# BUILDERS ASSCN v. U.0.1

- **Citation:** [1989] 2 S.C.R. 320
- **Court:** Supreme Court of India
- **Decided:** 1989-03-31
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/builders-asscn-v-u-0-1-10382
- **Pages:** 37

## Headnote

A
BUILDERS ASSOCIATION OF INDIA & ORS. ETC. ETC.
v..
UNION OF INDIA & ORS. ETC. ETC.
MARCH 31, 1989
B
[R.S. PATHAK, CJ, E.S. VENKATARAMIAH,
}-
RANGANATH MISRA, M.N. VENKATACHALIAH AND
fN.D. OJHA, JJ.]
Constitution of India 1950: Articles 286, 366(29A) and Seventh
'
Schedule List II Entry 54-Constitutional validity of Constitution
c (Forty-sixth Amendment) Act 1982-Validity of-Power of State legis-
--4 -
lature to levy tax on the transfer of property in goods involved in the
execution of works contracts-Suggestion that Amendment Act should
be prefaced by statement that it had been duly ratified by the States.
Words and Phrases: "Building Contracts"-Works contracts0 What are.
The petitioners in the writ petition are building contractors engaged in the business of constructing buildings, factories, bridges etc. +
They have challenged the levy of sales tax, by the concerned State
Governments under the sales tax laws passed by them, on the turnover
E of the works contracts entered into by them.
-
The petitions raised two questions for the consideration of the
Court; the first question relates to the constitutional validity of the 46th
Amendment Act by which the State legislatures have been empowered
,._.
to levy sales tax on certain transactions described in sub-clauses (a) to
F (f) of clause (29-A) of Article 366 of the Constitution, and the second
question is whether the power of the State legislature to levy tax on the
~
transfer of property in goods involved in the execution of works contracts referred to in sub-clause (b) of clause (29A) of Art. 366 of the
'
Constitution is subject to the restrictions and conditions in Art. 286 of
the Constitution.
G
rOn the passing of the 46th Amendment, the State Governments
after making necessary amendments in their laws commenced to levy
sales tax on the turn-over of the works entered into by the building
contractors for constructing houses, factories, bridges etc. In some
States taxable turnover was determined by deducting the money spent
H on labour engaged in connection with the execution of the works con320
BUILDERS ASSCN. v. U.0.1.
321
tracts. In some other States .a certain fixed percentage of the total
turnover was deducted from the total turnover as labour charges before
arriving at the taxable turnover. Each State adopted its own method of
determining taxable turnover either by framing mies under its sales tax
law or by issuing administrative directions.
Affected and aggrieved by the levy of sales tax so imposed, the
petitioners tiled the writ petitions under Art. 32 of the Constitution
challenging inter alia the Constitutional validity of the 46th Amendment
Act. Civil appeals were also tiled by some other building contractors
against the orders of the High Court for similar relief.
The petitioners and the appellants have raised two contentions;
viz (1) that the 46th Amendment Act is uncollStitutional because it bad
not" been ratified by the legislatures ofnot less than one-halfof the states
by Resolutions passed to that effect by these legislatures before the Bill
which led to the amendment in question was presented to the President
for assent; and (2) that it was not open to the States to ignore the
provisions contained in Art. 286 of the Constitution and the provisions
of the Central Sales Tax Act, 1966 while making assessment under the
Sales Tax laws passed by the legislatures of the States.
Notices were issued to the Attorney General for India and the
Advocates General for the concerned States, some of which contested
the Issues.
The main contention of the States on the second point was that
sub-clause (b) of Article.32"ii(29 A) bestowed on them a power to levy tax
on works contract independent of Entry 54 of List II.
Disposing of the Writ Petitions and directing that the appeals be
now placed before the Bench hearing Tax matters, this Court,
)-.
HELD. There has been in the instant case due compliance of
the provisions contained in the proviso to Art. 368(2) of the Constituti

## Text

_Characters 0–39,741 of 90,188. This is a partial read: ask again with offset=39741 for what follows._

A
BUILDERS ASSOCIATION OF INDIA & ORS. ETC. ETC.
v..
