M/S K.
Raheja Development Corporation Vs. State of Karnataka [2005] Insc 310 (5
May 2005)
S.
N. Variava & Dr. Ar. Lakshmanan S. N. Variava, J.
This
Appeal is against the Judgment of the Karnataka High Court dated 19th November, 1999.
Briefly
stated the facts are as follows:
The
Appellants carry on the business of real estate development and allied
contracts. They are having their Office at Bangalore. They enter into development Agreements with owners of lands.
Thereafter they get plans sanctioned. After approval of the plans they
construct residential apartments and/or commercial complexes. In most cases
before they construct the residential apartments and/or commercial complexes
they enter into Agreements of Sale with intended purchasers. The Agreements
would provide that on completion of the construction the residential apartments
or the commercial complex would be handed over to the purchasers who would get
an undivided interest in the land also. The owners of the land would then
transfer the ownership directly to the society which is being formed under the
Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales,
Management and Transfer) Act, 1974.
The
question which arises for consideration is whether the Appellants are dealers
and are liable to pay turnover tax under the Karnataka Sales Tax Act.
The
Appellants filed returns showing Nil liability to pay tax on the footing that
there was no transfer of any property in goods either by itself or by virtue of
any works contract. The Adjudicating Authority did not accept their contention
and passed an Assessment Order claiming tax.
Against
the Assessment Order, the Appellants went in Appeal to the Additional Joint
Commissioner of Commercial Taxes (Appeal). The Additional Joint Commissioner
held that tax was payable as there was transfer of property in goods pursuant
to a works contract.
Being
aggrieved with the Order the Appellants filed an Appeal to the Karnataka
Appellant Tribunal. The Appeal was partly allowed. It was held that the turnover
could only be computed on the value of goods in the execution of the works
contract.
The
Appellants filed a Revision Petition to the Karnataka High Court which has been
dismissed by the impugned Order. In the impugned Order it has been held that
the matter has been examined in detail in the case of M/s. Mittal Investment
Corporation vs. The Additional Commissioner of Commercial Taxes, Zone-I, Bangalore in S.T.A. Nos. 35 to 38 of 1998
decided on 24th
September, 1999. On
the principles laid down in that Judgment the Petition stood disposed off.
After
the Appellants got leave in this Appeal a Review Application was made in Mittal
Investment Corporation's case (supra). Some clarifications have been issued by
an Order dated 11th
February, 2000.
Mr.
Mehta submitted that as the Judgment in Mittal Investment Corporation's case
has been reviewed this matter should also be sent back to the High Court.
However, on a question from the Court, whether the Appellants were accepting
the principles laid down in Mittal Investment Corporation's case the answer was
that the Appellants wanted to agitate all the grounds including the ground that
there was no works contract. Such a contention would stand concluded by the
High Court Judgment in Mittal Investment Corporation's case even after the
Order passed in the Review Application. No purpose would therefore be served in
remitting the matter back to the High Court. Mr. Mehta was therefore asked to
proceed in this Court itself.
Mr.
Mehta drew the attention of this Court to relevant provisions of the Karnataka
Sales Tax Act [hereinafter called the said Act].
Section
2(1)(k)(viii) defines a "dealer" as follows:
"2(1)(k)
"dealer" means any person who carries on the business of buying,
selling or distributing goods, directly or otherwise, whether for cash or for
deferred payment, or for commission, remuneration or other valuable
consideration, and includes xxx xxx xxx xxx xxx xxx (viii) a person engaged in
the business of transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract.
xxx xxx
xxx xxx xxx xxx" Thus a person engaged in the business of transfer of
property in goods, whether as goods or in some other form, involved in
execution of a works contract would be a dealer.
