State
of Kerala & Anr Vs. Builders Association
of India & Ors [1996] INSC 1517 (28 November 1996)
B.P.
Jeevan Reddy, Suhas C. Sen B.P. Jeevan Reddy, J.
ACT:
HEAD NOTE:
THE
28TH DAY OF NOVEMBER, 1996 Present:
Hon'ble
Mr. Justice B.P. Jeevan Reddy Hon'ble Mr. Justice Suhas C. Sen A.S. Nambiar, Sr.Adv.
and M.T. George. Adv. with him for the appellants. K.M. Vijayan, Sr. Adv., K.V.
Mohan, E.M.S. Anam, (Roy Abraham) Adv. for Ms. Baby Krishnan, Advs. with him
for the Respondents
The
following Judgment of the Court was delivered:
Leave
granted.
Section
5 of the Kerala General Sales Tax Act levies tax on sale or purchase of goods.
Clause (iv) of sub-section (1) of Section 5 provides for levy of tax on
transfer of goods involved in the execution of the works contract. Sub- clause
(a) of clause (iv) of clause (iv) deals with a situation where "transfer
is in the form of goods". IN such a case, the rates and the point of levy
are specified in the First, Second or Fifth Schedule to the Act. Sub-clause (b)
deals with a situation where the "transfer of goods involved in the
execution of works contract.....is not in the form of goods but in some other
form". In such a case, the rate is specified in the Fourth Schedule to the
Act. There are two provisos to clause (iv) which we need not refer to for the
purpose of this case. Section 7 provides for payment of tax at compounded
rates. We are concerned herein with sub- sections (7), (7A), (7B), 11 and 12
which were inserted along with certain other provisions by Act 23 of 1991 and
Act 8 of 1992. Sub-section (7) provides:
"Notwithstanding
anything contained in sub-section (1) of Section 5, every contractor (engaged?)
in civil works of construction of buildings, bridges, roads, dams and canals
including any repair or maintenance of such civil works may at his option,
instead of paying tax in accordance with clause (iv) of that sub-section, pay
tax at the rate of two per cent on the whole amount of contract and which shall
be deducted from the payments made by the awarder at every time including
advance payment and shall remit to Government in such manner as may be
prescribed".
Sub-section
(7A) provides for a similar option to pay at a uniform specified rate in case
of contractors not covered by sub-section (7). Sub-section (7A) reads:
"(7A)
Notwithstanding anything contained in sub-section (1) of section 5 every
contractor not covered by sub-section 5 every contractor not covered by sub-
section (7) may at his option, instead of paying tax in accordance with the
said section, pay tax on the whole amount of contract at the rate of seventy
per cent of the rates shown in the Fourth Schedule against such contract, less
any tax paid by him under this Act on the purchase of any goods used in such
contract, the transfer of which to the works contract was effected without any
processing or manufacture;
[Proviso
omitted as not relevant for the purpose of this case.] Sub-section (7B)
provides that the tax under clause (iv) of sub-section (1) of Section 5 and
under sub-sections (7) and (7A) of this section shall be deducted from the
payment made by the awarder at every time including advance payment and remit
it to Government within seven days in the prescribed manner. Sub-section (ii)
required every contractor who opts for payment of tax in accordance with
sub-section (7) or sub-section (7A) of Section 7 to "file the returns
showing all the contracts he has undertaken along with certificates from the
awarders, showing the whole amount of contract and the details of tax deducted
and remitted to Government". The sub-section further says that if the
particulars so furnished are found to be correct and complete, the assessing
authority may summarily make an assessment on that basis. Sub-section (12)
provides that "after the close of the year or at the completion of the
works contract and on receipt of final statement of accounts and return, if the
tax on purchases is found to be in excess of the tax payable under the
compounded rates, no refund of such excess tax paid shall be made".
Rules
have been made under and pursuant to the aforesaid sub-sections. We are
concerned with two such rules, viz., Rule 22A and Rule 30A. They read as
follows:
"22A.
Payment and recovery of tax in works contract:- (1) In the case of works
contract on which tax is payable in accordance with the provisions of the Act
whether an option under sub-section (8) of Section 7 is made or not, the tax
shall be paid either by the contract in accordance with the rules or by the
awarder.
