1997 (1) TMI 499 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutionality of Section 19-A of the Karnataka Sales Tax Act.
2. Legislative competence of the State to impose tax on the total amount payable under a works contract.
3. Validity of Section 19-A as a machinery provision for tax deduction at source.

Summary:

1. Constitutionality of Section 19-A of the Karnataka Sales Tax Act:
The petitioners challenged the constitutionality of Section 19-A of the Karnataka Sales Tax Act, which mandates the deduction of tax at source from amounts payable to dealers for works contracts specified in the Sixth Schedule. The petitioners argued that this provision includes components not exigible to tax under the Sales Tax Act, thus exceeding the legislative competence of the State under entry 54 of the State List.

2. Legislative Competence of the State:
The petitioners contended that the State cannot impose or authorize the imposition of tax on elements embedded in the total contract receipts, which are excluded from the purview of State legislation. They argued that Article 366(29A) only enables legislation on sales tax on the transfer of goods involved in the execution of works contracts, not on the total amount payable under a works contract. The court referred to the Supreme Court's decisions in Builders Association of India v. Union of India and Gannon Dunkerley & Co. v. State of Rajasthan, which held that the State Legislature cannot impose tax on deemed sales that constitute inter-State trade, sales outside the State, or sales in the course of import and export.

3. Validity of Section 19-A as a Machinery Provision:
The learned single Judge upheld the validity of Section 19-A, considering it a machinery provision for tax collection, with necessary adjustments to be made during the final assessment. However, the appellants argued that even as a machinery provision, Section 19-A cannot operate beyond the competence of the State Legislature. The court noted that ancillary provisions must be within the legislative competence of the State and cannot extend to collecting amounts not exigible to tax. The court also highlighted the lack of a mechanism to determine the taxable turnover for advance tax collection, rendering Section 19-A arbitrary and unconstitutional.

Conclusion:
The court concluded that Section 19-A of the Karnataka Sales Tax Act is beyond the legislative competence of the State, as it includes amounts not exigible to tax under the State or Central laws. The provision was deemed arbitrary due to the absence of a mechanism for determining the taxable turnover. Consequently, the court declared Section 19-A unconstitutional and void, setting aside the judgment of the learned single Judge. The appeals were allowed, and parties were directed to bear their costs.