UNION OF INDIA & ORS. ETC. ETC.
MARCH 31, 1989
B
[R.S. PATHAK, CJ, E.S. VENKATARAMIAH,
}-
RANGANATH MISRA, M.N. VENKATACHALIAH AND
fN.D. OJHA, JJ.]
Constitution of India 1950: Articles 286, 366(29A) and Seventh
'
Schedule List II Entry 54-Constitutional validity of Constitution
c (Forty-sixth Amendment) Act 1982-Validity of-Power of State legis-
--4 -
lature to levy tax on the transfer of property in goods involved in the
execution of works contracts-Suggestion that Amendment Act should
be prefaced by statement that it had been duly ratified by the States.
Words and Phrases: "Building Contracts"-Works contracts0 What are.
The petitioners in the writ petition are building contractors engaged in the business of constructing buildings, factories, bridges etc. +
They have challenged the levy of sales tax, by the concerned State
Governments under the sales tax laws passed by them, on the turnover
E of the works contracts entered into by them.
-
The petitions raised two questions for the consideration of the
Court; the first question relates to the constitutional validity of the 46th
Amendment Act by which the State legislatures have been empowered
,._.
to levy sales tax on certain transactions described in sub-clauses (a) to
F (f) of clause (29-A) of Article 366 of the Constitution, and the second
question is whether the power of the State legislature to levy tax on the
~
transfer of property in goods involved in the execution of works contracts referred to in sub-clause (b) of clause (29A) of Art. 366 of the
'
Constitution is subject to the restrictions and conditions in Art. 286 of
the Constitution.
G
rOn the passing of the 46th Amendment, the State Governments
after making necessary amendments in their laws commenced to levy
sales tax on the turn-over of the works entered into by the building
contractors for constructing houses, factories, bridges etc. In some
States taxable turnover was determined by deducting the money spent
H on labour engaged in connection with the execution of the works con320
BUILDERS ASSCN. v. U.0.1.
321
tracts. In some other States .a certain fixed percentage of the total
turnover was deducted from the total turnover as labour charges before
arriving at the taxable turnover. Each State adopted its own method of
determining taxable turnover either by framing mies under its sales tax
law or by issuing administrative directions.
Affected and aggrieved by the levy of sales tax so imposed, the
petitioners tiled the writ petitions under Art. 32 of the Constitution
challenging inter alia the Constitutional validity of the 46th Amendment
Act. Civil appeals were also tiled by some other building contractors
against the orders of the High Court for similar relief.
The petitioners and the appellants have raised two contentions;
viz (1) that the 46th Amendment Act is uncollStitutional because it bad
not" been ratified by the legislatures ofnot less than one-halfof the states
by Resolutions passed to that effect by these legislatures before the Bill
which led to the amendment in question was presented to the President
for assent; and (2) that it was not open to the States to ignore the
provisions contained in Art. 286 of the Constitution and the provisions
of the Central Sales Tax Act, 1966 while making assessment under the
Sales Tax laws passed by the legislatures of the States.
Notices were issued to the Attorney General for India and the
Advocates General for the concerned States, some of which contested
the Issues.
The main contention of the States on the second point was that
sub-clause (b) of Article.32"ii(29 A) bestowed on them a power to levy tax
on works contract independent of Entry 54 of List II.
Disposing of the Writ Petitions and directing that the appeals be
now placed before the Bench hearing Tax matters, this Court,
)-.
HELD. There has been in the instant case due compliance of
the provisions contained in the proviso to Art. 368(2) of the Constitution. [344E]
Sales tax laws passed by the legislatures of States levying taxes on
the transfer of property in goods-whether as goods or in some other
form-involved in the execution of a works contract are subject to the
restrictions and conditions mentioned in each clause of sub-clauses of
Art. 286ofthe Constitution. [355B]
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c
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SUPREME COURT REPORTS
[1989] 2 S.C.R.