(2)
Wherever payment is made by the awarder to the contractor either in lump sum
for the whole contract or in installments, the awarder shall withhold an amount
equal to the tax due in accordance with the provisions of the Act from such
payment or payments and shall remit it to the assessing authority with whom the
contract is registered, as a dealer and if he is not so registered to the
assessing authority having jurisdiction over the place of works contract,
within seven days of the amount so withheld along with a statement in Form
No.21C.
30A(1).
Notwithstanding anything contained in rule 30, every contractor engaged in
civil works of construction of building, bridge, road or dam may opt to pay tax
in accordance with sub-section (7) of section 7 in respect of each such
contract.
Explanation--A composite and indivisible contract
for construction of building shall be construed as a civil work of construction
of building even if it involves works relating to electrical, sanitary,
painting, flooring and the like." [Sub-rules (2) to (7) - omitted as
unnecessary].
[Rule
22-A has been substantially amended later in 1994 but we are not concerned with
the amended rule. We will deal only with the rule as it stood when it was
considered, and struck down, by the High Court.] The validity of sub-sections 7,(7A),
(7B), 11 and 12 of Section 7 and of Rules 22A 30A of the Kerala General Sales
Tax rules was challenged in a batch of writ petitions filed in the Kerala High
Court by several builders/contractors. A learned Single Judge dismissed the
writ petitions. On appeal, however, the Division Bench has struck down the
aforesaid provisions on the ground that they are violative of clause (29A) of
Article 366 of the Constitution All the writ petitioners, who are respondents
in this batch of appeals, are contractors who have not opted to the composition
system provided by sub-section (7) or (7A). This fact has been repeatedly ad
expressly stated by Sri K.M. Vijayan, learned counsel for the respondents writ
petitioners. If so, we are unable to appreciate how and why did they impugn the
validity of the said sub-sections are the Rules made thereunder. It is obvious
that respondents- writ petitioners are shifting their stand in this Court. But
for their impugning the validity of the said provisions, the High Court would not
have gone into or considered their validity. We have perused the judgment of
the learned Single Judge dismissing the writ petitions and of the Division
Bench allowing the writ appeals filed by respondents-writ petitioners. Both the
Judgments clearly state that the writ petitioners challenged the validity of
the above provisions in addition to challenging the validity of Section 5(1)(iv).
Though
the respondents-writ petitioners have not pressed their challenge to the
validity of the above provisions before us, it has yet become necessary to
consider the issue relating to their validity in view of the fact that the said
provisions have been struck down by the High Court, the correctness whereof is
being questioned in these appeals preferred by the State of Kerala.
Clause
(29A) was inserted in Article 366 of the Constitution by the Constitution
[Forty-Sixth Amendment] Act, 1982. It reads:
"(29A)
`tax on the sale or purchase of goods' includes-- (a) a tax on the transfer,
otherwise than in pursuance of a contract, of property in any goods for cash,
deferred payment or other valuable consideration;
(b) a
tax on the transfer of property in goods (whether as goods or in some other
form) involved in the execution of a works contract." The main ground upon
which the High Court has held sub- sections (7) and (7A) of Section 7 to be
void is that they levy tax at two percent on the whole amount of the contract
[sub-section (7)] or at a particular rate applied to the entire value of
contract [sub-section (7A)] and not merely upon the value of the goods
transferred in the course of execution of the works contract as contemplated by
sub- clause (b) of clause (29A) in Article 366. The Court also noticed that the
goods which are transferred in the course of execution of a works contract may
be `declared goods'; they may be goods which are liable to be taxed under the
Central Sales Tax Act; the goods so transferred may also be taxable under
different Schedules to the Kerala Act which prescribe different rates. In such
a situation, it is held, levying tax on the entire value of the contract means
levy of tax contrary to the provisions of the Central Sales Tax Act and the Kerala
General Sales Tax Act. It also means, the Court held, taking the non-taxable
components of works contract, e.g., labour and services etc. For all these
reasons, it is held, the said sub-sections are clearly beyond the legislative
competence of the State legislature.
