Firm Of M/S. Peare Lal Hari Singh Vs.
The State of Punjab & ANR [1958] INSC 39 (7 April 1958)
AIYYAR, T.L. VENKATARAMA BOSE, VIVIAN DAS,
SUDHI RANJAN (CJ) DAS, S.K.
SARKAR, A.K.
CITATION: 1958 AIR 664 1959 SCR 438
ACT:
Sales Tax-Building contracts-State's Power of
taxation on supply of materials in construction works-Whether building contract
comprises a distinct agreement for sale of materials-East Punjab General Sales
Tax Act, 1948 (East Punjab XLVI of 1948), SS. 2(d)(j), 4(1)-Government of India
Act, 1935 (26 Geo. 5 Ch. 2), Sch. VII, List II, Entry 48.
HEADNOTE:
The petitioners who were building contractors
in the State of Punjab were assessed to tax by the sales tax authorities on the
supply of materials in construction works treating it as a sale, acting under
the provisions of the East Punjab General Sales Tax Act, 1948. The petitioners
challenged the legality of the assessment proceedings on the grounds, inter
alia, that the legislature of the Province of Punjab had, under Entry 48 in
List II of Sch. I'll to the Government of India Act, 1935, no power to impose
tax on the supply of materials in construction works as there was no sale in
fact or in law of those materials, and that the provisions of the Act which sought
to do it were ultra vires. The assessing authorities contended that on a true
construction of the building contract entered into by petitioners with the
Government it comprised a distinct agreement for the sale of materials and
particularly relied on r. 33 of printed General Conditions of Contracts issued
by the Government :
Held, that there was no sale as such of the
materials used in the constructions by the petitioners and that no tax could be
levied thereon.
439 Rule 33 which provides that the materials
brought to the site shall become the property of the Government but that when
the works are finally completed the surplus materials shall revert and become
the property of the contractor, has for its object that materials of the right
sort are used in the construction and has not the effect of converting what is
a lump sum contract for construction of buildings into a contract for the sale
of materials used therein.
State of Madras v. Gannnon Dunkerley &
Co. (Madras) Lid., [1959] S.C.R. 379, followed.
Tripp v. Armitage, (1839) 4 M. & W. 687
and Reid v. Macbeth
& ORIGINAL JURISDICTION: Petition No. 128
of 1957. Petition under Article 32 of the Constitution of India for enforcement
of Fundamental Rights.
Gopal Singh, for the petitioner.
N. S. Bindra and T. M. Sen, for the
respondents.
1958. April 7. The Judgment of the Court was
delivered by VENKATARAMA AIYAR J.-This is a petition under Art. 32 of the
Constitution, and the question that is raised therein for our decision is as to
the validity of certain provisions of the East Punjab General Sales Tax Act,
1948 (East Pb. XLVI of 1948), hereinafter referred to as the Act, imposing a
tax oil the supply of materials in construction works treating it as a sale.
It will be convenient at this stage to refer
to the relevant provisions of the Act. Section 2(c) defines contract " as
meaning, " Any agreement for carrying out for cash or deferred payment or
other valuable consideration(i) the construction, fitting out, improvement, or
repair of any building, road, bridge or other immovable property; or (ii) the
installation or repair of any machinery affixed to a building or other
immovable property................." "Dealer " is defined in s.
2((d) as any person engaged in the business of selling or supplying goods.
Section 2(h) defines " sale " as meaning " any transfer 440 of
property in goods for cash or deferred payment or other valuable consideration,
including a transfer of property in goods involved in the execution of a
contract................ " Turnover " is defined in s. 2(j) as
including " the carrying out of any contract, less such portion as may be
prescribed of such amount, representing the usual proportion of the cost of
labour to the cost of materials used in carrying out such contract ". Section
4(1) enacts that, "......... every dealer whose gross turnover during the
year immediately preceding the commencement of this Act exceeded the taxable
quantum shall be liable to pay tax under this Act on all sales effected after
the coming into force of this Act." Section 5 provides that the tax shall
be levied every year on the taxable turnover of a dealer at such rates as the
Provincial Government may by notification direct. Rule 28 prescribes the mode
of computing the taxable consideration with reference to contracts as provided
in sub-cl. (ii) of el. (i) of s. 2.
