Patna High Court
Geeta Prasad Singh And Co. And Ors. vs The State on 10 February, 1986
Equivalent citations: [1986]63STC337(PAT)
JUDGMENT Uday Sinha, J.
1. These four writ petitions under Articles 226 and 227 of the Constitution raise common questions of law. They have, therefore, been heard together and are being disposed of by this common judgment.
2. The questions agitated at the Bar are pure questions of law. They relate to the ambit/vires of notifications (annexures 1, 1/A and 1/B, all dated 7th November, 1984). As a follow up of those annexures, the Bihar Government in the Finance (Commercial Taxes) Department issued notice (annexure 2) whereby all Government departments, Board and Organisations were directed to deduct 4 per cent of the bills of all contractors engaged in works contract. In essence, the petitioners have prayed for quashing of annexures 1 series and annexure 2. Since the questions agitated are pure questions of law, it is not necessary to advert to the additional prayer of the petitioners in the different writ petitions for quashing the deductions in the bills of the petitioners.
3. The petitioners are contractors registered with various departments of Government of Bihar for executing works contracts. In terms of the contracts, materials like bitumen, "cement, steel rods, etc., are/were to be supplied to the petitioners by the Government. The value of the materials supplied was to be deducted from the bills of the contractors. In terms of annexures 1 series and annexure 2 the departments deducted 4 per cent from their entire bills. That brought the petitioners rushing to this Court. According to the petitioners, they were liable to pay tax only upon the value of the materials supplied/sold by them to the Government. On the face of it the contention of the petitioners appeared sound. Rules were, therefore, issued and by various ad interim orders, it was ordered that deduction of only 4 per cent of the value of materials supplied/not of the entire bills could be deducted. The rest of the bills should be paid to the contractors.
4. The broad questions falling for consideration are only two. The first question agitated before the Bar is that payments made in respect of works contract as a whole cannot be subjected to sales tax by the State Legislature or by the State Government. The second submission advanced by Mr. Bindeshwari Choudhary was that if the Government was entitled to deduct 4 per cent of the bills in terms of the notifications, referred to above, the State Government was liable to reimburse the contractors in regard to the taxes realised from them.
5. The stand of the State, on the other hand, is that the deductions ordered to be made from the total bills of the contractors were not tax realised from them, but the deduction was only a mode of collection of sales tax in respect of materials supplied by the contractors. Learned Advocate-General was candid in conceding that the materials supplied by the contractors alone were sales and tax could be levied and realised only in respect of materials supplied/sold by them. He stated in unmistakable term that the State Government had no intention of collecting tax on the entire bills of the contractors which would include payments for labour as well as materials supplied. Let us test the validity of the submissions urged on behalf of the petitioners. Another matter which I would like to set out clearly here and now is that the petitioners do not dispute that they would be liable to pay sales tax on materials supplied by them. The materials may be supplied either by the contractors from the market or they may be supplied to them through the department, the value for which may be deducted from their total bills, would attract the eye of the sales tax.
6. In 1982 the Constitution was amended by the Constitution (Forty-sixth Amendment) Act, 1982. Section 4 thereof introduced Sub-article (29A). Article 366 lays down that the expressions mentioned therein in the Constitution have the meanings respectively assigned to them in that article. In that behalf Sub-article (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;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;
In a way this amendment of the Constitution removed the difficulty created by the decision of the Supreme Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353 (SC); AIR 1958 SC 560 in levying sales tax on materials sold by the contractors. That was a composite contract for supply of materials as well as for labour. The levy of sales tax on materials supplied was countered by the assessee on the footing that the labour contract and contract for supply of materials being inextricably linked could not be brought to tax. The amendment of the Constitution thus lays down that tax on sale or purchase of goods include tax on transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract. The bar of taxability on supply of materials involved in the execution of a works contract was thus removed. In 1981 the Bihar Sales Tax Act was repealed and was supplanted by the Bihar Finance Act, 1981. In 1984 the State Legislature enacted the Bihar Finance Act, 1984. Section 25A thereof reads as under:
25A. Tax deductions from the bills/invoices of the works contractors.--(1) Notwithstanding anything contained in Section 26, every person making any payment or discharge of any liability on account of valuable consideration payable for the transfer of property in goods, whether as goods or in some other form, involved in the execution of works contract shall be lawfully competent to deduct an amount not exceeding four per centum purporting to be a part or full of the tax payable on such sales, from the bills or invoices raised by the works contractor as payable by the person:
Provided that no such payment or discharge of any bill raised by a works contractor shall be made without deduction referred to in Sub-section (1):
Provided further that if the State Government is satisfied that it is necessary to do so in the interest of the State revenue it may notify the names/posts of such persons who shall be lawfully competent person to make such deduction as referred to in Sub-section (1).
