2002 (9) TMI 816 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutionality of Section 19-A of the Karnataka Sales Tax Act.
2. Validity of the reintroduced Section 19-A with concessions.
3. Competence of the State Legislature to impose advance tax on non-exigible items.

Summary:

1. Constitutionality of Section 19-A of the Karnataka Sales Tax Act:
The original Section 19-A was struck down as unconstitutional by a division Bench of this Court in the case of KEC International Limited v. State of Karnataka, reported in [1997] 105 STC 192. The Supreme Court dismissed the special leave petition against this judgment as withdrawn on January 30, 1997. The section was invalidated because it authorized deduction of tax on the total amount of works contracts without provisions for deducting the value of components not exigible to sales tax.

2. Validity of the reintroduced Section 19-A with concessions:
Section 19-A was reintroduced by Act No. 7 of 1997 with effect from April 1, 1997, incorporating four concessions:
- Proviso (ii) to Section 19-A(1): Total exemption from tax deduction in specified situations on certification by the Commissioner.
- Proviso (iii) to Section 19-A(1): Total exemption for contracts involving only labor or service.
- Proviso (iv) to Section 19-A(1): Tax deduction on 75% of the total turnover for contracts involving partly labor or service.
- Section 19-A(1A): Permits a dealer to pay 4% of the total turnover by way of composition.

The Court found these concessions inadequate to address the defects pointed out in the earlier judgment. The first concession was deemed illusory as it was confined to dealers with a turnover exceeding Rs. 5 crores and in business for at least three years, leading to hostile discrimination. The second concession was redundant as labor work is already outside the purview of the charging section. The third concession did not address the issue of non-exigible transactions within the 75% taxable turnover. The fourth concession, being voluntary, did not apply to dealers who did not opt for compounding.

3. Competence of the State Legislature to impose advance tax on non-exigible items:
The Court reiterated that the mechanism section (Section 19-A) must conform to the charging section (Section 5-B), which deals with taxable turnover. The State Legislature cannot impose advance tax on items not exigible to tax under the charging section. The Court relied on the principles laid down in Gannon Dunkerley's case, which held that the State Legislature has no competence to impose tax on the total amount payable under works contracts, including non-exigible items. The Court also referenced judgments from other High Courts and the Supreme Court, emphasizing that any provision for advance tax must exclude transactions not within the legislative competence of the State.

Conclusion:
Following the Supreme Court's judgment in Steel Authority of India Limited v. State of Orissa, the Court struck down Section 19-A of the Karnataka Sales Tax Act as it presently stands, for failing to exclude non-exigible transactions from advance tax. The writ appeals were allowed, and the judgment under appeal was set aside. Any advance tax collected under Section 19-A shall be adjusted in future assessments of the assessee. Appeals allowed.