2006 (2) TMI 607 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutional validity of section 35 of the Chhattisgarh Vanijyik Kar Adhiniyam, 1994.
2. Legislative competence of the Madhya Pradesh State Legislature to enact section 35.
3. Compliance with Article 286 of the Constitution of India.
4. Precedent and binding nature of earlier judgments.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Section 35:
The petitioner challenged the constitutional validity of section 35 of the Chhattisgarh Vanijyik Kar Adhiniyam, 1994, arguing that it does not provide for the deduction and ascertainment of the value and nature of goods supplied during the execution of works contracts. The court analyzed section 35, noting that it mandates a deduction of 2% of the contract value towards sales tax, regardless of whether the contract includes inter-State sales, outside sales, or sales in the course of import. The court concluded that this provision is beyond the legislative competence of the State Legislature as it imposes tax on transactions outside the State's jurisdiction, thus violating Article 286 of the Constitution.

2. Legislative Competence of the Madhya Pradesh State Legislature:
The respondents argued that the State Legislature had the competence to enact section 35 under entry 54 of List II of the Seventh Schedule read with Article 246 of the Constitution. However, the court noted that the provision allows for deduction of tax even on transactions not taxable by the State, such as inter-State sales or sales in the course of import. The court cited the Supreme Court's judgment in Bhawani Cotton Mills Ltd. v. State of Punjab, emphasizing that if a transaction is not taxable by the State, it cannot be included in the calculation for tax deduction. Therefore, the court held that the Madhya Pradesh State Legislature exceeded its legislative competence in enacting section 35.

3. Compliance with Article 286 of the Constitution:
Article 286(1) prohibits States from imposing taxes on sales or purchases that occur outside the State, in the course of import or export. The court referred to the Supreme Court's ruling in Gannon Dunkerley & Co. v. State of Rajasthan, which mandates the exclusion of such transactions from the value of works contracts for tax purposes. Section 35 of the Adhiniyam, by not excluding these transactions, was found to be in violation of Article 286.

4. Precedent and Binding Nature of Earlier Judgments:
The respondents relied on the Madhya Pradesh High Court's judgment in Punj Lloyd Ltd. v. State of M.P., which upheld the validity of section 35. However, the petitioner argued that this judgment did not consider the Supreme Court's binding decisions in Bhawani Cotton Mills Ltd. and other relevant cases. The court agreed, noting that the Madhya Pradesh High Court's judgment was rendered per incuriam, as it overlooked binding Supreme Court precedents. Consequently, the court held that the Punj Lloyd judgment was not good law and was not binding.

Conclusion:
The court struck down section 35 of the Chhattisgarh Vanijyik Kar Adhiniyam, 1994, as being beyond the legislative competence of the State Legislature and in violation of Article 286 of the Constitution. The court ordered the refund of any amounts collected under this provision to the petitioner, emphasizing that any provision intended to collect advance tax must be within the legislative competence of the State. The writ petition was allowed, and each party was directed to bear its own costs.