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CASE NO.: Appeal (civil)  2766 of 2000

PETITIONER: M/s K. Raheja Development Corporation

RESPONDENT: State of Karnataka

DATE OF JUDGMENT: 05/05/2005

BENCH: S. N. Variava & Dr. AR. Lakshmanan

JUDGMENT: J U D G M E N T

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

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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 \026

       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

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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

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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

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(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’)"  

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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

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Schedule hereunder written.

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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.

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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

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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.