The petitioners are a firm of building
contractors. In December, 1956, they entered into a contract with the Military
Engineering Services Department of the Government for the construction of
certain buildings known as " Married accommodation " at Ambala
Cantonment and received a sum of Rs. 32,000 on January 31, 1957, as advance. On
February 14, 1957, the assessing authority, Jullundur District issued a notice
intimating the petitioners that as they had failed to apply for registration
under s. 7 of the Act assessment would be made under s. 18, sub-s. (2), for the
periods commencing from April 1, 1955, onwards, and calling upon them to
produce their account books and attend the hearing on February 16, 1957.
Thereupon, the petitioners filed the present petition under Art. 32 of the
Constitution challenging the legality of the assessment proceedings, the main
ground of attack being that the legislature of the Province of Punjab had under
Entry 48 in List II of Sch.
VII to the Government of India Act, 1935, no
power to impose tax on the supply of materials in construction works as there
was no sale in fact or in law of those 441 materials, and that the provisions
of the Act which sought to do it were ultra vires. This question is now
concluded by the decision of this Court in The State of Madras V. Gannon
Dunkerley & Co. (Madras) Ltd. (1) wherein it has been held that the
expression " sale of goods" in Entry 48 has the same import which it
bears in the Indian Sale of Goods Act, 1930, that in a building contract there
is no sale of materials as such, and that accordingly the Provincial
Legislature had no power to impose a tax thereon under Entry 48.
In this view, we have now to consider the
contention advanced by Mr. Bindra for the respondents that the building
contract entered into by the petitioners with the Government was not an
agreement simpliciter for the construction of works, but that on its true
construction, it comprised a distinct agreement for the sale of materials. If
that can be established, it is not disputed that the respondents would have 'a
right to tax the transaction even apart from the impugned provisions. The
question is whether the contract of the petitioners with the Government for
construction was one and indivisible, or whether it was a combination of an
agreement for sale of materials and an agreement for work and labour. The
evidence placed before us leaves us in no doubt as to the true character of the
contract. The tenders which were called for and received were for executing
works for a lump sum, and in his acceptance of the tender of the petitioners
dated December 15, 1956, the Deputy Chief Engineer stated :
" The above tender was accepted by me on
behalf of the President of India for a lump sum of Rs. 9,74,961." How this
amount is made up is given in Annexure E to the reply statement. It will be
seen there from that the petitioners were to construct nine blocks, and the
amounts are worked out treating each of the blocks as one unit, and the figures
are totalled up. It is impossible on this evidence to hold that there was any
agreement for sale of the materials as such by the petitioners to the
Government.
(1) [1959] S.C.R. 379.
56 442 For the respondents reliance was
placed on the rules appearing in the printed General Conditions of Contracts
issued by the Government. Rule 33 which was particularly relied on provides:
" All stores and materials brought to
the Site shall become and remain the property of Government and shall not be
removed off the Site without the prior written approval of the G. E. But
whenever the works are finally completed, the contractor shall at his own
expense forthwith remove from the Site all surplus stores and materials
originally supplied by him and upon such removal, the same shall retest in and
become the property of the Contractor." It is argued that the true effect
of this provision vesting the materials in the Government is that those
materials must be taken to have been sold to it. That this is not the true
meaning of the rule will be clear when regard is had to other provisions in the
rules. Thus, the materials which are used in the construction must be approved
by the authorities as of the right quality, and they could be condemned even
after the construction is completed if they are not according to contract or of
inferior quality, in which case the contractor has to remove them and rebuild
with proper materials. Terms such as these and those in r. 33 quoted above are
usually inserted in building contracts with the object of ensuring that
materials of the right sort are used in the construction and not with the
intention of purchasing them. If r. 33 is to be construed as operating by way
of sale of materials to the Government when they are brought on the site, it
must follow that the surplus materials remaining after the completion of the
work must be held to have been resold by the Government to the contractor, and
that is not contended for.
