1998 (2) TMI 556 - HC - VAT and Sales Tax

Issues Involved:
1. Validity of section 13AA of the Orissa Sales Tax Act, as amended.
2. Legality of the notices issued under section 13AA(6) of the Orissa Sales Tax Act.
3. Competence of the State Legislature to enact section 13AA.
4. Constitutional validity of the tax deduction at source (TDS) mechanism under section 13AA.

Detailed Analysis:

1. Validity of Section 13AA of the Orissa Sales Tax Act, as Amended:
The petitioner challenged the constitutional validity of section 13AA of the Orissa Sales Tax Act, as amended by the Orissa Sales Tax (Amendment and Validation) Act of 1993. The petitioner argued that section 13AA(1) had the potential to include supplies covered under section 3 or 5 of the Central Act, which is ultra vires the State's power. The court noted that the amendment introduced certification provisions similar to section 194C(4) of the Income-tax Act and provided for penalties under sub-section (6). The court found that the amended provisions did not transgress constitutional limitations and were valid, as they aimed to tax or deduct at source only the permissible turnover.

2. Legality of the Notices Issued Under Section 13AA(6) of the Orissa Sales Tax Act:
The petitioner also challenged the notices issued by the Sales Tax Officer, which called for a show cause as to why penalties should not be imposed for non-compliance with section 13AA. The court observed that the petitioner had deducted and paid tax as per the provisions of the Act and based on interpretations from previous judgments. The court held that the notices were valid, as they were issued by a competent authority for contravention of section 13AA. The court emphasized that the notices were part of a mechanism to ensure compliance and were subject to principles of natural justice.

3. Competence of the State Legislature to Enact Section 13AA:
The court examined whether the State Legislature had the competence to enact section 13AA, which provides for TDS in works contracts. The court referred to entry 54 of List II of the Seventh Schedule and article 366 clause (29A) of the Constitution, which authorize the levy of sales tax on the transfer of property in goods. The court held that the ancillary and incidental powers of the State Legislature included the power to enact laws for advance collection of tax. Therefore, the Legislature was competent to enact section 13AA.

4. Constitutional Validity of the TDS Mechanism Under Section 13AA:
The petitioner argued that the TDS mechanism under section 13AA was arbitrary and inconsistent with the scheme of the Act, particularly regarding works contracts. The court rejected this argument, stating that the provision for advance tax collection does not become invalid merely because it precedes the determination of liability. The court noted that the liability to pay tax existed and the mechanism for its realization, including the issuance of show cause notices and the opportunity for appeal and revision, was consistent with the principles of natural justice. The court concluded that section 13AA was not ultra vires the Constitution.

Conclusion:
The court dismissed the writ petition, upholding the validity of section 13AA of the Orissa Sales Tax Act and the legality of the notices issued under it. The court found that the State Legislature was competent to enact the provision and that the TDS mechanism was constitutionally valid. The interlocutory order permitting the petitioner to file a show cause reply and the sales tax authorities to make a final order was rendered moot by the final judgment. The sales tax authorities were allowed to realize the demand as per the assessment, subject to any restrictions in the independent case challenging the assessment.

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