M/S. Mycon
Construction Limited Vs. State of Karnataka & Anr [2002] Insc 262 (7 May 2002)
Shivaraj
V. Patil & Bisheshwar Prasad Singh Bisheshwar Prasad Singh, J.
WITH C.A.Nos.
7575-77/1999, C.A.Nos. 950-957/2000 AND C.A.
Nos.1111/2000
In
this batch of appeals by special leave common questions arise for consideration
and therefore the appeals have been heard together and are being disposed of by
this common judgment.
The
questions which arise for consideration are whether sub- section 6 of Section
17 of the Karnataka Sales Tax Act, 1957 (hereinafter referred to as "the
Act") as amended by Act No. 5 of 1996 is unconstitutional, and secondly,
whether the amendment brought in Clause (i) of sub-section 6 of Section 17 of
the Act by Act No.7 of 1997 retrospectively is also unconstitutional. The High
Court of Karnataka has answered both these questions in the negative and
against the appellants. The main judgment was rendered in the writ petition
preferred by the appellant in Civil Appeal No.902 of 1999.
The
remaining matters were disposed of by the High Court following the aforesaid
judgment.
To
determine the questions that arise for consideration, it is necessary to notice
the legislative history of sub-section 6 of section 17 of the Act. We may first
notice Section 5B of the Act which provides for levy of tax on transfer of
property in goods involved in the execution of works contract which reads as
follows:- "5-B. Levy of tax on transfer of property in goods (whether as
goods or in some other form) involved in the execution of works contracts.
Notwithstanding
anything contained in sub-section (1) or sub-section (3) or sub-section (3-C)
of Section 5, but subject to sub-section (4), (5) or (6) of the said Section,
every dealer shall pay for each year, a tax under this Act on his taxable
turnover of transfer of property in goods (whether as goods or in some other
form) involved in the execution of works contract mentioned in column (2) of
the Sixth Schedule at the rates specified in the corresponding entries in column
(3) of the said Schedule." Section 5B was introduced in the Act by Act
No.27 of 1985 with effect from April 1, 1986
pursuant to the Constitution (46th Amendment Act, 1982) introducing Clause (29
A) in Article 366 of the Constitution.
By Act
4 of 1987 sub-section 6 of Section 17 of the Act was incorporated which as
originally enacted read as follows :- " Notwithstanding anything contained
in sub- section (1) to (3), subject to such conditions and in such
circumstances as may be prescribed, the Assessing Authority of the area may, if
a dealer liable to tax under Section 5-B so elects, accept in lieu of the
amount of tax payable by him during any year, under this Act, in respect of
works contracts falling under serial number 6 of the Sixth Schedule, by way of
composition, an amount at the rate of Two percent of his total turnover in
respect of transfer of property in goods (whether as goods or in some other
form) involved in the execution of such works-contracts." Sub-section 6 of
Section 17 of the Act was amended by Act No.4 of 1992 with effect from April 1,
1992 and the amended sub- section read as follows :- "Notwithstanding
anything contained in sub- section (1) to (3), but subject to such conditions
and in such circumstances as may be prescribed, the Assessing Authority of the
area may, if a dealer liable to tax under Section 5-B in respect of the works
contract specified in column (2) of the table below so elects, accept in lieu
of the amount of tax payable by him during the year under this Act, by way of composition
an amount at the rates specified in the corresponding entries in column (3) of
the Table on his total turnover relating to transfer of property in goods
(whether as goods or in some other form) involved in the execution of such
works-contract." Again by Act No.5 of 1996 sub-section 6 of Section 17 was
amended to read as follows:- "Notwithstanding anything contained in
Section 5- B, but subject to such conditions and in such circumstances as may
be prescribed, the Assessing Authority of the area may, if a dealer liable to
tax under Section 5-B so elects, accept in lieu of the amount of tax payable by
him during the year under this Act, by way of composition an amount on the
total consideration for the works contracts executed by him in that year in the
State in respect of works contract specified in column (2) of the Sixth
Schedule at the rates specified in the corresponding entries in Column (4) of
the said Schedule." Sub-section 6 was further amended by Act No.7 of 1997
