Karnataka High Court
B. Seenaiah & Co. vs Deputy Commissioner Of Commercial ... on 25 September, 1997
Equivalent citations: ILR1998KAR1178
Author: Tirath S. Thakur
Bench: Tirath S. Thakur
ORDER Tirath S. Thakur, J.
1. A Division Bench of this Court in KEC International Limited v. State of Karnataka [1997] 105 STC 192 examined the constitutional validity of section 19A of the Karnataka Sales Tax Act, 1957, which made a provision for deduction at source from amounts payable to a dealer in respect of works contracts of the nature specified in the Sixth Schedule to the Act. The challenge was mainly based on the plea that section 19A, authorised deduction of tax on the total amount of works contract without making any provision for deduction of the value of certain components of such contracts which were not otherwise exigible to tax. Relying upon the decision of the Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan , this Court held that the entire amount payable under a works contract was not exigible to Central or State sales tax and that the taxable amount has to be calculated out of the total amount on the principles stated by their Lordships in the aforementioned judgment. It was held that section 19A made a provision for deduction of tax at certain percentages on the total amount payable to a dealer in respect of a works contract which meant that such deductions have to be made even on the amount which were not otherwise exigible to tax, but which sometimes form an integral part of the total amount. While repelling the argument that section 19A was only a machinery provision, meant to make the charging section effective, the court held that an ancillary provision could not go beyond the legislative power of the State and must confine itself to the power conferred on it by an entry in one or the other lists enumerated in the Constitution. The court upheld the argument that in the garb of the machinery provisions made by the Legislature for recovery of a tax it could not enact a provision under which advance tax could be levied even in respect of the amounts that were not exigible to tax either under the State or the Central sales tax enactments. The provisions of section 19A were accordingly found to be ultra vires of the Constitution struck down. The reasoning for the view proceeded thus :
"........... It is clear from the above decisions of the Supreme Court referred to above that a works contract may take in turnover which is exigible to tax either under the State Act or under the Central Act, there are other components in a works contract, viz., charges for labour and services which are not exigible to tax at all to be deducted from the value of the works contract for the purpose of determining the tax liability. No provision is made in section 19A even tentatively to give deductions for the aforesaid amounts and the amount is deducted at a flat rate from the total amount payable to the contractor which is not constitutionally permissible. As stated earlier, the power under entry 54 is restricted by various constitutional inhibitions and other provisions which are not reflected at all in section 19A of the Karnataka Sales Tax Act. Accordingly, we do not find our way to agree with the learned single Judge and in reversal of the same, we hold that section 19A of the Karnataka Sales Tax Act is constitutionally invalid and liable to be struck down. As stated earlier, the power of the State Legislature for making a provision for collection of tax in advance cannot be doubted but in so far as section 19A is concerned, it directs deduction of tax at a flat rate from the total amount of the contract amount which is impermissible. The invalidity of the above section goes to the root of the imposition of the advance tax and in the absence of the said provision, advance tax cannot be levied.
In view of what is stated above, these appeals are allowed. The judgment of the learned single Judge is set aside and it is declared that section 19A of the Karnataka Sales Tax Act is unconstitutional and void."
2. With a view to rectifying the defects highlighted by the court, the Legislature has substituted the provisions of section 19A, by a new provision under the Karnataka Taxation Laws (Amendment) Act, 1997. The substituted provision of section 19AA as it now stands in the statute book and to the extent the same is relevant for the present reads as under :
"19-A. Deduction of tax at source. - (1) Notwithstanding anything contained in this Act, the Central Government, or any State Government, or an industrial, commercial or trading undertaken of the Central Government or of any State Government, or a local authority or a statutory body, shall deduct out of the amounts payable by them to a dealer in respect of works contracts of the nature specified in the Sixth Schedule executed for them, in the State, an amount calculated, -
(a) in the case of a dealer who is permitted to pay amount by way of composition under sub-section (6) of section 17, at the rate of four per cent of the total amount to such dealer;
(b) in the case of a dealer other than the dealer referred to in clause (a), at the rates specified in the Sixth Schedule :
Provided that, -
(i) no such deduction shall be made if the amount payable to a dealer by the authorities mentioned in sub-section (1), is less than one lakh rupees in a year; or
(ii) if any works contract for execution for the authorities mentioned in sub-section (1), involves only labour or service but does not involve transfer of property in goods and it is certified to be so by the assessing authority or by the assessing authority of the area on an application made by any dealer, the provisions of sub-section (1) shall not apply and every such application shall be disposed of by the assessing authority within one month from the date of receipt, either by issue of a certificate as aforesaid or by endorsement intimating to such a certificate to the dealer, as the case may be;
(iii) in case of a dealer mentioned in clause (b), in respect of any other works contract which involves partly labour or service and partly transfer of property in goods, the total amount on which tax is calculated under sub-section (1), shall be the total amount payable to the dealer as reduced by twenty-five per cent thereof as tentatively representing cost of labour or service.
