The Hindustan Construction Co. Ltd. vs The Assessing Authority

S.M. Fazl Ali, C.J.—This is an application for quashing the order of assessment passed by the Assessing Authority under the Jammu and

Kashmir General Sales Tax Act, 1962 (hereinafter to be referred to as the Act) as upheld by the Sales Tax Commr. which is the final authority

under the Act. The application arises in the following circumstances.

The petitioners are a public limited company incorporated under the Indian Companies Act with their registered office at Bombay. The petitioners

are a firm of Engineers and Contractors and on receiving tender notice for lump sum contracts for construction of bridges in the State, the State

accepted the petitioners' tender and a contract was entered into between the petitioners and the State through the Governor for execution of the

contract. The petitioners submitted that the contract was an indivisible works contract on a lump sum basis. The contract extended to the

construction of a bridge over river Chenab at Bardari near Reasi, two bridges on Beasi-Rajauri road and a road bridge on Suina Nallah. The date

of the contract is 29-7-65 and the date of the completion of the contract varies from 18-6-66 to 13-6-67 which has been extended from time to

time.

The petitioners contend that in the execution of their contract the firm had to undertake sale of various articles directly or through their contractor

used in the building of bridges and for which the State Government had to be charged under the terms of the agreement. It is therefore not disputed

before us that the present contract is a lumpsum works contract and amounts to an indivisible contract of sale. The sales tax authorities have held

that the petitioners are liable to pay sales tax on the various sales incurred by them in connection with the execution of the works contract. The

petitioners contend that the contract of the petitioners being an indivisible one, any transaction of sale which takes place for the purpose of

executing the contract is not covered by the provisions of the Act and therefore the sales tax authorities had no jurisdiction to tax the turnover of

the petitioners.

Mr. Mehta appearing for the petitioners submitted two points before us. In the first place he argued that the State legislature was not competent

to pass any law in order to levy tax on any indivisible contract which fell within the competence of the Parliament under Article 246 of the

Constitution of India or at any rate which was beyond the ambit of the State List. Secondly it was contended that even if the State legislature had

the power to levy tax on an indivisible contract of sale the provisions of the Act did not effectively express an intention to do so and therefore, the

Assessing Authorities had no jurisdiction to levy tax on the petitioners.

As regards the first argument advanced by Mr. Mehta, in our opinion it is wholly untenable in law. Article 246 has not been applied in toto to

the State, for in its application to the State the reference to Clauses (2) and (3) in clause (1) of Article 246, Clause (2) alone has been retained and

clauses (3) and (4) have been deleted. Similarly the words 'Notwithstanding anything in Clause (3)' occurring in Clause (2) of Article 246 have

been omitted. Furthermore, it is not disputed that the State Lists have not been applied to the State of Jammu and Kashmir under Article 370.

Thirdly Section 5 of the Jammu and Kashmir State Constitution provides thus:

The executive and legislative powers of the State extend to all matters except those with respect to which Parliament has power to make laws for

the State under the provisions of the Constitution of India.

From the aforesaid facts it is manifest that the State Legislature enjoys a residuary power of legislating even on subjects which do not fall directly

within the ambit of the State list or the Concurrent List. The only limitation placed u/s 5 on the legislative powers of the State extends to those

matters under which Parliament alone has power to make laws for the State under the provisions of the Constitution of India (Article 246). In this

view of the matter there can be no doubt that the State legislature had power to enact a law for taxing sales which were not only sales simpliciter

but were sales indivisible in character. On being confronted with this position Mr. Mehta did not press his first argument and therefore, this matter

need not detain us any further.

The second argument advanced by Mr. Mehta warrants a serious and careful consideration. Before, however dealing with this argument it may

be necessary to refer to the scheme of the Act and to the intention of the legislature as expressed in the various sections of the Act. To begin with

in The State of Madras Vs. Gannon Dunkerley and Co., (Madras) Ltd., their Lordships of the Supreme Court pointed out that the words 'sale of

goods' appearing in Entry 48 were nomen juris and were to be used in the general sense in which a transaction of sale is legally understood.

