1991 (9) TMI 329 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutionality of Rule 46(2) of the Rajasthan Sales Tax Rules, 1955.
2. Constitutionality of Rule 29(2) of the Rajasthan Sales Tax Rules, 1955.
3. Constitutionality of Section 5(3) of the Rajasthan Sales Tax Act, 1954.

Detailed Analysis:

1. Constitutionality of Rule 46(2) of the Rajasthan Sales Tax Rules, 1955:
The petitioners challenged Rule 46(2) which mandates the deduction of 3% of the sum payable to a contractor towards tax. This rule applies to departments of any government, corporations, government undertakings, cooperative societies, local bodies, trusts, or private/public limited companies. The petitioners argued that this provision is arbitrary and should be struck down.

The court held that Rule 46(2) is a machinery provision aimed at securing government revenue and checking tax evasion. The court noted that similar provisions exist in other taxing statutes, such as Section 194(C) of the Income Tax Act, 1961. It was emphasized that the provision is meant to facilitate the recovery of tax and is reasonable. The court also referred to Section 23-BB of the Act and Rule 38-D of the Rules, which provide mechanisms for refund in cases where tax is not payable. Consequently, the court upheld the validity of Rule 46(2).

2. Constitutionality of Rule 29(2) of the Rajasthan Sales Tax Rules, 1955:
The petitioners contended that Rule 29(2), which provides for deductions towards labor charges directly correlated with the goods in the execution of a works contract, is unreasonable. They argued that total labor charges, including service charges, should be deductible from the turnover.

The court referred to the Supreme Court's decision in Builders Association of India v. Union of India, which held that only the value of goods involved in a works contract could be taxed, not labor or service charges. The court found that Rule 29(2) allows for the deduction of all sums towards labor charges directly correlated with the goods. If labor charges are not determinable or are unreasonably high, the assessing authority can refer to prescribed limits. The court upheld the validity of Rule 29(2), stating that it is a valid piece of legislation and not discriminatory or violative of the Act.

3. Constitutionality of Section 5(3) of the Rajasthan Sales Tax Act, 1954:
The petitioners argued that Section 5(3), which subjects the turnover of a works contract to tax, is against the Supreme Court's decision in Builders Association of India v. Union of India. They contended that the entire turnover of a works contract cannot be subjected to sales tax.

The court clarified that Section 5(3) should not be read in isolation but along with other provisions of the Act and Rules. The definition of "turnover" under Section 2(t) and "taxable turnover" under Section 2(s) was examined. The court noted that the turnover for a works contract is the amount payable for carrying out the contract, less the cost of labor. The court concluded that Section 5(3) is within the legislative competence of the State Legislature and does not subject the entire turnover of a works contract to tax.

Conclusion:
The court found no merit in the writ petitions and dismissed them, upholding the constitutionality of Rule 46(2), Rule 29(2), and Section 5(3) of the Rajasthan Sales Tax Act and Rules. The stay orders, if any, were vacated.