(2) The authority making deduction under sub-section (1), shall send every month to the prescribed authority a statement in the prescribed form containing particulars of tax deducted during the preceding month and pay full amount of the tax so deducted by it within twenty days after the close of the preceding month in which such deductions were made and the amount so payable shall for the purposes of section 13 be deemed to be an amount due under this Act :
Provided that where default is made in complying with the provisions of this sub-section, the prescribed authority may, after such enquiry as it deems fit and after giving opportunity to the concerned authority of being heard, determine to the best of its judgment, the amount payable under this sub-section by such authority and the amount so determined shall be deemed to be an amount due user the Act for the purposes of section 13.
(3) to (5)................"
3. A bare reading of the above would show that there is a specific provision now incorporated in section 19A, under which in the case of "works contracts" which involve only labour or service, it is possible for the dealer executing such contracts to apply to the assessing authority for a certificate to the effect that the provisions of sub-section (1) of section 19A, do not apply to such a contract. Any such application is required to be disposed of by the assessing authority within one month from the date of receipt, either by issue of a certificate as aforementioned or by an endorsement intimating to the dealer his ineligibility for the grant of the same. In the case of dealers executing works contracts which involve party labour or service and partly transfer of goods, the substituted provision permits a tentative deduction to the tune of 25 per cent from the total amount payable to the dealer towards the costs of labour or services. Deduction of tax at source under sub-section (1) of section 19A is thus made at the prescribed rates on only 75 per cent of the total receipts disbursed to a dealer executing such contracts.
4. The petitioner who is a class-1 contractor presently engaged in the construction of a road in Belur Industries Area in Dharwad is dissatisfied with the machinery provided by section 19A, even in its present incarnation. He has questioned the provisions of section 19A, on the basis of a three-fold argument. firstly, it is contended that since section 5B of the Act read with Rules permits full deduction of the amount received on account of labour or services provided, section 19A should also have provided for the same. Secondly, it is urged that even in cases where the books of account maintained by the dealer were not accepted by the assessing authority, deductions on account of labour and other charges were admissible to the extent of 30 per cent of the total contract receipts. In having provided for a deduction to the extent of only 25 per cent of the contract receipts, the provisions of section 19A, argued the learned counsel, do not adhere to the well-recognised principle that no tax can be levied or recovered on services and charges that are not otherwise taxable. Thirdly, it was contended the instead of fixing the permissible deductions at a static rate of 25 per cent of the total receipts, the Legislature ought to have left it to the assessing authority to determine in his wisdom, having regard to the nature of the contract under execution, the extent of deductions that would be justified. Such a provision, argued Mr. Narayan would have been more in tune with the spirit of law which frowns at deductions from payments that are not truly taxable. Such deductions if permitted would be confiscatory depriving the assessee concerned not only of the amount lawfully due to him but even compensation for such deprivation in the form of interest.
5. I have given my anxious consideration to the submissions made at the Bar. Tax on transfer of property in goods involving execution of works contracts is chargeable under section 5B of the Act, which provides that every dealer shall pay for each year a tax under the 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 rate specified therein. Section 19A, as it originally stood, as also as it stands now was and continues to be a machinery provision meant to effectuate the provisions of the charging section. It only permits deduction of tax payable under section 5B at the source from where payments for such contracts are made provided the contracts are executed for the Central Government, any State Government or any industrial, commercial or trading undertaking of such Governments or for any local or statutory authority.