Section
2(1)(u1) defines the words "taxable turnover" as under:
"2(1)(u1)
"taxable turnover" means the turnover on which a dealer shall be
liable to pay tax as determined after making such deductions from his total
turnover and in such manner as may be prescribed, but shall not include the
turnover of purchase or sale in the course of inter- State trade or commerce or
in the course of export of the goods out of the territory of India or in the
course of import of the goods into the territory of India." Section 2(1)
(v-i) is relevant. It defines a "works contract" as follows:
"2(1)(v-i)
"works contract" includes any agreement for carrying out for cash,
deferred payment or other valuable consideration, the building, construction,
manufacture, processing, fabrication, erection, installation, fitting out,
improvement, modification, repair or commissioning of any moveable or immovable
property." It is thus to be seen that under the Karnataka Sales Tax Act
the definition of the words "works contract" is very wide. It is not
restricted to a "works contract" as commonly understood, i.e., a
contract to do some work on behalf of somebody else. It also includes "any
agreement for carrying out either for cash or for deferred payment or for any other
valuable consideration, the building and construction of any moveable and
immoveable property" (emphasis supplied). The definition would therefore
take within its ambit any type of agreement wherein construction of a building
takes place either for cash or deferred payment, or valuable consideration. To
be also noted that the definition does not lay down that the construction must
be on behalf of an owner of the property or that the construction cannot be by
the owner of the property. Thus even if an owner of property enters into an
agreement to construct for cash, deferred payment or valuable consideration a
building or flats on behalf of anybody else it would be a works contract within
the meaning of the term as used under the said Act.
Section
5B provides for levy of tax on transfer of property in goods, whether as goods
or in some other form, in the execution of the works contract. It reads as
follows:
"5B.
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 (3C) 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." Mr. Mehta submitted that by virtue of
the Agreement entered into by the Appellants with the owner of the property the
Appellants became owners of the property even though a formal conveyance in
their favour had not been executed. He took this Court through various
provisions of the Agreement entered into by the Appellants with the owner of
the property. He submitted that under such Agreements almost the entire
consideration amount is paid to the owners and possession of the property is handed
over to the Appellants. He submitted that by virtue of the principles laid down
in Section 53A of the Transfer of Property Act the Appellants were the owners
of the property. In support of this submission, he relied upon the Judgments of
this Court in the cases of C.I.T. vs. Podar Cement Ltd. reported in (1992) 5
SCC 482 and Mysore Minerals Ltd. vs. C.I.T. reported in (1999) 7 SCC 106. In
these cases, in the context of the Income Tax Act, it has been held that even
though there is no formal conveyance the concerned party could be considered to
be the beneficial owner. Mr. Mehta submitted that an owner cannot be said to
carrying on a works contract on behalf of others.
Mr.
Mehta next submitted that in any event the Appellants did not undertake any
works contract for and on behalf of the intended purchasers. He submitted that
the Appellants were themselves developing the property and selling flats or
commercial complexes in that property. He submitted that in such type of
activities no works contract was involved. Mr. Mehta submitted that in the
Agreements with the intended purchasers there was a clause which provides that
if all payments are not made then amounts paid can be forfeited and the
agreement rescinded. He submitted that a person carrying out a works contract
would have no right to forfeit or rescind the contract itself. He submitted
that such a clause indicates that the Agreements are not agreements to carry
out a works contract.
On the
other hand, Mr. Hegde submitted that the definition of a `works contract' in
the said Act is an inclusive definition which is very wide. He submitted that
any agreement wherein party has agreed to construct or build for cash, deferred
payment or other valuable consideration would be covered by the definition of the
term `works contract' as used in the said Act. In support of his submission he
relied upon the Agreements entered into by the Appellants with the various
purchasers and submitted that these Agreements indicate that the Appellants are
undertaking the construction of the building and the flats for and on behalf of
the purchasers and that the same is for valuable consideration to be paid in a
differed manner. He submitted that except to the extent that the Appellants
retain certain commercial premises or flats for themselves, the work carried
out pursuant to such Agreements would amount to a `works contract'. He
submitted that the Appellants are liable to pay turnover tax on the transfer of
property in goods involved in such works contract.
We
have heard the parties, perused the various documents and considered the cases
cited at the bar. As has been rightly submitted by Mr. Hegde the definition of
the term `works contract' in the said Act is an inclusive definition. It does
not include merely a works contract as normally understood. It is a wide
definition which includes "any agreement" for carrying out building
or construction activity for cash, deferred payment or other valuable
consideration. The definition does not make a distinction based on who carries
on the construction activity. Thus even an owner of the property may also be
said to be carrying on a works contract if he enters into an agreement to
construct for cash, deferred payment or other valuable consideration.