With
great respect, we are unable to agree. The first feature to be noticed is that
the alternate method of taxation provided by sub-section (7) or (7A) of Section
7 is optional. The sub-sections expressly provide that the method of taxation
provided thereunder is applicable only to a contractor who elects to be
governed by the said alternate method of taxation. There is no compulsion upon
any contractor to opt for the method of taxation provided by sub-section (7) or
sub-section (7A). It is wholly within the choice and pleasure of the
contractor. If he thinks it is beneficial for him to so opt, he will opt;
otherwise, he will be governed by the normal method of taxation provided by
Section 5(1)(iv). Sub-section (8) provides that the option to come under
sub-section (7) or (7A) has to be exercised by the contractor "either by
an express provision in the agreement for the contract or by an application to
the assessing authority to permit him to pay the tax in accordance with any of
the said sub-sections". In these circumstances, it is evident that a
contractor who had not opted to this alternate method of taxation cannot
complain against the said sub-sections, for he is in no way affected by them.
Nor can the contractor who has opted to the said alternate method of taxation,
complain. Having voluntarily, and with the full knowledge of the features of
the alternate method of taxation, opted to be governed by it, a contractor
cannot be heard to question the validity of the relevant sub-sections or the
rules. Sub-sections (2), (11) and (12) of Section 7 are incidental and
ancillary to sub-sections (7) and (7A) and cannot equally be faulted. Secondly,
it is true that the goods transferred in the course of execution of the works
contract may be chargeable at different rates under different Schedules
appended to the Kerala Act; it may also be that some of them may be `declared
goods', the levy of tax upon which is subject to certain restrictions specified
in Sections 14 and 15 of the Central Sales Tax Act; it may also be that sale of
some of the goods may also be subject to Central sales tax. It must yet be
remembered that the method of taxation introduced by sub-sections (7) and (7A)
is in the nature of composition of tax payable under Section 5(1)(iv). The
impugned sub-sections have evolved a convenient, hassle-free and simple method
of assessment just as the system of levy of entertainment tax on the gross
collection capacity of the cinema theaters. By opting to this alternate method,
the contractor saves himself the botheration of book-keeping, assessment,
appeals and all that it means. It is not necessary to enquire and determine the
extent or value of goods which have been transferred in the course of execution
of a works contract, the rate applicable to them and so on. For example, under
sub-section (7), the contractor pays two percent of the total value of the
contract by way of tax and he is done with all the above-mentioned botheration.
The rate of two percent prescribed by sub-section (7) is far lower than the
rates in Schedules 1, 2 and 5 referred to in Section 5(1)(iv)(a). In short,
sub-sections (7) and (7A) evolve a rough and ready method of assessment of tax
and leave it to the contractor either to opt to it or be governed by the normal
method. It is only an alternative method of ascertaining the tax payable, which
may be availed of by a contractor if he thinks it advantageous to him. It must
be remembered that the analogous system of alternate method of taxation evolved
by certain State legislature in the matter of levy of entertainment tax has
been upheld by this Court in Venkateswara Theatre v. State of Andhra Pradesh
[1993 (3) S.C.C.677]. The rough and ready method evolved by the impugned
sub-sections for ascertaining the tax payable under Section 5(1)(iv) of the Act
cannot be said to be beyond the legislative competence of the State or violative
of clause (29A) of article 366 either. The Constitution does not preclude the
legislature from evolving such alternate.
Simplified
and hasle-free method of assessment of tax payable, making it optional for the assessee.
The object of sub-sections (7) and (7A) is the same as that or Section 5(1)(iv);
it is only that they follow a different route to arrive at the same
destination. Several taxing enactments contain provisions for composition of
tax liability which may sometimes be in the interest of both the Revenue and
the assessees. It must also be remembered that in the field of taxation, the
legislature must be allowed greater `play in the joints', as it is called.
Allowance must also be made for "trial and error" by the legislature,
as has been held in R.K. Garg v. Union of India [1981 (4) S.C.C.675]:
"Law
relating to economic activities should be viewed with greater latitude than
laws touching civil rights such as freedom of speech, religion etc. It has been
s aid by no less a person than Holmes, J., that the legislature should be
allowed some play in the joints, because it has to deal with complex problems
which do not admit of solution through any doctrinaire or straight jacket
formula and this is particularly true in case of legislation dealing with
economic matters, where, having regard to the nature of the problems required
to be dealt with, greater play in the joints has to be allowed to the
legislature. The Court should feel more inclined to give judicial deferene to
legislative judgment in the field of economic regulation than in other areas
where fundamental human rights are involved.....The Court must always remember
that `legislation is directed to practical problems, that the economic
mechanisms is highly sensitive and complex, that many problems are singular and
contingent, that laws are not abstract propositions and do not relate to
abstract units and are not to be measured by abstract symmetry' that exact
wisdom and nice adaptation of remedy are not always possible and that `judgment
is largely a prophecy based on meagre and uninterpreted experience'. Every
legislation particularly in economic matters is essentially empiric and it is
based on experimentation or what one may call trial and error method and
therefore it cannot provide for all possible situations or anticipate all
possible abuses. There may be crudities and inequities in complicated
experimental economic legislation but on that account alone it cannot be struck
down as invalid. The Courts cannot, as pointed out by the United States Supreme
Court in Secy. of Agriculture v. Central Roig, Refining Co., (1950) 94
L.ed.3811, be converted into tribunals for relief from such crudities and
inequities..... If any crudities, inequities or possibilities of abuse come to
light the legislature can always step in and enact suitable amendatory
legislation.