(2) The deduction referred to in Sub-section (1) shall be made in the manner which may be prescribed.
(3) The payment of such deduction into the Government treasury shall be the responsibility of the person making such deduction.
(4) The person making such deduction shall issue deduction certificate in the prescribed manner to the person or dealer from whose bill or invoice such deduction has been made.
(5) If any person contravens the provisions of Sub-sections (1), (3) and (4), the prescribed authority shall, after giving an opportunity of being heard in the manner prescribed, by an order in writing, direct that such person shall pay by way of penalty, a sum not exceeding twice the amount so deducted and not deposited into the Government treasury in the manner prescribed.
As a follow up of Section 25A, the Bihar Government framed new rules. Rule 26A laid down that the deduction was to be made at the rate notified by the Government from time to time. In November, 1984, comprehensive amendments were made in the Rules. The first amendment is annexure 1 to C.W.J.C. No. 3420 of 1985. Rule 26A prescribed the modality for deduction of sums from bills of contractors. Rule 26A so far as is relevant reads as follows:
26A. Deduction of the tax from the bills/invoices of works contractors under Section 25A.--(1) The deduction referred to in Sub-section (1) of Section 25A shall be made at the rate notified in this behalf from time to time by the Government.
(2) Such deduction shall be made from all payments being made in respect of all works contracts executed, whether in part or in full, after 1st April, 1984, provided the total value of works contract or contracts exceeds Rs. 25,000.
In this batch of cases we are concerned with cases involving works contract of the total value of sums exceeding Rs. 26,000. While Rule 26A (annexure 1) enjoins deduction from all payments, annexure 1/A prescribes the authority who has the right/liability to make the deduction. By annexure 1/B the Governor of Bihar directed that an amount equal to four per centum of the bill was to be deducted in terms of Section 25A.
7. Item 54 in List II of the Seventh Schedule to the Constitution empowers the State Legislature to enact laws imposing taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92-A of List I. It is not in controversy that sales tax has the sanction of item 54. Long arguments were addressed and with some amount of vehemence that the State Legislature has no power to enact law levying sales tax where no sale was involved. There can be no controversy about this position in law and the learned Advocate-General did not contest this proposition. In view of the stand of the learned Advocate-General there is no controversy that it is sale alone which can be taxed. Transactions which do not involve sales cannot fall within the mischief of the sales tax law. If there were such a law, that would be ultra vires the Constitution. In that background, it has to be considered whether Section 25A of the Act or Rule 26A of the Sales Tax Rules imposes tax on execution of works contracts or labour contracts as they are called. For that we have to examine the nature of the deduction. The heading of Section 25A reads as "Tax deductions from the bills/invoices of the works contractors". Sub-section (1) thereof quoted earlier empowers a person or authority to deduct four per cent from the bill. That deduction will be deemed to be part or full of the tax payable on sales which enjoin all persons making payments to deduct. It enjoins that no payment should be made without deduction. Sub-rule (1) of Rule 26A lays down that the deduction shall be made at the rate notified in this behalf from time to time by the Government and Sub-rule (2) thereof enjoins deduction from all payments being made in respect of all works contracts, provided of course, the total value of works contract or contracts exceeds Rs. 25,000. On the face of it, it appears that the deduction is of sales tax from the total bill of the contractors. The various provisions made in this behalf, however, present a different picture.
8. Paragraph 13 of the Bihar Sales Tax Rules (see annexure 1 at page 36 in C.W.J.C. No. 3420 of 1985) refers to form XII. It introduces Clauses (g) and (h) in form XII. These are:
(g) Deductions, if any, on account of labour charges involved in the execution of works contract...Rs.
(h) Deduction on account of transfer of right to use any goods for purposes other than in course of business...Rs.