In other words the words 'sale of goods' toeing a term of well-known legal significance would have the same meaning as in the Sale of Goods Act.

In this connection their Lordships observed as follows:

On these authorities, the contention of the appellant is well founded that as the words 'sale of goods' in Entry 48 occur in a Constitution Act and

confer legislative powers on the State Legislature in respect of a topic relating to taxation, they must be interpreted not in a restricted but broad

sense.

We must accordingly hold that the expression 'sale of goods' in Entry 48 cannot be construed in its popular sense and that it must be interpreted in

its legal sense. What its connotation in that sense is must now be ascertained.

To sum up, the expression 'sale of goods' in Entry 48 is a nomen juris, its essential ingredients being an agreement to sell movables for a price and

property passing therein pursuant to that agreement. In a building contract which is, as in the present case, one, entire and indivisible -- and that is

its norm, there is no sale of goods and it is not within the competence of the Provincial legislature under Entry 48 to impose a tax on the supply of

the materials used in such, a contract treating it as a sale.

These observations apply with equal force to Entry 54 of State List which corresponds to Entry 48 of the List under the Government of India Act,

1935. The effect of the decision of the Supreme Court, therefore, is that the words 'tax on sale or purchase of goods' as used in Entry 54 would

only have a limited meaning so as to be confined to pure contracts of sale and would not embrace within its ambit transactions which are coupled

with the cost of labour and transaction of sale, that is to say an indivisible contract of sale. Therefore, for the purpose of construing the word 'sale'

even in the Act, the observations of their Lordships of the Supreme Court (Supra) have to be followed. In fact what had happened in the Acts

passed by other States particularly the Madras Act which was considered by the Supreme Court was that the words 'sale of goods' were sought

to be given an extended meaning by introduction of an additional clause which included materials used in the construction, fitting out,

improvements, repair of immovable property.... Thus the definition of Section 2(h) of the Madras Act was so enlarged as to include an indivisible

contract of sale. Their Lordships of the Supreme Court in view of this addition held that this did not fall within the ambit of the legislative powers of

the State and was therefore, ultra vires.

In the Act passed by our State, however, there is nothing to show that the legislature intended to give any extended meaning to the word 'sale'.

In fact the word 'sale' has been defined in Section 2(1) of the Act thus:

Sale means any transfer of property in goods for cash or deferred payment or other valuable consideration but does not include a mortgage,

hypothecation, charge or pledge.

A perusal of this definition manifestly shows that the section postulates a pure and simple sale where goods pass from the seller to the buyer on

payment of the consideration without the intervention of an intermediary. In the instant case on the allegations made by the petitioners in their

petition which have not been disputed before us by the Advocate General the transaction of sale involves a composite and a complicated process

under which the petitioners buy materials required for construction of the bridges through contractors and labourers and invest the same in the

construction of the bridges. Thus the sale and the construction of bridges became a composite and an indivisible transaction so that it is difficult to

divorce the transaction of sale from the lumpsum contract itself. It is obvious that after the materials that are purchased by the petitioners through

their contractors or labourers are used for the construction of the bridges, the bridges become the property of the State and the petitioners get only

their contract money.

In our opinion therefore the definition of Clause 2(1), (Supra) does not at all envisage a transaction of an indivisible or composite sale and has

been used only to bring within its ambit sales properly so-called where there is a direct transfer of property from the seller to the buyer on payment

of consideration. The petitioners' contract therefore does not fall within the ambit of Section 2(1) and is therefore not chargeable to tax.

Similarly in Section 2(g) the word dealer has been defined thus:

Dealer means any person including a Department of Government who carries on the business of selling goods in the State.

