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PETITIONER: STATE OF KERALA & ANR.

       Vs.

RESPONDENT: BULDERS ASSOCIATION OF INDIA & ORS.

DATE OF JUDGMENT:       28/11/1996

BENCH: B.P. JEEVAN REDDY, SUHAS C. SEN

ACT:

HEADNOTE:

JUDGMENT:                THE 28TH DAY OF NOVEMBER, 1996 Present:               Hon’ble Mr. Justice B.P. Jeevan Reddy               Hon’ble Mr. Justice Suhas C. Sen A.S. Nambiar, Sr.Adv. and M.T. George. Adv. with him for the appellants. K.M. Vijayan,  Sr.  Adv.,  K.V.  Mohan,  E.M.S.  Anam,  (Roy Abraham) Adv.  for Ms. Baby Krishnan, Advs. with him for the Respondents J U D G M E N T      The following Judgment of the Court was delivered:                       J U D G M E N T      B.P. JEEVAN REDDY, J.      Leave granted.      Section 5  of the  Kerala General  Sales Tax Act levies tax on sale or purchase of goods. Clause (iv) of sub-section (1) of  Section 5  provides for  levy of  tax on transfer of goods involved  in the execution of the works contract. Sub- clause (a)  of clause  (iv) of  clause  (iv)  deals  with  a situation where  "transfer is in the form of goods". IN such a case, the rates and the point of levy are specified in the First, Second  or Fifth  Schedule to the Act. Sub-clause (b) deals with a situation where the "transfer of goods involved in the execution of works contract.....is not in the form of goods but  in some  other form". In such a case, the rate is specified in  the Fourth  Schedule to the Act. There are two provisos to  clause (iv)  which we need not refer to for the purpose of  this case. Section 7 provides for payment of tax at compounded  rates. We  are  concerned  herein  with  sub- sections (7),  (7A), (7B),  11 and  12 which  were  inserted along with  certain other  provisions by  Act 23 of 1991 and Act 8 of 1992. Sub-section (7) provides:      "Notwithstanding anything contained      in sub-section  (1) of  Section  5,      every  contractor   (engaged?)   in      civil  works   of  construction  of      buildings, bridges, roads, dams and      canals  including   any  repair  or      maintenance of such civil works may      at his  option, instead  of  paying

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    tax in  accordance with clause (iv)      of that sub-section, pay tax at the      rate of  two per  cent on the whole      amount of  contract and which shall      be deducted  from the payments made      by  the   awarder  at   every  time      including advance payment and shall      remit to  Government in such manner      as may be prescribed".      Sub-section (7A)  provides for  a similar option to pay at a  uniform specified  rate in  case  of  contractors  not covered by sub-section (7). Sub-section (7A) reads:      "(7A)   Notwithstanding    anything      contained  in  sub-section  (1)  of      section  5   every  contractor  not      covered  by   sub-section  5  every      contractor  not   covered  by  sub-      section  (7)  may  at  his  option,      instead of paying tax in accordance      with the  said section,  pay tax on      the whole amount of contract at the      rate of  seventy per  cent  of  the      rates shown  in the Fourth Schedule      against such contract, less any tax      paid by  him under  this Act on the      purchase of  any goods used in such      contract, the  transfer of which to      the  works  contract  was  effected      without    any     processing    or      manufacture;      [Proviso omitted  as  not  relevant      for the purpose of this case.]      Sub-section (7B)  provides that  the tax  under  clause (iv) of  sub-section (1) of Section 5 and under sub-sections (7) and  (7A) of  this section  shall be  deducted from  the payment made  by the awarder at every time including advance payment and  remit it to Government within seven days in the prescribed   manner.   Sub-section   (ii)   required   every contractor who  opts for  payment of  tax in accordance with sub-section (7)  or sub-section  (7A) of  Section 7 to "file the returns  showing all  the contracts  he  has  undertaken along with certificates from the awarders, showing the whole amount of  contract and  the details  of  tax  deducted  and remitted to  Government". The  sub-section further says that if the  particulars so furnished are found to be correct and complete, the  assessing authority  may  summarily  make  an assessment on  that basis.  Sub-section (12)  provides  that "after the  close of  the year  or at  the completion of the works contract and on receipt of final statement of accounts and return, if the tax on purchases is found to be in excess of the  tax payable under the compounded rates, no refund of such excess tax paid shall be made".      Rules  have   been  made  under  and  pursuant  to  the aforesaid sub-sections.  We  are  concerned  with  two  such rules, viz., Rule 22A and Rule 30A. They read as follows:      "22A. Payment  and recovery  of tax      in works contract:-      (1) In  the case  of works contract      on  which   tax   is   payable   in      accordance with  the provisions  of      the Act  whether  an  option  under      sub-section (8)  of  Section  7  is      made or  not, the tax shall be paid      either   by    the   contract    in      accordance with the rules or by the

