1999 (7) TMI 646 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Vires of section 25-A of the Bihar Finance Act, 1981.
2. Applicability of Entry 54 of the State List and Article 286 of the Constitution.
3. Validity of deductions from contractors' bills under section 25-A.

Summary:

1. Vires of section 25-A of the Bihar Finance Act, 1981:
The vires of section 25-A of the Bihar Finance Act, 1981, which mandates the deduction of sales tax at source from contractors' bills, was challenged. The court examined the legislative competence of the State Legislature to impose such tax and make deductions under the amended provisions of section 25-A.

2. Applicability of Entry 54 of the State List and Article 286 of the Constitution:
Entry 54 of the State List authorizes State Legislatures to impose taxes on the sale and purchase of goods, subject to Entry 92A of the Union List and Article 286 of the Constitution. The Supreme Court in Builders Association of India v. Union of India [1989] 73 STC 370 clarified that the legislative power to impose tax on works contracts is subject to the same restrictions as ordinary sales under Entry 54. The court reiterated that the State Legislature cannot impose tax on sales that occur in the course of inter-State trade, outside the State, or in the course of import/export, as per sections 3, 4, and 5 of the Central Sales Tax Act.

3. Validity of deductions from contractors' bills under section 25-A:
The court noted that section 25-A mandates deductions from contractors' bills without distinguishing between taxable and non-taxable transactions under the Constitution. The provision was found to be ultra vires as it did not exclude transactions that are not taxable by the State, including inter-State sales, sales outside the State, and sales in the course of import/export. The court emphasized that the machinery provision must have a rational connection with the taxing power and cannot extend to areas beyond the legislative competence of the State.

The court also highlighted practical difficulties in implementing section 25-A, such as the lack of a mechanism to exclude non-taxable transactions and the potential for double taxation. The court concluded that section 25-A, to the extent it mandates deductions for non-taxable transactions and labor charges, is ultra vires Entry 54 of the State List and Article 366(29A)(b) of the Constitution.

Conclusion:
The court held that section 25-A of the Bihar Finance Act, 1981, is ultra vires to the extent it mandates deductions for transactions not taxable by the State and for labor charges. The writ petitions were allowed without any order as to costs.