It would be pertinent to note that neither in the word 'dealer' nor in the word 'sale' has the legislature expressly or by necessary intendment

indicated any intention to include a contract of an indivisible sale. In the definition of the word 'sale' (Supra) only such transactions have been

indicated which amount to a simple transfer of property for goods for cash or deferred payment and does not include at all a works contract or an

indivisible sale where the transaction of sale is so coupled with the cost of labour that it is difficult to divorce one from the other. It is true that

Section 2(f)(i) defines contract thus:

'Contract' means any agreement for carrying out for cash or deferred payment or other valuable consideration--

(i) the preparation, construction, fitting out, improvement or repair of any building, road, bridge or other immovable property.

But this by itself does not extend the import and the meaning given to the word ""sale"" in the definition clause 2(1). Section 2(n) defines the word

'turnover' thus:

Turnover means the aggregate amount for which goods are sold by a dealer whether for cash or deferred payment or other valuable

consideration."" Here also we find that the word 'sold' is used in the same sense as it is used in Clause 2(1).

Then we come to Section 4 of the Act which is the charging section and the relevant portion whereof runs thus:

Subject to the provisions of this Act, every dealer except the one dealing exclusively in goods declared tax free u/s 5, shall pay for each year tax on

his total turnover at a rate not exceeding ten per cent of such turnover as may be determined by the Government and notified by the Government in

the Government Gazette and such tax shall be charged on the sale of goods once only"". Thus the charging section also has reference only to the

word 'turnover' as may be determined by the Government and the tax to be charged on the sale of goods which as we have already mentioned is

defined in Section 2(1). In these circumstances therefore we agree with the learned Counsel for the petitioners that the Act does not contain any

effective intention to tax indivisible sales.

The Advocate General, however, relied on the definition of the word 'turnover' particularly on the following explanation to this clause:

(1) the amount for which goods are sold shall in relation to a contract be deemed to be the amount payable to the dealer for carrying out such

contract less the cost of labour.

(2) any cash or other discount on the price allowed in respect of any amount refunded in respect of articles returned by the customers shall not be

included in the turn-over.

and contended that this definition included a works contract also. We are however, unable to agree with this argument because to begin with the

definition of the word 'turnover' has to be understood with reference to two things 1) sale and 2) a dealer. Both the terms have, as discussed

above, been defined in Sections 2(g) and 2(1) of the Act and neither the definition of a dealer nor that of sale includes a contract of indivisible sale.

Sub-clause (1) of the Explanation therefore, does not advance the case of the State any further. It may be that the State Legislature may have

wanted to include an indivisible sale also within the ambit of the Act, but there is no effective expression of its intention to do so in the language

which it has employed in the Act. In this connection I might advert to a decision of the Supreme Court in A.V. Fernandez Vs. The State of Kerala,

where their Lordships have pointed out that in construing fiscal statutes and in determining the liability of a subject to tax, the Courts must have

regard to the strict letter of the law and not merely to the spirit of the Statutes or the substance of the law. In this connection their Lordships

observed as follows:

It is no doubt true that in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the

law and not merely to the spirit of the statute or the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the

provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing

statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was

the substance of the matter.

The Advocate General, however, submitted that the Supreme Court had modified the view taken by it in The State of Madras Vs. Gannon

Dunkerley and Co., (Madras) Ltd., ; in Mithan Lal v. State of Delhi AIR 1958 SC 632 . A careful perusal of this decision would clearly reveal that

their Lordships have not at all overruled their previous decision in The State of Madras Vs. Gannon Dunkerley and Co., (Madras) Ltd., but have

distinguished it on the ground that the Act being applicable to a Union territory (Delhi), fell clearly within the competence of the Parliament. Their

Lordships reiterated in that case that the word 'sale' as defined in Entry 48 of the State List of the Government of India Act, 1935, (which is the

same as Entry 54 of the State List of the Constitution of India) has reference only to sales as defined in the Sale of Goods Act and does not apply

to building contracts. The legislation in that case was upheld in so far as it related to Delhi which was then a Part C State and Parliament alone was

competent to legislate for a Union territory.

