1990 (7) TMI 317 - HC - VAT and Sales Tax

Issues Involved:
1. Constitutionality of the Forty-sixth Amendment.
2. Power of the State Legislature to levy and determine tax on works contracts.
3. Validity of the Karnataka Amending Act No. 27 of 1985.
4. Validity of Section 5B of the Karnataka Sales Tax Act.
5. Validity of the Karnataka Sales Tax Rules.
6. Prescription of different rates of taxation.

Detailed Analysis:

1. Constitutionality of the Forty-sixth Amendment:
The petitioners challenged the Forty-sixth Amendment, arguing it was not an enabling amendment and did not amend entry 54 of List II in the State List of the Seventh Schedule. They contended that the amendment lacked the necessary ratification by one-half of the State Legislatures as required under Article 368 of the Constitution. The court, referencing the Supreme Court ruling in Builders Association of India v. Union of India, found that the Forty-sixth Amendment had been duly ratified and was constitutional. The amendment aimed to convert non-sales into sales, making them taxable under the sales tax laws.

2. Power of the State Legislature to Levy and Determine Tax on Works Contracts:
The petitioners argued that the State Legislature lacked the power to levy tax on works contracts without a law made under Article 286(3)(b) of the Constitution. The court held that Article 286 only imposed certain restrictions on the State's power to tax sales, which were not transgressed in this case. The court concluded that the State Legislature was competent to levy tax on works contracts under entry 54 of List II, as long as the goods involved in the execution of the works contract were within the State at the time of transfer.

3. Validity of the Karnataka Amending Act No. 27 of 1985:
The petitioners contended that the amendments made by the Karnataka Amending Act No. 27 of 1985 were illegal on various grounds. The court found that the amendments were made in pursuance of the Forty-sixth Amendment and were valid. The amendments aimed to bring the activity of works contracts within the scope of the Karnataka Sales Tax Act, which was within the legislative competence of the State.

4. Validity of Section 5B of the Karnataka Sales Tax Act:
The petitioners argued that Section 5B was ultra vires of Section 5(4) of the Act and was arbitrary and without any nexus. The court held that Section 5B, introduced by Karnataka Act No. 27 of 1985, was valid. It was an independent provision for taxing the value of goods involved in works contracts and did not violate any constitutional provisions. The court also found that the non obstante clause in Section 5B indicated the Legislature's intention to treat works contracts as a separate entity for taxation purposes.

5. Validity of the Karnataka Sales Tax Rules:
The petitioners contended that the Karnataka Sales Tax Rules were ambiguous, contradictory, and imposed unreasonable restrictions. The court found that Rule 6, which dealt with the determination of total and taxable turnover, was not ultra vires. The rule allowed for deductions of actual amounts expended towards labor charges and other like charges in works contracts, depending on the nature of the contract and the method of keeping accounts. The court held that the rule was valid and did not impose unreasonable restrictions.

6. Prescription of Different Rates of Taxation:
The petitioners argued that the prescription of different rates of taxation was discriminatory and violative of Article 14 of the Constitution. The court found that except for a minor discrepancy between the rates in the Second Schedule and the Sixth Schedule, the rates of taxation were valid. The court emphasized that the Legislature had wide discretion in choosing the objects of taxation and that different rates were permissible as long as they were not discriminatory. The court struck down the discriminatory rate for item No. 6 of the Second Schedule but upheld the rates for other items.

Conclusion:
The court dismissed the writ petitions, upholding the validity of the Forty-sixth Amendment, the Karnataka Amending Act No. 27 of 1985, Section 5B of the Karnataka Sales Tax Act, and the Karnataka Sales Tax Rules. The court found that the prescription of different rates of taxation was generally valid, except for one discriminatory rate, which was struck down. The judgment was made effective from 1st April 1990 onwards, with costs awarded to the respondents.

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