In Tripp v. Armitage (1), a builder who had
been engaged to construct a hotel became insolvent, and dispute arose between
the assignees in bankruptcy and the proprietors of the hotel as to the title to
certain wooden sash-frames which had been delivered by the insolvent on the
premises of the hotel and had been (1) (1839) 4 M. & W. 687; 150 E. R.
1597, 16O3.
443 approved by the clerk and returned to the
insolvent for the purpose of being affixed. The contention on behalf of the
proprietors was that the goods having been approved by their surveyor, they
must be held to have been appropriated to the contract and the property therein
passed to them. In negativing this contention, Parke B. observed:
" It is said that the approbation of the
surveyor is sufficient to constitute an acceptance by the defendants;
but that approbation is not given eo animo at
all; it is only to ascertain that they are such materials as are suitable for
the purpose; and notwithstanding that approval, it is only when they have been
put up, and fixed to the house, in performance of the larger contract, that
they are to be paid for." In Reid v. Macbeth & Gray(1), the facts were
similar. The dispute related to certain plates which had been prepared by
contractors to be fitted in a ship. These plates had been passed by the
surveyor and were marked with the number of the vessel and with marks showing
the position which each plate was to occupy in the vessel. The ship-owners laid
claim to these plates on the ground that by reason of the approval by their
surveyor and by the markings the property therein must be held to have passed
to them, and that accordingly the assignees in bankruptcy of the contractors
could not claim them. That contention war, negatived by the House of Lords, who
hold that the facts relied on did not establish a contract of sale of the
materials apart from the contract to construct the ship, and that the title to
the materials did not as such pass to the shipowners. The position is the same
in the present case. Rule 33 has not the effect of converting what is a lump
sum contract for construction of buildings into a contract for the sale of
materials used therein. It must therefore be held following the decision in The
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (2) that there has
been no sale of the materials used by the petitioners in their constructions,
and that no tax could be levied thereon.
(1) [1904] A.C. 223.
(2) [1959] S.C.R. 379.
444 Counsel for the petitioners raised two
other contentions, but they are unsubstantial and may be shortly disposed of.
One was that in the definition of "
turnover " in s. 2 (j), el. (ii) which is what is applicable to the present
case, there is no reference to sale of goods, and that, accordingly, even if
Entry 48 in List II is to be interpreted in a wide sense, the provision as
actually enacted does not, in fact, tax the supply of materials in works
contracts, treating it as a sale. But the charging section is s. 4 (1), which
makes it clear that the tax is on the gross turnover in respect of sales
effected after the coming into force of the Act, and the obvious intention is
to include the supply of materials in works contracts within the category of
taxable turnover.
It was next contended that the definition of
" dealer in s. 2 (d) required that the person should be engaged in the
business of selling or supplying goods, that the petitioners who were building
contractors were not engaged in the business of selling or supplying goods but
of constructing buildings, and that therefore they were not dealers within that
definition, and that as under s. 4 the tax could be imposed only on a dealer,
the petitioners were not liable to be taxed. But if the supply of materials in
construction works can be regarded as a sale, then clearly building contractors
are engaged in the sale of materials, and they would be within the definition
of " dealers " under the Act.
There is no substance in this contention
either.
The petitioners, however are entitled to
succeed on the ground that the impugned provisions are not within the authority
conferred by Entry 48, and a writ of prohibition should accordingly issue
restraining the respondents from taking proceedings for assessment of tax in
respect of materials supplied by the petitioners in construction contracts. We
direct the parties to bear their own costs, Petition allowed.
Back