with effect from April
1,1997. Clause (i) of
sub-section 6 of Section 17 of the Act as amended reads as follows:- "(a)
for the words and brackets "on his total turnover relating to transfer of
property in goods (whether as goods or in some other form) involved in the
execution of such works contract", the words "on the total
consideration received or receivable by him in respect of such works contract
executed by him in that year in the State", shall be deemed to have been
substituted with effect from the first day of April, 1988:
(b) for
the words, brackets and figure, "at the rates specified in the
corresponding entries in column (4) of the said Schedule," the words,
"at the rate of four per cent" shall be substituted." The
constitutional validity of sub-section 6 of Section 17 of the Act was
challenged in several writ petitions filed before the High Court of Karnataka
at Bangalore. The challenge was on the ground
that in view of Entry 54 of List III of the Seventh Schedule read with
sub-clause (b) of Clause (29A) of Article 366 of the Constitution of India, the
tax under the Act is leviable only on transfer of property in goods (whether as
goods or in some other form). Therefore, even under a scheme of composition of
tax, the tax could not be levied on any goods other than goods in which there
was transfer of property in execution of the works contract. The State had no
legislative competence to levy sales tax on the total consideration of the
works contract so as to include items or goods in which there was in fact no
transfer of property. Reliance was placed on the decisions of this India &
Ors. (1989) 2 SCC 645 and Gannon Dunkerley and Co. of India (1997) 2 SCC 183
ran counter to the ratio in Builders Association of India (supra), a judgment
rendered by a Constitution Bench of this Court, and therefore the same had no
binding effect. In any event that decision was distinguishable having regard to
the facts and circumstances of that case and the provisions contained in the Kerala
Act.
Secondly,
it was contended that in any event sub-section 6 of Section 17, to the extent
it had been given retrospective operation by Act 7 of 1997, was
unconstitutional as it violated the rights guaranteed to the petitioners under
Articles 14, 19 (1)(g) and Article 265 of the Constitution of India. The petitioners
and others like them, who had opted for the composition scheme, as it stood
prior to April 1, 1996, could not be saddled with
additional burden of tax by the amended provision which was given effect
retrospectively from April
1, 1988.
In the
facts and circumstances of the case the retrospective operation of the amended
provision was arbitrary, violating the right guaranteed to the petitioners
under Article 14 of the Constitution of India.
The
State of Karnataka on the other hand relied upon the Association
of India (supra) and contended that the question was no longer res integra and
the validity of sub-section 6 of Section 17 as amended must be upheld. As to
the retrospective operation of the amended provision, it was submitted that the
legislature had competence not only to enact a law prospectively, but also
retrospectively, subject to its being consistent with the constitutional
provisions. It was submitted that the rights of the petitioners guaranteed
under Article 14 and 19 were not breached at all. In fact the legislature
always intended to levy tax on total consideration of works contract so far as
assessment under the scheme of composition was concerned, and for this he
relied upon the Budget speech of the Finance Minister wherein a reference was
made to the levy at an average rate of 2% on the total turnover in lieu of all
taxes payable under the Act. The legislative intent was not truly reflected in
the amendment effected in the Act which gave rise to some controversy on the
subject. To clarify and to give effect to the legislative intent, a circular
was issued by the Commissioner but the same was quashed by the High Court. In
these circumstances the State was left with no option, but to exercise its
legislative power to legislate retrospectively with a view to remove the lacuna
in the existing provision.
A
batch of writ petitions, including the writ petition preferred by the appellant
in Civil Appeal No.902 of 1999, was disposed of by a common judgment of a
learned Judge of the High Court holding that Association of India (supra)
squarely answered the challenge and the question was no longer res integra. The
challenge to the constitutional validity of sub-section 6 of Section 17 was
accordingly repelled.
