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PETITIONER: FIRM OF M/S.  PEARE LAL HARI SINGH

       Vs.

RESPONDENT: THE STATE OF PUNJAB & ANOTHER

DATE OF JUDGMENT: 07/04/1958

BENCH: AIYYAR, T.L. VENKATARAMA BENCH: 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.,

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[1959] S.C.R. 379, followed. Tripp v. Armitage, (1839) 4 M. & W. 687 and Reid v.  Macbeth JUDGMENT:

& 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

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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 where 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  therefrom  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

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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,

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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. 445