2005 (5) TMI 7 - SC - VAT and Sales Tax

Service Tax - Activity of construction / development by a Builder would constitute Work Contract in certain circumstances.

Issues Involved:
1. Whether the appellants are dealers liable to pay turnover tax under the Karnataka Sales Tax Act.
2. Whether the agreements entered into by the appellants constitute works contracts under the Karnataka Sales Tax Act.
3. Whether the appellants are considered owners of the property under the Transfer of Property Act.

Issue-wise Detailed Analysis:

1. Liability to Pay Turnover Tax:
The primary question was whether the appellants, engaged in real estate development, are liable to pay turnover tax under the Karnataka Sales Tax Act. The appellants argued that there was no transfer of property in goods either by themselves or through any works contract, hence they showed nil liability in their tax returns. However, the Adjudicating Authority did not accept this contention and passed an Assessment Order claiming tax. The Additional Joint Commissioner of Commercial Taxes (Appeal) upheld this order, stating that tax was payable due to the transfer of property in goods pursuant to a works contract. The Karnataka Appellant Tribunal partly allowed the appeal, computing turnover only on the value of goods in the execution of the works contract. The High Court dismissed the Revision Petition, relying on the principles laid down in the case of M/s. Mittal Investment Corporation.

2. Definition and Scope of Works Contracts:
The appellants contended that their agreements with intended purchasers did not constitute works contracts. They argued that they were developing the property and selling flats or commercial complexes, not undertaking works contracts on behalf of the purchasers. The Court examined the definitions under the Karnataka Sales Tax Act, particularly Section 2(1)(k)(viii), which defines a dealer, and Section 2(1)(v-i), which defines a works contract. The Court noted that the definition of works contract is very broad, including any agreement for building or construction for cash, deferred payment, or other valuable consideration. The Court concluded that even if the appellants were owners, their agreements to construct buildings for valuable consideration constituted works contracts, making them liable to pay turnover tax on the transfer of property in goods involved in such contracts.

3. Ownership under the Transfer of Property Act:
The appellants argued that they became owners of the property by virtue of agreements with the landowners, despite the absence of formal conveyance. They cited Section 53A of the Transfer of Property Act and relied on judgments in C.I.T. vs. Podar Cement Ltd. and Mysore Minerals Ltd., where beneficial ownership was recognized under the Income Tax Act. The Court, however, distinguished these cases, noting that they were specific to the Income Tax Act. The Court emphasized that under the Karnataka Sales Tax Act, the appellants did not hold registered sale-deeds and thus were not considered owners. The agreements were deemed development agreements, with the landowners executing conveyances directly to the purchasers' society. The appellants only had a possessory interest and a right to construct, not ownership.

Conclusion:
The Court upheld the High Court's judgment, confirming that the appellants' activities constituted works contracts under the Karnataka Sales Tax Act, making them liable for turnover tax. The appeal was dismissed, and the observations in Mittal Investment Corporation's case that contradicted this view were not approved. The Court clarified that if agreements were entered into after construction was complete, they would not constitute works contracts. However, agreements made before construction completion were considered works contracts, subject to turnover tax. The appeal was dismissed with no order as to costs.

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