6. That the Legislature could in exercise of its taxing power under entry 54 of the State List provide for deduction of the tax levied by it at source has not been disputed, as indeed the same could not be disputed for the power to levy a tax must of necessity carry with it the incidental power of recovery of such tax including a recovery made at source from where payments representing the turnover subject to tax flow. A provision made for any such deduction at source, has therefore to be distinguished from the charging section and understood as a provision made in the nature of a machinery provided for the recovery of the taxes that are validly levied. Such a provision may provide for a recovery on a tentative basis both as regards the total amount on which the recoveries are made as also the rate at which the same are made. Section 19A, as it stood, authorised deductions at source, at a rate lower than the one at which works turnover was taxable under the Sixth Schedule. For instance, in the case of "works contracts" falling under Sl. No. 6 of the Sixth Schedule, it permitted deduction at the rate of 2 per cent of the total amount payable to the dealer against a rate of 8 per cent otherwise prescribed by the Schedule. In regard to the rest, it prescribed a uniform rate of 4 per cent even though the rate prescribed in the Sixth Schedule varied from 4 per cent to 15 per cent. The substituted provision however, classifies the dealers differently for purposes of deduction at source. It permits deduction at source at the rate of 4 per cent of the total amount payable to such dealers in cases where the dealers are permitted to pay the tax amount by way of composition under sub-section (6) of section 17 of the Act. In the remaining cases, the substituted provision permits deduction at source at the rates specified in the Sixth Schedule which are the rates otherwise prescribed for purpose of section 5B also. The question then is whether the deduction at source of tax at the prescribed rate could be found fault with even when there is no legal infirmity in the levy of the said tax under section 5B of the Act. In the case decided by the division Bench the challenge to section 19A, as it then stood, had succeeded because the provision was found to prescribe a uniform rate but deduction at source without prescribing even tentatively a deduction on amounts that the dealer may have received by way of service or labour charges not otherwise eligible to such tax. This Court found that in the works contracts where transfer of property in goods is accompanied by labour and service charges deduction of tax at source, at a uniform rate without providing for any deduction for amount that were not otherwise taxable would go beyond the power of the Legislature to prescribe a machinery for effectuating the charging provisions of the Act. That defect has, in my opinion, been sufficiently removed by the Legislature in the provisions of section 19A as it now stands. As noticed earlier, the provisions of section 19A, clearly recognises the right of a dealer to prevent deduction at source by proving to the satisfaction of the assessing authority and obtaining a certificate from him to the effect that the "works contract", being executed by any such dealer involves only labour and/or services without involving any transfer of property in goods. The provision thus clearly identifies cases in which no deductions would be permissible having regard to the fact that the amounts received by the dealer are referable only to labour and services provided by him. Even in cases where the dealer is executing "works contracts" which involve partly labour or service and partly transfer of property in goods, the provision now recognises the fact that the payments made to the tune of 25 per cent would be tentatively taken as payments representing the cost of labour or service and would therefore be executed from consideration while deducting the tax at source. Unlike the provisions of section 19A, as it originally stood, the provisions section 19A now on the statute book permit deductions no matter on a tentative basis. The absence of any such provisions, in section 19A, as it then stood alone was the basis of this Court holding that the provision was unconstitutional for in the absence of such a provision, the deduction at source would be even in respect of amounts that are received by the dealer but are not otherwise taxable under the Act. The decision of this Court does not however lay down that deductions for purposes of recovery of tax at source ought to be to the fullest extent possible or that the validity of the provision permitting such deductions could be judged on golden sales. What was found unacceptable by the court was the absence of a provision in section 19A permitting deductions even on a tentative basis in regard to amounts that were not admittedly taxable. That however is not the position in section 19A as it now stands. Not only does the provision permit total exclusion of such deductions in cases where the works contract involves only supply of labour or services but it permits deductions even in contract involving transfer of goods to the extent of 25 per cent of the total receipts. Just because the deductions are tentative in nature or the same are less than the total deductions that the dealer might on regular assessment be found entitled to, cannot possibly affect the validity of a machinery provision. What is important is not whether the machinery provided by the provision is effective and correct to the last farthing even at an interim stage of deductions at source but whether the