1996 (5) TMI 392 - HC - VAT and Sales Tax

Issues Involved:
1. Constitutionality of Section 35 of the M.P. Commercial Tax Act, 1994.
2. Legislative competence of the State Legislature to enact Section 35.
3. Alleged double taxation and unreasonable restriction on trade.
4. Comparison with similar provisions in other statutes and jurisdictions.
5. Adequacy of machinery provisions for tax deduction at source.

Detailed Analysis:

1. Constitutionality of Section 35 of the M.P. Commercial Tax Act, 1994:
The petitioner challenged the validity of Section 35, arguing it was ultra vires and unconstitutional, alleging it imposed an unreasonable restriction on the freedom of trade under Article 19(1)(g) of the Constitution. Section 35 mandates a 2% tax deduction at source on works contracts exceeding one lakh rupees. The court held that Section 35 is a machinery provision for tax collection and not a charging section. The charging section is Section 9, which imposes tax on the sale or purchase of goods. The court emphasized that Section 35 does not tax labor charges or exempt items but facilitates advance tax collection subject to final adjustment.

2. Legislative Competence of the State Legislature to Enact Section 35:
The court affirmed the State Legislature's competence to enact Section 35 under Entry 54 of List II of the Seventh Schedule of the Constitution, which empowers states to legislate on taxes on the sale or purchase of goods. The court dismissed the petitioner's argument that Section 35 taxed exempted items, clarifying that it is a machinery provision for securing advance tax and does not alter the incidence of tax under Section 9.

3. Alleged Double Taxation and Unreasonable Restriction on Trade:
The petitioner argued that Section 35 resulted in double taxation and imposed an unreasonable restriction on trade. The court rejected this, stating that Section 35 is designed to secure advance tax and does not impose additional tax liabilities. The court noted that the provision ensures tax collection from the inception of the works contract, with final adjustments made to exclude non-taxable items.

4. Comparison with Similar Provisions in Other Statutes and Jurisdictions:
The court compared Section 35 with similar provisions in other state laws and the Income-tax Act, 1961 (Section 194-C). It noted that many states have similar provisions for tax deduction at source in works contracts, and these have generally been upheld by various High Courts. The court cited judgments from the Supreme Court and other High Courts affirming the validity of such provisions, emphasizing their role as machinery provisions for tax collection.

5. Adequacy of Machinery Provisions for Tax Deduction at Source:
The court acknowledged that the absence of specific guidelines in Section 35 for excluding non-taxable items could cause hardship. However, it pointed out that a notification issued by the State Government on April 12, 1996, provided a mechanism for contractors to obtain certificates exempting them from tax deduction at source for non-taxable items. The court suggested that incorporating such provisions directly into the Act could mitigate potential hardships.

Conclusion:
The court upheld the validity of Section 35 of the M.P. Commercial Tax Act, 1994, affirming the legislative competence of the State Legislature and clarifying that the provision is a machinery mechanism for tax collection. The court dismissed the petitions, noting that the notification issued by the State Government provided a mechanism to address potential hardships, and suggested that similar provisions be incorporated into the Act or Rules to further mitigate issues.

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