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    awarder.      (2) Wherever payment is made by the      awarder to the contractor either in      lump sum  for the whole contract or      in installments,  the awarder shall      withhold an amount equal to the tax      due   in    accordance   with   the      provisions of  the  Act  from  such      payment or payments and shall remit      it to  the assessing authority with      whom the contract is registered, as      a  dealer  and  if  he  is  not  so      registered   to    the    assessing      authority having  jurisdiction over      the place of works contract, within      seven  days   of  the   amount   so      withheld along  with a statement in      Form No.21C.      30A(1).  Notwithstanding   anything      contained   in   rule   30,   every      contractor engaged  in civil  works      of   construction    of   building,      bridge, road  or dam may opt to pay      tax in  accordance with sub-section      (7) of section 7 in respect of each      such contract.      Explanation--A    composite     and      indivisible      contract       for      construction of  building shall  be      construed  as   a  civil   work  of      construction of building even if it      involves    works    relating    to      electrical,   sanitary,   painting,      flooring and the like."      [Sub-rules (2)  to (7) - omitted as      unnecessary].      [Rule 22-A has been substantially amended later in 1994 but we are not concerned with the amended rule. We will deal only with  the rule  as it stood when it was considered, and struck down, by the High Court.]      The validity of sub-sections 7,(7A), (7B), 11 and 12 of Section 7  and of  Rules 22A 30A of the Kerala General Sales Tax rules  was challenged in a batch of writ petitions filed in the  Kerala High Court by several builders/contractors. A learned  Single  Judge  dismissed  the  writ  petitions.  On appeal, however,  the Division  Bench has  struck  down  the aforesaid provisions  on the  ground that they are violative of clause (29A) of Article 366 of the Constitution      All the  writ petitioners,  who are respondents in this batch of  appeals, are contractors who have not opted to the composition system provided by sub-section (7) or (7A). This fact has  been repeatedly  ad expressly  stated by  Sri K.M. Vijayan,  learned   counsel   for   the   respondents   writ petitioners. If  so, we are unable to appreciate how and why did they  impugn the  validity of  the said sub-sections are the Rules  made thereunder.  It is obvious that respondents- writ petitioners are shifting their stand in this Court. But for their impugning the validity of the said provisions, the High Court  would not  have gone  into or  considered  their validity. We have perused the judgment of the learned Single Judge dismissing  the writ  petitions and  of  the  Division Bench allowing  the writ  appeals filed  by respondents-writ petitioners. Both  the Judgments clearly state that the writ petitioners challenged  the validity of the above provisions in addition to challenging the validity of Section 5(1)(iv).