All transfers, deliveries and supplies of goods referred to in
clauses (a) to (f) of clause (29-A) of Art. 366 of the Constitution are
subject to the restrictions and conditions mentioned in clause (1), clause
(2) and sub-clause (a) of clause (3) of Art. 286 of the Constitution and
the transfers and deliveries that take place under sub-clauses (b), (c)
and (d) of clause (29-A) of Art. 366 of the Constitution are subject to an
additional restriction mentioned in sub-clause (b) of Art. 286 (3) of the
Constitution. [349C J
The power to levy sales-tax was conferred on the legislatures of
States by the Constitution by Entry 54 of List II of the Seventh Schedule
to the Constitution of India. {329B]
State of Bombay and Another v. The United Motors (India) Ltd.
and Others, [1953] S.C.R. 1069 and Bengal Immunity Company
Limited v. The State of Bihar & Others, [195512 S.C.R. 503, referred
to.
D
Ordinarily unless there is a contract to the contrary in the case of
a works contract, the property in the goods used in the construction of a
building passes to the owner as the mate_rials used are incorporated in
the buildings. The contractor becomes liable to pay the sales tax ordinarily when the goods or materials are so used in the construction of the
building and it is not necessary to wait till final bill is prepared for the
E
entire work. [352C]
Hudson's Building Contracts (8th Edition) at page 362 and Benjamin's Sale of Goods (3rd Edition) in para 43 at page 36.
The constitutional-Amendment in Art. 366 (29-A) read with the
F
relevant taxation entries has enabled the States to exert its taxing power
in an important area of social and economic life of the community. In
exercising this power particularly in relation to transfer of property in
goods involved in the execution of "works-contracts" in building activity, in so far as it affects the housing projects of the under-privileged
and weaker sections of society, the State might perh_aps, be pushing its
G
taxation power to the peripheries of the social limits of that power and
perhaps even of the constitutional limits of that power, in dealing with
unequals. In such class of cases 'building Activity' really relates to a
basic subsistential necessity. It would be wise and appropriate for the
State to consider whether the requisite and appropriate classifications
should not be made of such building-activity attendant with such social
H purposes for appropriate separate treatment. [355E-G I
-
•
BUILDERS ASSCN. v. U.0.1.
323
Whatever might be the situational differences of individual cases,
the constitutional limitations on the taxing power of the State as are
applicable to "works-contracts" represented by "building-contracts"
in the context of the expanded concept of "tax on the sale or purchase of
goods" as constitutionally defined under Art. 366 (29-A) would equally
apply to other species of "works-contracts" with the requisite situational modifications. [355C-D I
~
~
At the commencement of the Act it should have been stated that
· the bill in question had been presented to the President for his assent
after it had been fully ratified by the required number of legislatures of
the States. This suggestion should be followed by the Central Secretariat hereafter since it was found that even the Attorney General was
not quite aware till the case was taken up for hearing that the bill which
~ ~ had become the 46th Amendment had been duly ratified by the required
num'1er of States. [344F]
Gannon Dunkerley and Co. (Madras) Ltd. v. State of Madras,
A.LR. 1954 Mad. 1130; Gannon Dunkereley & Co. Madras (Pvt.) Ltd.
v. Sales Tax Officer, Mattancheri, A.I.R. 1957 Kerala 146; Mohamed
Khasim v. State of Mysore, [1955] VI Sales Tax Cases 211; Pandit
Banarsi Das v. State of Madhya Pradesh and Ors., [1955] VI Sales Tax
Cases 93; Jubilee Engineering Co. Ltd. v. Sales Tax Officer, Hydera·
bad City & Ors., A.I.R. 1956 HYO. 79; Bhuramal and Ors. v. State of
Rajasthan, A.LR. 1957 Rajasthau 104; State of Madras v. Gannon
Dunkerley & Co. (Madras) Ltd., [19551 S.C.R. 379; M/s. New India
Sugar Mills Ltd. v. Commissioner of Sales Tax, Bihar, [1963] Supp. 2
SCR 459; Oil and Natural Gas Commission v. State of Bihar & Ors.,
[197711 SCR 354; Vishnu Agencies (Pvt.) Ltd. etc. v. Commercial Tax
Officer & Ors. etc., [1978] 2 SCR 433; Northern India Caterers (India)
Ltd. v. Lt. Governor of Delhi, [1979] 1 SCR 557; Sydney.Hydraulic
and Central Engineering Co. v. Blackwood & Son, 8 N SWR 10 and
M.R. Bornibrook (Pvt.) Ltd. v. Federal Commissioner of Taxation,
f-. . [ 1939 I 62 C.L.R. 272.
