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CASE NO.: Appeal (civil)  5679 of 2007

PETITIONER: State of Chhattisgarh & Ors

RESPONDENT: M/s. VTP Constructions

DATE OF JUDGMENT: 07/12/2007

BENCH: Dr. ARIJIT PASAYAT & AFTAB ALAM

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.   5679 OF 2007 (Arising out of SLP (C) No. 991 of 2007)

Dr. ARIJIT PASAYAT, J.  

1.      Leave granted.  

2.      Challenge in this appeal is to the judgment rendered by a  Division Bench of the Chhatisgarh High Court. Respondent  filed a writ petition before the Chhatisgarh High Court  questioning constitutional validity of Section 35 of  Chhattisgarh Vanijyik Kar Adhiniyam, 1994 (hereinafter  referred to as the ’Adhiniyam’).  It corresponds to the  Chhatisgarh Commercial Tax Act, 1994 (in short the ’Act’). The  respondent hereinafter is described as the ’assessee’.          3.      Background facts highlighted by the respondent are as  follows:

The writ petitioner is a proprietary concern of one Shri  Krishana Mudliar and it has been executing works contracts  for various Departments of the Chhattisgarh State  Government and others and was holding sales-tax registration  No.061/RDN/14,’2739/02. During the assessment year 2001- 2002, the writ petitioner had executed works contracts  awarded by Executive Engineer, P.W.D. (B&R), Division  Khairagarh, for which it received payment of Rs.1,27,115/- on  which sales tax of Rs.2,545/-, being 2% of sum of  Rs.1,27,115/- was deducted at source towards the sales tax  payable as provided under Section 35 of the Adhiniyam.  Certificate of tax deduction is dated 11/04/2001 made under  Section 35 of the Act. 4.      In support of the writ petition, it was contended that  Section 35 of the Act does not make any provision for  deduction and ascertainment of value and nature of goods  supplied during execution of work-contracts. Section 35 of the  Act does not make any provision for determination of value of  goods supplied in the course of inter State trade during  execution of works contracts.          5.      The writ petition is opposed by the present appellants by  filing reply/statement of objections. In the reply statement, it  was stated that the contractors who are engaged in the  construction of buildings, roads, bridges, dams etc generally  come from other States. The process of assessment of sales tax

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is very lengthy and before the assessment is completed, such  contractors disappear from the scene after receiving full  payment under the contract. In such situation, it was very  difficult for the Commercial Tax Department to trace out such  contractors and eventually sales tax payable by such  contractors could not be recovered at all thereby causing  heavy financial loss to the Government. In order to safeguard  the interest of the State, Section 35 is enacted in the Act and  that the State Legislature has legislative competence to enact  Section 35. It was stated that Section 35 is not a unique  provision in the Act and similar provisions are enacted in the  Sales Tax Acts of other States, for example, Section 6-D of the  Uttar Pradesh Trade Tax Act, Section 6-E of the Bengal  Finance (Sales-Tax) Act, 1941; Section 25-A of the Bihar  Finance Act, 1981; Section 25-B of the Haryana General Sales  Tax Act 1973, Section 12-A of the Himachal Pradesh General  Sales Tax Act 1968, Section 16-C of the Jammu & Kashmir  General Sales Tax Act, Section 19-A of the Karnataka Sales  Tax Act and Section 13-AA of the Orissa Sates Tax Act, 1947.   It was also contended that the Constitutional validity of  Section 35 of the Adhiniyam was already considered and  upheld by the Division Bench of the Madhya Pradesh High  Court in the case of Punj Lloyd Ltd. v. State of Madhya  Pradesh and Ors. (1996) 29 VKN 533.  

6.      The High Court referred to decisions of this Court in Steel  Authority of India Ltd. v. State of Orissa and Others  [2000(3)SCC 200) and M/s. Nathpa Jhakri Jt. Venture v. State  of Himachal Pradesh and Ors. [2000 (3) SCC 319] and  declared the provision to be unsustainable.  

7.      In support of the appeal learned counsel for the  appellants submitted that the ambit and scope of Section 35 of  the Act were not kept in view by the High Court.  The decision  in Steel Authority’s case (supra) and Nathpa’s case (supra)  were dealing with different provisions and, therefore, has no  application to the facts of the case.

8.      Steel Authority’s case (supra) related to Section 13AA of  the Orissa Sales Tax Act, 1947 (hereinafter referred to as the  ’Orissa Act’). In Nathpa Jhakri’s case (supra) dispute related to  Section 12A of the Himachal Pradesh General Sales Tax Act,  1968 (in short the ’Himachal Pradesh Act’). While striking  down Section 13AA of the Orissa Act, this Court observed as  follows in Steel Authority’s case (supra):

"There can be no doubt, upon a plain  interpretation of Section 13AA, that it is  enacted for the purposes of deduction at  source of the State sales tax that is payable by  a contractor on the value of a works contract.  For the purpose of the deduction neither the  owner nor the Commissioner who issues to the  contractor a certificate under Section 13AA(5)  is entitled to take into account the fact that the  works contract involves transfer of property in  goods consequent upon of an inter-State sale,  an outside sale or a sale in the course of  import.  The owner is required by Section  13AA(1) to deposit towards the contractor’s  liability to State sales tax four per cent of such  amount as he credits or pays to the contractor  regardless of the fact that the value of the  works contracts includes the value of inter- State sales, outside sales or sales in the course

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of import.  There is, in our view, therefore, no  doubt that the provisions of Section 13AA are  beyond the powers of the State Legislature for  the State Legislature may make no law levying  sales tax on inter-State sales, outside sales or  sales in the course of import."

9.      In Nathapa Jhakri’s case (supra) this court held Section  12A of the Himachal Pradesh Act to be unconstitutional and  the relevant portion of the judgment reads as follows:

"A bare perusal of the two provisions will  make it clear that in either provision there is  an obligation to deduct from transactions  relating to works contract on bills or invoices  raised by the works contractor an amount not  exceeding 4 percent or 2 per cent as the case  may be. Though the object of the provision is  to meet the tax in respect of the transactions  on all works contract on the valuable  consideration payable for the transfer of  property in goods involved in the execution of  the works contract, the effect of the provision  is that, irrespective of whether the sales are  inter-State sales or outside sales or export  sales which are outside the purview of the  State Act and those transactions in respect of  which no tax can be levied even in terms of the  enactment itself, such deductions have to be  made in the bills or invoices of the contractors.   To say that if a person is not liable for payment  of tax inasmuch as on completion of the  assessment refund can be obtained at a later  stage in no solace, as noticed in Bhawani  Cotton Mills Ltd. v. State of Punjab [(1967) 20  STC 290 (SC): (1967) 3 SCR 577].  Further,  there is no provision for certification of the  extent of the deduction that can be made by  the authority.  Therefore, we must hold that  arbitrary and uncanalised powers have been  conferred on the concerned person to deduct  up to 4 per cent from the sum payable to the  works contract irrespective whether ultimately  the transaction is liable for payment to any  sales tax at all.  In that view of the matter, we  have no hesitation in rejecting the contention  advanced on behalf of the State."  

10.     In view of what has been stated by this Court in Steel  Authority’s case and Nathpa’s case (supra) the inevitable  conclusion is that the High Court was right in holding that  Section 35 of the Act was constitutionally invalid. The  direction for refund of the amount collected from the  respondent under the provisions of the said section had been  rightly directed to be refunded.  

11.     The appeal is sans merit and, therefore, deserves  dismissal, which we direct. There will be no order as to costs.