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Though the  respondents-writ petitioners  have  not  pressed their challenge  to the  validity of  the  above  provisions before us, it has yet become necessary to consider the issue relating to their validity in view of the fact that the said provisions have  been struck  down by  the High  Court,  the correctness whereof  is being  questioned in  these  appeals preferred by the State of Kerala.      Clause  (29A)  was  inserted  in  Article  366  of  the Constitution by  the  Constitution  [Forty-Sixth  Amendment] Act, 1982. It reads:      "(29A) ‘tax on the sale or purchase      of goods’ includes--      (a)  a   tax   on   the   transfer,      otherwise than  in pursuance  of  a      contract, of  property in any goods      for cash, deferred payment or other      valuable consideration;      (b)  a   tax  on  the  transfer  of      property in goods (whether as goods      or in  some other form) involved in      the execution of a works contract."      The main ground upon which the High Court has held sub- sections (7)  and (7A)  of Section 7 to be void is that they levy tax  at two percent on the whole amount of the contract [sub-section (7)]  or at  a particular  rate applied  to the entire value  of contract  [sub-section (7A)] and not merely upon the  value of  the goods  transferred in  the course of execution of  the works  contract as  contemplated  by  sub- clause (b)  of clause  (29A) in  Article 366. The Court also noticed that  the goods  which are transferred in the course of execution  of a  works contract  may be ‘declared goods’; they may  be goods  which are  liable to  be taxed under the Central Sales  Tax Act; the goods so transferred may also be taxable under  different Schedules  to the  Kerala Act which prescribe different  rates. In such a situation, it is held, levying tax  on the  entire value of the contract means levy of tax  contrary to  the provisions of the Central Sales Tax Act and the Kerala General Sales Tax Act. It also means, the Court held,  taking  the  non-taxable  components  of  works contract, e.g.,  labour and  services  etc.  For  all  these reasons, it  is held,  the  said  sub-sections  are  clearly beyond the  legislative competence of the State legislature. With great  respect, we  are  unable  to  agree.  The  first feature to  be noticed  is  that  the  alternate  method  of taxation provided by sub-section (7) or (7A) 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 (7A). 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 (7A)  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,

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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 (2), (11) and (12) of Section  7 are  incidental and  ancillary to sub-sections (7) and  (7A) 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 (7A)  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 theaters. 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  percent  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 percent 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  (7A) evolve a rough and  ready method of assessment of tax and leave it to the contractor  either to  opt to  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 legislature in the matter of levy  of entertainment  tax has been upheld by this Court in Venkateswara Theatre v. State of Andhra Pradesh [1993 (3) S.C.C.677]. 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 (29A) of  article 366  either.  The  Constitution  does  not preclude  the  legislature  from  evolving  such  alternate. Simplified  and  hasle-free  method  of  assessment  of  tax payable, making  it optional for the assessee. The object of sub-sections (7)  and (7A)  is the  same as  that or Section 5(1)(iv); it  is only  that they follow a different route to arrive at  the same  destination. Several  taxing enactments contain provisions  for composition  of tax  liability which may sometimes be in the interest of both the Revenue and the assessees. It  must also  be remembered that in the field of taxation, the  legislature must  be allowed greater ‘play in the joints’,  as it  is called.  Allowance must also be made for "trial  and error"  by the legislature, as has been held in R.K. Garg v. Union of India [1981 (4) S.C.C.675]:      "Law    relating     to    economic      activities should  be  viewed  with      greater latitude than laws touching      civil rights  such  as  freedom  of      speech, religion etc. It has been s      aid  by   no  less  a  person  than

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    Holmes, J.,  that  the  legislature      should be  allowed some play in the      joints, because it has to deal with      complex problems which do not admit      of solution through any doctrinaire      or straight jacket formula and this      is particularly  true  in  case  of      legislation dealing  with  economic      matters, where,  having  regard  to      the nature of the problems required      to be  dealt with,  greater play in      the joints has to be allowed to the      legislature. The  Court should feel      more  inclined   to  give  judicial      deferene to legislative judgment in      the field  of  economic  regulation      than   in    other   areas    where      fundamental   human    rights   are      involved.....The Court  must always      remember   that   ‘legislation   is      directed  to   practical  problems,      that  the  economic  mechanisms  is      highly sensitive  and complex, that      many  problems   are  singular  and      contingent,  that   laws  are   not      abstract propositions  and  do  not      relate to  abstract units  and  are      not  to  be  measured  by  abstract      symmetry’  that  exact  wisdom  and      nice adaptation  of remedy  are not      always possible  and that ‘judgment      is  largely  a  prophecy  based  on      meagre      and       uninterpreted      experience’.   Every    legislation      particularly in economic matters is      essentially empiric and it is based      on experimentation  or what one may      call trial  and  error  method  and      therefore it cannot provide for all      possible situations  or  anticipate      all possible  abuses. There  may be      crudities   and    inequities    in      complicated  experimental  economic      legislation  but  on  that  account      alone it  cannot be  struck down as      invalid.  The   Courts  cannot,  as      pointed out  by the  United  States      Supreme   Court    in   Secy.    of      Agriculture   v.    Central   Roig,      Refining Co.,  (1950) 94 L.ed.3811,      be  converted  into  tribunals  for      relief  from   such  crudities  and      inequities..... If  any  crudities,      inequities  or   possibilities   of      abuse come to light the legislature      can  always   step  in   and  enact      suitable  amendatory   legislation.      That is  the essence  of  pragmatic      approach  which   must  guide   and      inspite the  legislature in dealing      with complex economic issues."      In our opinion, the above passages from the judgment of the Constitution  Bench furnish  a complete  answer  to  the objections against the validity of the said provisions.      Accordingly,  the   judgment  of   the  Division  Bench

