional permission, making the territorial classification proper.

Issue 4: Executive Powers of the State under Article 162
The petitioners argued that the State's executive powers are circumscribed by Article 162, limiting the collection of tax to subjects in List II or List III of the Seventh Schedule. The court found this argument without merit, citing Article 277, which allows the continuation of taxes lawfully levied before the Constitution. The Act was saved by Article 372, and Article 277 permits the tax to be levied and applied until Parliament provides otherwise.

Issue 5: Legality of Rules Framed Under the Act After the Inauguration of the Constitution
The petitioners claimed that the rules framed under the Act after the Constitution's inauguration are ultra vires. The court held that the continuance of the levy under the Constitution entails the incidental power to frame necessary rules. The rules under the repealed enactment were available, and substituting one set of rules without changing the substance does not affect the liability to pay the tax.

Conclusion
The court dismissed the writ petitions, holding that the General Sales Tax Act, XI of 1125, and its rules are constitutional and do not violate Article 14. The Act's provisions are based on rational classification, and the State's executive powers are not circumscribed by Article 162 in this context. The court also found that the rules framed after the Constitution's inauguration are valid. The petitions were dismissed with costs, and counsel fees were fixed at Rs. 200 for each petition.