The amended Rule 9 (amended by paragraph 15) reads thus:
9. Maintenance of separate accounts by dealers.--(1) Every dealer who sells or purchases goods, involved in execution of any works contract shall keep accounts separately in respect of each works contract of all goods, purchased or received and sold, supplied or delivered (whether as goods or in some other form) as well as of all receipts and payments.
(2) Every dealer who makes first sale in the State of Bihar of goods notified under Sub-section (2) of Section 11 shall keep a separate trading account in respect of goods mentioned in the notification.
Rule 26A lays down an elaborate procedure in regard to the duties of the officer who makes the deduction. The person making the deduction is required to deposit the sum by the 15th of the following month in the Government treasury by separate treasury chalans in form XVII in quadruplicate. After depositing the sum deducted, the person making the deduction is enjoined to send to the Commercial Taxes Officer of the concerned area quarterly return in form A-II on 31st July, 31st October, 31st January and 30th April in respect of the deductions. Sub-rule (6) provides that any deduction made in accordance with the provisions of Sub-section (1) of Section 25A and paid in the Government treasury shall be treated as payment of the tax on behalf of the works contractor from whom such deduction was made and credit shall be given to Mm for the amount so deducted and deposited in the Government treasury. The full scheme thus is as follows. Every transfer of goods involved in the works contract is sale and exigible to tax. This position is not contested by the petitioners. The next stage is that certain deductions will be made in terms of Section 25A from the total bill of the works contractor. After the deductions have been made, they will be deposited in the Government treasury. The deducting officer will inform the Sales Tax Officer about the deductions. After this stage, the sales tax law takes off. In terms of the sales tax law the Sales Tax Officer will assess the works contractor in respect of the sales effected, i.e., in respect of the goods sold by the contractor to the other party. After assessments have been completed, the Sales Tax Officer will proceed to make the demand or refund, as the situation may warrant. Section 42 of the Bihar Finance Act, 1981, provides that the taxing officer shall refund the amount paid by a dealer in excess of the amount finally determined. It is thus obvious that the assessment of tax has to be, and will be done by sales tax authority. The persons making the deductions are not the taxing authorities. It is thus obvious that they only deduct 4 per cent of the value of the total bill in a works contract agreement. This provision encompasses not only Government departments, but all persons entering into works contract.. It may involve private individuals or companies. Annexure 1/A which is a copy of Notification No. S.O. 1210 dated 7th November, 1984, shows that the Governor of Bihar has notified every person, officer or authority, by whatever name called or designated, of the Central and State Government undertaking, company, corporation and body corporate, local authority, autonomous board, body and institution, co-operative society or any other society, club or association of persons, firm or voluntary organisation or any other organisation authorised or made responsible for making any payment or discharge of any liability on account of valuable consideration payable for transfer of property in goods as the person lawfully competent to deduct. Surely corporations, clubs, society, etc., cannot assess or impose tax. They can only deduct. The deduction thus is certainly no taxation. It is only a mode of recovery of sales tax and is meant to secure Government revenue. Section 25A may be read as an extension of Section 25. The heading of Section 25 is "Payment and recovery of tax". Section 25A must also, therefore, be read as the mode of recovery of tax. Section 27 prescribes for "Special mode of recovery" of tax. Thus, Sections 25, 25A and 27 are modes of recovery of sales tax. Section 28 deals with the period of limitation for recovery of tax. From the study of these provisions, it is thus obvious that Section 25A is not a taxing section, but it is only law in regard to recovery of tax.
9. It partakes the character of advance tax. The principle of recovery of advance tax is not new. That concept of advance tax finds place in the Income-tax Act as well. In this connection, it will be useful to refer to Section 194C of the Income-tax Act, 1961, which reads as follows:
194C. Payments to contractors and Sub-contractors.--(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and--
(a) the Central Government or any State Government; or
(b) any local authority;
(c) any corporation established-by or under a Central, State or Provincial Act; or
(d) any company; or
(e) any co-operative society, shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
(2) Any person (being a contractor and not being an individual or a Hindu undivided family) responsible for paying any sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the subcontractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax on income comprised therein.
From the above it will be seen that in regard to works contract two per cent of the sum to be paid has to be deducted by the authorities making the payments. The provisions of Section 25A of the Bihar Finance Act, 1981, are in pari materia with those of the Income-tax Act. Section 25A, Rule 26A and the notifications issued to fulfil those objects are thus mere modes of recovery of tax on sales. The total amount of the bill in case of works contract is not exigible to tax. What is exigible is only the sales effected by transfer of property in goods under a works contract.