So far
as the validity of Act No.7 of 1997 is concerned, the learned Judge upheld its
validity holding that the legislature was competent to enact the law with
retrospective effect. The High Court however noticed the stand of the State in
its statement of objections filed in reply to the writ petition in which it was
submitted that with a view to avoid hardship that may be caused by the
retrospective operation of the amended provision, the Court in the interest of
justice may direct that the works contractors may opt, if so advised, for regular
assessment under Section 5B of the Act, even if they had earlier opted for
assessment under the composition scheme. The learned Judge therefore, while
dismissing the writ petitions, having regard to the stand of the State of
Karnataka, reserved liberty to the petitioners to opt for regular assessment
under Section 5B of the Act notwithstanding the fact that they had opted for
composition under Section 17 (6) of the Act. For this purpose petitioners were
required to make an application to the concerned assessing authority and the
assessing authorities were directed to proceed to assess the petitioners and
all others who were not before the court, under Section 5B of the Act, if they
so opted.
Appeals
preferred before a Division Bench of the High Court were also dismissed, since
the Division Bench of the High Court found itself in complete agreement with
the learned Judge and was also of the view that the judgment of this Court in
the State of case. The judgment of the Division Bench is impugned before us by special
leave in Civil Appeal No. 902 of 1999. In the remaining appeals the High Court
followed its aforesaid judgment, and dismissed the writ petitions.
Mr. Raju
Ramachandaran, Senior Advocate appearing on behalf of some of the appellants
placed before us the judgment of this SCC 183. We have carefully read the
aforesaid judgment. Fairly Mr. Raju Ramachandaran submitted that he was unable
to point out any distinction between the provisions of the Kerala Act and the
Karnataka Act which may have a bearing on the question of interpretation. We
have also considered the matter and we are also of the view that so far as the
scheme of composition of tax is concerned, the relevant provisions of both the
Acts even if not identical, are vastly similar. On the question of the
constitutional validity of sub- section 6 of Section 17 the same argument was
advanced before this In that case, the High Court had declared as
unconstitutional sub- sections (7) and (7A) of Section 7 upholding the
contention that they sought to levy tax at the rate of 2 % on the whole amount
of the contract, or at a particular rate applied to the entire value of
contract, and not merely upon the value of the goods transferred in the course
of execution of the works contract as contemplated under sub-clause (b) of
clause (29-A) of Article 366. The court noticed that the goods which were
transferred in the course of execution of works contract may be "declared
goods", liable to be taxed under the Central Sales Tax Act, 1956. The
goods so transferred may also be taxable under different Schedules to the Kerala
Act which prescribe different rates.
In
such a situation levy of tax on entire value of the contract meant levy of tax
contrary to the provisions of the Central Sales Tax Act and the Kerala General
Sales Tax Act. It also meant including the non- taxable components of works
contract e.g. labour and services etc.
For
all these reasons, the High Court held that the said sub-sections were clearly
beyond the legislative competence of the State Legislature. This court repelled
the submission urged before it in the following words:- "The first feature
to be noticed is that the alternate method of taxation provided by sub-section
(7) or (7-A) 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 (7-A). 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 (7-A) 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
(8), (11) and (12) of Section 7 are incidental and ancillary to sub-sections
(7) and (7-A) 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 (7-A) 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 theatres. 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 per cent 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 per cent 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 (7-A) evolve a rough and ready method of assessment of tax and
leave it to the contractor either to opt for 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 Legislatures in the matter of levy of entertainment tax has
been upheld by this Court in Venkateshwara Theatre V. State of A.P. 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 (29-A) of Article
366 either.
The
Constitution does not preclude the legislature from evolving such alternate,
simplified and hassle-free method of assessment of tax payable, making it
optional for the assessee. The object of sub-sections (7) and (7-A) is the same
as that of Section 5(1)(iv); it is only that they follow a different route to
arrive at the same destination." We are of the considered view that
principles laid down by this Court in the aforesaid decision squarely apply to
the facts of this case having regard to the similarity of the provisions in the
two Acts. We therefore find ourselves in complete agreement with the High Court
and hold that sub-section 6 of Section 17 of the Karnataka Sales Tax Act is
constitutionally valid and the challenge on the ground of lack of legislative
competence of the State Legislature must be repelled.