machinery provision recognises the broad principle and excludes from recovery amounts that are not subject to tax. The provisions of section 19A, are to an extent presumptive in nature. They recognise subject to a regular assessment being completed in due course that any contract involving both transfer of goods and providing service and labour, the component attributable to "service" and "labour" should be to the extent of 25 per cent of the total receipts. This presumption, there is no gain-saying is tentative as indeed, the provision itself says so and would therefore be clearly rebuttable by the assessee in the course of the final assessment. The argument that while providing for a deduction the machinery by which the deductions could be granted to the extent of 100 per cent even at the pre-assessment stage or at least permitted such deductions at the optimum level of 30 per cent admissible in cases where the books of accounts maintained by the dealer were not acceptable also does not impress me. It is fairly well-settled that while a taxing provision is not immune from a challenge on the touch-stone of the provisions contained in the Constitution, yet in the field of taxation the Legislature exercises an extremely wide discretion in classifying items for purposes of tax and making machinery provisions for recovery of the tax levied. So long as the Legislature refrains from a clear and hostile discrimination or an intrusion which can be said to be unconstitutional, the court would not substitute their own standards or classifications made by the former or even prescribe rate, no matter the same may appear in their wisdom to be more reasonable or rational. In Venkateshwara Theatre v. State of Andhra Pradesh , the Supreme Court quoted with approval the following passage from the decision of San Antonio Independent School District v. Rodrigues [1973] 411 US 1, where Justice Stewart, speaking for the majority observed thus :
"No scheme of taxation, whether the tax is imposed on property, income or purchases of goods and services, has yet been devised which is free of all discriminatory impact. In such a complex arena in which no perfect alternatives exist, the court does well not to impose too rigorous a standard of scrutiny lest all local fiscal schemes become subject of criticism under the equal protection clause."
7. In Union of India v. Sanyasi Rao , the Supreme Court was examining the constitutional validity of section 44AC of the Income-tax Act, which made a special provision for computing profits and gains from business of trading in certain goods. Section 206C of the Income-tax Act provided for deduction at source of income-tax from persons carrying trading activities in alcoholic liquor, forest produce and scrap, etc., and authorised deduction at source by way of tax under the Act, a sum equal to 15 per cent of the amount paid by such dealer towards the purchase of goods by him. The provisions enabled the revenue to estimate the profits of a person engaged in the trades mentioned above on a presumptive basis. Upholding the provision, the Supreme Court held that the same had been enacted in the light of the practical difficulties faced by the Revenue. Such provisions aimed at facilitating collection of the tax on a presumptive basis, it was declared as not offensive to article 14 of the Constitution.
8. In the present case also, the deduction at source is made on a presumptive basis only though the method prescribed for such deduction is different. Here instead of the assessee depositing money at the prescribed rate for the purchase of goods of the prescribed nature, it is the authority making the payment to the dealer who is supported to deduct tax at the prescribed rate after giving a deduction prescribed tentatively towards the cost of labour or services. The deduction at 25 per cent apart from being tentative can also not be termed arbitrary having regard to the fact that the rules made under the Act provide for a deduction ranging from 20 to 30 per cent in the case of "works contract" depending upon their nature in cases where the books of accounts maintained by the dealer are not acceptable. So also it was not necessary that even for the purposes of deductions at source based on a tentative assumption of the taxable turnover, the Legislature ought to have provided for a machinery that was perfect in all respects. Insistence upon the law providing for a machinery which could work out the tax liability or the admissible deductions correct to the last penny amounts to insisting upon making a final assessment at every stage in the execution of a contract which I am afraid is neither warranted nor necessary.
9. There is yet another aspect which cannot be ignored. In terms of section 12(5) as it stood originally, the assessing authority could make an assessment order within a period of three years from the date on which a return under sub-section (1) of section 12 was submitted by the dealer. The amending Act, while substituting section 19A, has simultaneously amended section 12(5) also to provide that the assessments shall be completed within two years from the dates on which the returns are filed under sub-section (1) of section 12. There is therefore merit in the submission made by the Government Pleader that the reduction in the period of limitation prescribed for completing the assessments is meant to proportionately reduce any prejudice that an assessee may suffer should it be found that an amount in excess of what was actually payable.
In the result, I see no merit in this petition, which fails and is accordingly dismissed.
10. Petition dismissed.