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declaring sub-sections  (7), (7A, (7B), 11 and 12 of Section 7 as  unconstitutional and  void, is  liable to be set aside and is set aside herewith.      In these  appeals, Sri  Vijayan concentrated his attack upon the validity of Rules 22A and 30A alone. His submission is that  Rule 22A  provides for  deduction of  tax at source even in  respect of  amounts payable to contractors who have not chosen  to opt  to  the  composite  method  of  taxation provided by sub-section (7) or (7A) of Section 7. He submits that such  a provision  providing for collection of tax even before the  making of  an assessment  is contrary to the Act besides being  unreasonable and  arbitrary. We  are  of  the opinion that this contention is based upon a misapprehension of the  scope and purpose of Rule 22-A. Sub-rule (1) of Rule 22A says  that whether  a contractor  opts to be governed by sub-sections (7)  and (7A)  or whether  he  is  governed  by Section 5(1)(iv) of the Kerala Act, tax shall be paid either by the  contractor in  accordance with  the Rules  or by the person  who  awards  the  contract.  No  one  can  have  any objection to  sub-rule (1) since it only says that where tax is payable,  it shall be paid either by the contractor or by the awarder  according to  law. Now, coming to sub-rule (2), it is equally applicable to all the contractors whether they are governed  by Section  5(1)(iv) or  by sub-section (7) or (7A) of  Section 7.  What the sub-rule says is that wherever payment is  made by  the awarder  to  the  contractor,  "the awarder shall  withhold an  amount equal to the tax due" and remit the  same to  the assessing  authority. It  is evident that sub-rule  (2) does  not provide for deduction of tax at source like  the one provided by Section 194-C of the Income Tax Act,  1961. Sub-rule  (2) merely  says that where tax is due from  a contractor, the awarder shall withhold an amount equal to  the due while making payment to the contractor. In the case of a contractor who has not opted for the alternate method of taxation and is governed by Section 5(1)(iv), this sub-rule means  that where  tax is due from him according to law and  the awarder  is apprised  of  the  said  fact,  the awarder comes under an obligation to deduct the amount equal to the  tax due  and remit it to the assessing authority. It needs to  be emphasised  that the  sub-rule speaks  of  "tax due". Of  course, so far as the contractor who has opted for the alternate  method of  taxation under  sub-section (7) or (7A) of  Section  7  is  concerned,  the  deduction  at  the prescribed rate  would be  at the  time  of  any  and  every payment by awarder to him, for in his case tax is due at the flat rate prescribed in the relevant sub-section even at the inception of  the contract  and at  all times, until the tax due is  satisfied. We  fail to  see how can any objection be taken to the sub-rule. Sub-rule (3) is really explanatory in nature. It  says that  notwithstanding anything contained in sub-rule (2),  any contractor  who  pays  tax  regularly  in accordance with  the Rules,  shall be entitled to payment of the full  contract  amount  without  any  deduction  by  the awarder,  if   he  produces  a  certificate  issued  by  the assessing authority  to the  effect that  no tax is due from him.  All  these  provisions  are  designed  to  ensure  due realisation of  the tax  due.  No  exception  can  be  taken thereto. The  attack upon Rule 30-A is equally untenable. It merely provides  the procedure according to which the option to come  under the  alternate method of taxation provided by sub-section (7) or (7A) of Section 7 is to be exercised. The Division Bench  was, therefore,  in error  in declaring  the said rules as invalid.      For the  above reasons, the appeals are allowed and the writ petitions  filed by  the respondents  in the High Court

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are dismissed.  The  respondents  shall  pay  costs  of  the appellants, which  are assessed  at Rupees  twenty  thousand consolidated.