Learned
Counsel then submitted that even while evolving a simplified method for
assessment of tax, such as the scheme of composition in the instant case, the
law cannot give an option to the assessees which is in the teeth of
constitutional provisions. This argument does not survive in view of the
principles laid down by the (supra). He made a faint attempt to draw a
distinction between the Kerala Act and the Karnataka Act by reference to the
background in which the provisions were enacted. He submitted that under the Kerala
Act the composition scheme was introduced by the amendments in the years 1991
and 1992. So far as State of Karnataka is
concerned sub-section 6 of Section 17 which gave option to the assessees to pay
tax at a fix rate on the value of the goods, the property in which was transferred
in the course of execution of works contract came into effect in the year 1988
and continued till the year 1996. The appellants had taken benefit of the said
scheme of composition by exercising their option for assessment under the
composition scheme. They had therefore opted for something different from what
is sought to be given to them under the amended provision which levies tax not
merely on the value of goods transferred, but on the whole amount of the
contract. He, therefore, submitted that having regard to the legislative
background, amendment of sub-section 6 of Section 17 with retrospective effect
by Act 7 of 1997 is clearly unconstitutional. The submission has no force. If
the Legislature has legislative competence to enact a statute and the statute
so enacted does not breach any constitutional provision, the same cannot be
said to be unconstitutional merely because it is retrospective in operation.
Moreover, in the instant case (supra) the appellants had opted for assessment
under the composition scheme. They were not compelled to exercise their option
and otherwise they would have been assessed in accordance with the provisions
of the Act particularly Section 5-B thereof. To remove any hardship to the assessees
by retrospective operation of the amended scheme of composition, the State
Government itself submitted that the appellants and others like them may be
given option to opt for assessment under Section 5-B of the Act even if they
had earlier opted for assessment under sub-section 6 of Section 17. The High
Court has in fact made such a direction. The appellants are therefore not
prejudiced in any manner whatsoever.
Lastly,
counsel submitted that while considering the question of retrospectivity, the
High Court has passed its judgment on an erroneous assumption of facts, namely
that the assessments so far made were on the basis of total consideration. The
learned counsel submitted that this was not factually correct. We have perused
the judgment and we find that though the submission of the counsel for the
State to this effect was noticed, the judgment of the High Court is not based
on this assumption. The judgment of the High Court would not have been
different even if the fact was otherwise.
Mr.
S.S. Javali, learned Senior Advocate, appearing for the appellants in Civil
Appeals Nos.7575-77 of 1999 submitted that the appellants had opted under the
composite scheme and enjoyed the benefit for almost 9 years. It would be
unreasonable to relegate them to the same position that they occupied before
they exercised the option for assessment under the composition scheme. He
submits that considerations of equity must persuade this court to pass an
appropriate direction so that the assessments made on the basis of the options
already given are not affected in any manner. Having held that the
retrospective operation of the amended provision is constitutional, and having
noticed that the assessees are at liberty to opt for regular assessment under
Section 5-B of the Karnataka Sales Tax Act, it would not be appropriate to make
such a direction on considerations of equity particularly while dealing with a
taxing statute.
Learned
counsel relied upon some observations made in He also relied upon the judgment
of this court in D. Cawasji & Co.
have
carefully perused the aforesaid judgments of this Court but we find nothing in
the two judgments to support the case of the appellants. Those cases proceeded
on altogether different considerations, which do not arise in the appeals
before us. The principles laid down therein are of no assistance to the
appellants.
Having
considered all aspects of the matter we find that there is no merit in these
appeals.
We
accordingly dismiss the appeals, but without any order as to costs.
....J
(SHIVARAJ V. PATIL)
....J
(BISHESHWAR PRASAD SINGH) May 7, 2002.
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