Furthermore, in the Bengal Act which was being considered by their Lordships Section 2(d) which defined the word 'sale' was expressly given an

extended meaning in the additional clause which defined goods as including 'all materials, articles and commodities whether or not to be used in the

construction, fitting out, improvement or repair of immovable property and similarly the word 'sale' was defined u/s 2(g) of the Act as including a

transfer of property for goods involved in the execution of a contract. These additional clauses are, however, conspicuously absent from the

provisions of the State Act. In the Bengal Act the sections expressly included goods involved in the execution of a contract, that is to say an

indivisible sale also. The State Act, however, contains no such clause and therefore it is not applicable to sale of goods in execution of a contract

or to transactions of an indivisible sale. This case therefore does not appear to be of any assistance to the Advocate General.

What is more important to note is that in the Calcutta Act also the word 'sale' had been used in an extended and a popular sense by addition of

the clause beginning with 'includes as quoted supra' after defining the word sale. This additional clause is conspicuously absent from the definition of

the word 'sale' as given in Section 2(1) of the State Act. In these circumstances therefore we are not in a position to infer or imply any extended

meaning to the word 'sale' beyond what has been indicated in Section 2(1) of the Act.

For these reasons we are clearly of the opinion that the sales entered into by the petitioners in connection with their works contract did not fall

within the charging section of the Act and could not therefore be taxed.

It therefore follows that the orders of the Assessing Authority dated 9-2-1968 and 28-8-1968 are without jurisdiction and must be quashed.

The petition is accordingly allowed and by a writ of certiorari the orders of the Assessing Authority as confirmed by the Sales Tax Commr. are

hereby quashed. In the circumstances there will be no order as to costs.

Jaswant Singh, J.

I have had the benefit of going through the judgment proposed to be delivered by my Lord the Hon'ble Chief Justice in this writ petition and

agree with the order proposed to be made by his Lordship. I also agree that on a true construction of Section 5 of the Constitution of Jammu and

Kashmir and the provisions of the Constitution of India as applied by the Constitution (Application to Jammu and Kashmir) Order made by the

President of India under Clause (1) of Article 370 of the Constitution of India with the concurrence of the Government of the State of Jammu and

Kashmir the State Legislature is competent to make a law imposing sales tax on the value of goods utilized by a contractor in the execution of

works contracts in the State.

I also agree with his Lordship that Section 4 of the Jammu and Kashmir General Sales Tax Act, 1962, which is the charging section does not

create an effective charge on the value of goods utilized in the execution of indivisible works contracts. Under the existing law it is only a dealer on

whom an obligation is cast to pay sales tax on his annual turnover at a rate not exceeding 10% of such turn-over as may be determined and notified

by the Government and such tax is chargeable on sale of goods only. The word 'dealer' has been defined in Section 2(g) of the Act as meaning a

person (including a department of Government) who carries on the business of selling goods in the State. This definition of the word 'dealer' has to

be read in conjunction with the definitions of the words 'goods' and 'sale' as contained in Clauses (h) and (i) of the same section i.e., Section 2 of

the Act construing the word 'dealer' in the light of the definitions of the expressions 'goods' and 'sales'.

I have no hesitation in holding that there has been no sale of goods as envisaged by the Act by the petitioner company and it could not be

subjected to sales tax on the value of goods utilized by it in carrying out indivisible works contracts in the State. The mere fact that the word 'turn

over' has been defined in Clause (n) of the aforesaid Section 2 of the Act as including the amount payable to the dealer for carrying out a contract

less the cost of labour cannot ipso facto make him a dealer as contemplated by the Act. The intention of the Legislature to subject to sales tax the

amount payable to a contractor for carrying out a contract after deducting the cost of labour could not, in my opinion, be achieved by mere

insertion of the definition of the word 'turn over' in the Act. If the legislature intended to subject that amount to sales tax it should have employed

appropriate language in this behalf in Sections 2 and 4 of the Act. This view is in accord with the well settled rule of construction according to

which while interpreting a fiscal statute we have to go by the letter of law and not by the intention of the Legislature, and in case of doubt an

interpretation favourable to the subject should be preferred.