We,
therefore, do not need to go into the question whether the Appellants are
owners as even if the Appellants are owners to the extent that they have
entered into Agreements to carry out construction activity on behalf of
somebody else for cash, deferred payment or other valuable consideration, they
would be carrying out a works contract and would become liable to pay turnover
tax on the transfer of property in the goods involved in such works contract.
Further
under the said Act there is no distinction between construction of residential
flats or commercial units. Thus, a works contract, within the meaning of the
term in the said Act, can also be for construction of commercial units. For the
purposes of considering whether an agreement amounts to a works contract or
not, the provisions of the Karnataka Ownership Flats (Regulation of Promotion
of Construction, Sales, Management and Transfer) Act, 1974 will have no
relevance.
However
as Mr. Mehta has argued on this aspect we record that reliance of the Judgments
in Podar Cement Ltd. and Mysore Minerals Ltd. cases (supra) are of no
assistance to the Appellants. Those are cases under the Income Tax Act. Those
cases lay down that the term `owner' must be given an interpretation in the
context of the provisions of the Act. If that rational was to be applied then
in the context of the Karnataka Sales Tax Act, the Appellants would not be
owners as admittedly they do not have any registered sale-deeds in their hand.
The Agreement relied upon by Mr. Mehta between the Appellants and the owners of
the land is nothing but a development Agreement. Pursuant to such an Agreement,
plan would be get sanctioned in the name of the owner of the property. It would
be the owner of the property who would then execute a conveyance directly to
the society of purchasers. All that the Appellants have is a possessary
interest and a right to construct. Such rights do not constitute the person an
owner of the property.
To
consider whether the Appellants are executing works contract one needs to look
at a typical Agreement entered into with the purchaser. The relevant clauses
are clause (q), (r) of the recitals and clauses 1, 5(c) and 7, which read as
follows:
"q)
i) Construction of the said multi-storeyed building;
ii)
Sale of the units in the aforesaid multistoreyed building to different persons
in whose favour ultimately a Deed of Conveyance would be obtained by the
Holders, directly from the Vendors, of an undivided fractional interest in the
said land (i.e. the area of 5910.17 sq. metres described in the First Schedule
hereunder written) and such owner of units would own, on ownership basis, the
respective units on condition that an Agreement would be entered into between
the Holders on the one hand and the persons (desiring to acquire on ownership
basis an unit in such multi-storeyed building) on the other hand and it would
be an essential, integral and basic concept, term and condition of the proposed
transaction (which would be by way of a package deal not capable of being
segregated or separated or terminated one without the corresponding effect on
the other) that K. Raheja Development Corporation as the Land-holder would
agree to sell to such persons an undivided fractional interest in the said land
described in the First Schedule hereunder written on condition that they i.e.
M/s K. Raheja Development Corporation as Developers on behalf of and as
Developers of such person would construct for, as a unit ultimately to belong
to such person a unit or units that would be so mutually selected and settled
by and between K. Raheja Development Corporation and the person concerned;
[emphasis
supplied] r) The Prospective Purchaser is interested in acquiring ownership
rights in respect of unit/s Nos. 1101 on the eleventh floor/s of the said
multi-storeyed building named `Raheja Towers' and also car parking space/s
No./s nil in the basement/ground floor of the said building (hereinafter
referred to as `the said Unit')"
......................................................................