10. Is the deduction confiscatory ? I have shown above that no exception can be taken to deduction of tax in advance. Section 12 of the Bihar Finance Act, 1981, as amended in 1984 provides that sales tax may be levied between eight per cent and twenty-five per cent. Deduction of four per cent, therefore, cannot be held to be excessive. The Indian Income-tax Act enjoins deduction of two per cent. The Bihar Sales Tax Act enjoins deduction of four per cent.' It is well-known that in most works contracts the percentage of the value of goods to be supplied is more than the payment for labour. It is, therefore, not unreasonable to deduct four per cent of the total bills. This cannot be said to be excessive, where the total bill is to the tune of rupees five lacs, the sum deducted will be about Rs. 20,000. This is certainly not excessive and beyond the means of the contractors. In my view, there will be very few cases where the value of materials supplied would be less than four per cent of the total bill. I have, therefore, not the least hesitation in holding that the provisions relating to deduction of four per cent of the total bills are not confiscatory.
11. Having looked at the entire scheme of law, I have not the least hesitation in holding that Section 25A, Rule 26A and the Government notifications (annexures 1, 1/A and 1/B) are modes of recovery of tax. They are not taxing provisions. They thus in no way infringe Article 366(29A) of the Constitution. They do not levy tax on subjects which are not sales. They do not transcend the limitations of item 54 in List II of the Seventh Schedule to the Constitution. The attack on the vires of the provisions and the validity of the State action has no substance and must be rejected.
12. Mr. G.C. Bharuka, learned Counsel for the petitioners, submitted that if the sums payable to the works contractor are not relatable to sales, the legislature has no power to legislate for deduction of something which is not sale. Reliance was placed upon Kunnathai Thathunni Moopil Nair v. State of Kerala AIR 1961 SC 552 at paragraph 8 where it was laid down that tax cannot be levied and deduction cannot be made from something which is not taxable. In my view, the reliance placed upon the Supreme Court decision has no substance. That was a case of imposition of tax. This is not a case of imposition of tax. It is only a mode of recovery of tax in advance. It can adversely affect only unscrupulous taxpayers and taxing officers. In normal course it is likely to be of great relief to the persons liable to pay tax. After the assessment has been done, he will find that he has already paid part of the tax. If the tax paid is in excess, he may be entitled to some interest as well. In that view of the matter, no legal objection can be raised to this mode of deduction of tax. The submission advanced on behalf of the petitioners has no substance and must be rejected outright.
13. It only remains to take note of some contracts where no sale is involved. It is not inconceivable that the works contract may relate only to supplying labour. In those cases, it goes without saying that no deduction can be made. Learned Advocate-General was candid in conceding that where the contract is only for labour and not supply of any material, statutory deduction is not permissible, and would not be made. He filed in court a circular issued by the Works Department to show that any contracts where no sales are involved, deductions should not be made. Such contracts arise generally in the Minor Irrigation Department where only earth work is involved. Contractors engaged in such works need have no apprehension. We, therefore, hereby order that the statutory deduction of four per cent of the bill will not be done by the person making the payment if there is no transfer of property in goods.
14. Mr. Bindeshwari Choudhary, the learned Counsel for the petitioner, as stated earlier, contended that in terms of Section 64-A of the Sales of Goods Act, in case there is a statutory deduction, Government was liable to reimburse such contractors. We are not concerned with the rights of the parties. If the contractors are entitled to reimbursement on account of levy of sales tax, they will rough it out with the Government and claim reimbursement. That is a separate matter. That does not affect the vires or validity of the power to deduct. The submission of Mr. Bindeshwari Choudhary, therefore, has no substance and must be rejected.
15. For the reasons, stated above, I am of the view that Section 25A is intra vires the Constitution. So is Rule 26A of the Bihar Sales Tax Rules, 1983. The notifications (annexures 1 series) and notice (annexure 2) are not open to attack. The deductions effected in annexure 3 are perfectly right. The applications must, therefore, fail. They are dismissed accordingly with costs. Hearing fee Rs. 250 in each case.
Nazir Ahmad, J.--I agree.