That
is the essence of pragmatic approach which must guide and inspite the
legislature in dealing with complex economic issues." In our opinion, the
above passages from the judgment of the Constitution Bench furnish a complete
answer to the objections against the validity of the said provisions.
Accordingly,
the judgment of the Division Bench declaring sub-sections (7), (7A, (7B), 11
and 12 of Section 7 as unconstitutional and void, is liable to be set aside and
is set aside herewith.
In
these appeals, Sri Vijayan concentrated his attack upon the validity of Rules
22A and 30A alone. His submission is that Rule 22A provides for deduction of
tax at source even in respect of amounts payable to contractors who have not
chosen to opt to the composite method of taxation provided by sub-section (7)
or (7A) of Section 7. He submits that such a provision providing for collection
of tax even before the making of an assessment is contrary to the Act besides
being unreasonable and arbitrary. We are of the opinion that this contention is
based upon a misapprehension of the scope and purpose of Rule 22-A. Sub-rule
(1) of Rule 22A says that whether a contractor opts to be governed by
sub-sections (7) and (7A) or whether he is governed by Section 5(1)(iv) of the Kerala
Act, tax shall be paid either by the contractor in accordance with the Rules or
by the person who awards the contract. No one can have any objection to
sub-rule (1) since it only says that where tax is payable, it shall be paid
either by the contractor or by the awarder according to law. Now, coming to
sub-rule (2), it is equally applicable to all the contractors whether they are
governed by Section 5(1)(iv) or by sub-section (7) or (7A) of Section 7. What
the sub-rule says is that wherever payment is made by the awarder to the
contractor, "the awarder shall withhold an amount equal to the tax
due" and remit the same to the assessing authority. It is evident that
sub-rule (2) does not provide for deduction of tax at source like the one
provided by Section 194-C of the Income Tax Act, 1961. Sub-rule (2) merely says
that where tax is due from a contractor, the awarder shall withhold an amount
equal to the due while making payment to the contractor. In the case of a
contractor who has not opted for the alternate method of taxation and is
governed by Section 5(1)(iv), this sub-rule means that where tax is due from
him according to law and the awarder is apprised of the said fact, the awarder
comes under an obligation to deduct the amount equal to the tax due and remit
it to the assessing authority. It needs to be emphasised that the sub-rule
speaks of "tax due". Of course, so far as the contractor who has
opted for the alternate method of taxation under sub-section (7) or (7A) of
Section 7 is concerned, the deduction at the prescribed rate would be at the
time of any and every payment by awarder to him, for in his case tax is due at
the flat rate prescribed in the relevant sub-section even at the inception of
the contract and at all times, until the tax due is satisfied. We fail to see
how can any objection be taken to the sub-rule. Sub-rule (3) is really
explanatory in nature. It says that notwithstanding anything contained in
sub-rule (2), any contractor who pays tax regularly in accordance with the
Rules, shall be entitled to payment of the full contract amount without any
deduction by the awarder, if he produces a certificate issued by the assessing
authority to the effect that no tax is due from him. All these provisions are
designed to ensure due realisation of the tax due. No exception can be taken
thereto. The attack upon Rule 30-A is equally untenable. It merely provides the
procedure according to which the option to come under the alternate method of
taxation provided by sub-section (7) or (7A) of Section 7 is to be exercised.
The Division Bench was, therefore, in error in declaring the said rules as
invalid.
For
the above reasons, the appeals are allowed and the writ petitions filed by the
respondents in the High Court are dismissed. The respondents shall pay costs of
the appellants, which are assessed at Rupees twenty thousand consolidated.
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