1. As
and by way of a package deal :
a) K. Raheja
Development Corporation, (as Holders) agree to sell to the Prospective
Purchaser an undivided 0.42% share, right, title and interest in the said land
described in the First Schedule hereunder written (with no right to the
Prospective Purchaser to claim any separate sub-division and/or right to
exclusive possession of any portion of the said land) for a lump sum agreed and
quantified consideration of Rs.3,25,000/- (Rupees three lacs twenty five
thousand only) to be paid by the Prospective Purchaser to the Holders at the
time and in the manner stated in Clause 2 hereof;
b) K. Raheja
Development Corporation, (as Developers) agree to build the said building named
`Raheja Towers', having the specifications and amenities therein set out in the
Second Schedule hereunder written and as Developers for the prospective
Purchaser, the Developers shall build for and as unit/s to belong to the
Prospective Purchaser, the said premises (details whereof are set out in the
Third Schedule hereunder written) for a lump sum agreed and quantified
consideration of Rs. 5,07,000/- (Rupees five lacs seven thousand only) to be
paid by the Prospective Purchaser to the Developers at the time and in the
manner set out in Clause 3 hereof. The said premises shall have the amenities
set out in the Fourth Schedule hereunder written.
....................................................................
5. The
undermentioned terms and provisions are express conditions to be observed,
performed and fulfilled by the Prospective Purchaser, on the basis of which
this Agreement has been entered into by the Holders/Developers and the due and
proper fulfillment whereof are to be conditions precedent to any title being
created and / or being capable of being documented by the Prospective Purchaser
in the aforesaid fractional interest in the land described in the First
Schedule hereunder written and/or in the said premises:
a)
.........................................................
b)
.........................................................
c) The
overall control and management of the project and the development and
completion of the said building shall be with the Developers and furthermore
the Developers are and shall continue to be in possession of the said land and
building and shall be entitled to a lien thereon and that the Prospective
Purchaser shall not be entitled to claim or demand from the Holders possession
of any portion of the said land or to claim or demand from the Developers
possession of the said premises unless and until the Prospective Purchaser has
paid in full through the Holders the full consideration money payable to the
Holders under Clause 2 above and the full consideration money payable to the
Developers under Clause 3 above.
...................................................................
7. If
the Prospective Purchaser commits default in payment of any of the instalments
of consideration aforesaid on their respective due dates (time being the
essence of the contract) and/or in observing and performing any of the terms
and conditions of this Agreement, the Holders/Developers shall be at liberty,
after giving 15 days notice specifying the breach and if the same remains not
rectified within that time, to terminate this Agreement, in which event, a sum
equivalent to 10% of the amounts that may till then have been paid by the
Prospective Purchaser to the Holders and the Developers respectively shall
stand forfeited.
The
Holders and the Developers shall, however, on such termination, refund to the
Prospective Purchaser the balance amounts of the instalments of part payment,
if any, which may have till then been paid by the Prospective Purchaser to the
Holders and the Developers respectively but without any further amount by way
of interest or otherwise. On the Holder/Developers terminating this Agreement
under this Clause, they shall be at liberty to dispose off the said Unit/s and
the said fractional interest in the land to any other person as they deem fit,
at such price as they may determine and the Prospective Purchaser shall not be
entitled to question such sale, disposal or to claim any amount from
them." Thus the Appellants are undertaking to build as developers for the
prospective purchaser. Such construction/development is to be on payment of a
price in various instalments set out in the Agreement.
As the
Appellants are not the owners they claim a "lien" on the property. Of
course, under clause 7 they have right to terminate the Agreement and to
dispose off the unit if a breach is committed by the purchaser. However, merely
having such a clause does not mean that the agreement ceases to be a works
contract within the meaning of the term in the said Act. All that this means is
that if there is a termination and that particular unit is not resold but
retained by the Appellants, there would be no works contract to that extent.
But so long as there is no termination the construction is for and on behalf of
purchaser. Therefore, it remains a works contract within the meaning of the
term as defined under the said Act. It must be clarified that if the agreement
is entered into after the flat or unit is already constructed, then there would
be no works contract. But so long as the agreement is entered into before the
construction is complete it would be a works contract.
In
this view of the matter, the Judgment of the High Court to the extent that it
confirms with the above-mentioned view stands confirmed. We do not approve the
observations in Mittal Investment Corporation's case (supra) which are contrary
to the view expressed above. As on the main aspects we agree with the High
Court Judgment, we see no reason to interfere.
The
Appeal stands dismissed. There will be no order as to costs.
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