'
ORIGINAL JURISDICTION: Writ Petition (Civil) No. 1060 of
1987 etc. etc.
(Under Article 32 of the Constitution of India)
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B
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K. Parasaran, Attorney General, G. Ramaswamy, Additional
Solicitor General, N .A. Palkhiwala, Kapil Sibal, A.K. Ganguli, A.K. ·
Sen. Shanti Bhushan, Raja Ram Aggarwal, Dr. Shankar Gho~h, H
324
SUPREME COURT REPORTS
[1989] 2 S.C.R.
A
Tapas Ray, Devi Pal, B. Sen. G. A. Shah, Ashwani Kumar, Yogesh-
,/...
war Prasad, P.A. Choudhary, Dr. L.M. Singhvi, S.K. Dholakia, R.N.
Sachthey, A.B. Misra, P.S. Poti, R.N. Narasimha Murty, N.N.
Gooptu, Advocate Generals, R.P. Gupta, S.
Krishan, J.B.
Dadachanji, D.N. Mishra, Mrs. A.K. Verma, Vijay Hansaria, Sunil
B
c
K. Jain, A.T.M. Sampath, P.N. Ramalingam, C. Natarajan, N.
Inbrajan, M.S. Singh, K.K. Gupta, N.B. Sinha, Sanjeev B. Sinha,
~
Yogendra B. Sinha, Ms. Madhu Khatri, Ms. Bina Gupta, K.N. Rai,
Ms. Panaki Misra, Harish Salve, Ajay K. Jain, Pramod Dayal, K.M. ,l
Vyayar, Badar Durraj Ahmed, Parijat Sinha, J.R. Das, P.R. Seetharaman, Ranjit Kumar, A. Sharan, J.D. Jain, C.S. Vaidyanathan, B.R.
Setia, N.N. Keswani, R.N. Keswani, Pramod Dayal, Dilip Tandon,
R.B. Mehrotra, M.C. Dhingra, M. Qamaruddin, Ashok Kumar
Gupta, M.M. Kashyap, S.B. Upadhya, R.N. Karanjawala, Mrs.
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Manik Karanjawala, G.S. Vasisht, S.K. Gambhir, Amlan Ghosh, -i -
A.K. Singla, K.K. Khurana, L.K. Pandey, Mahabir Singh, E.C.
Agarwala, Ms. Pumima Bhatt, Vineet Kumar, K.J. John, Ms. Naina
Kapur, Ms. Hemantika Wahi, Sarva Mittar, P.K. Jain, Ms. A.
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Subhashini, B.V. Decra, M.N'. Shroff, R. Mohan, R.A. Perumal,
R.N. Patil, S.K. Agnihotri, Ashok K. Srivastava, Manoj Swamp,
Pramod Swamp, T.V.S.N. Chari, S.K. Dhingra, A.M. Khanwilkar,
A.S. Bhasme, Anip Sachthey, P.N. Misra, Ajay K. Jha, K.R.
Nambiar, P.R. Ramasesh, N.K. Puri, P.R. Monda!, M.P. Jha, Sushi! --J..
Kumar Jain, S.R. Grover, M.P. Sharma, S.K. Nandy, D. Goburdhan,
El
A. Subba Rao, K. Swami, U.S. 'Prasad, M. Veerappa, R.K. Mehta,
andNaresh K. Sharma for the appearing parties.
The Judgment of the Court was delivered by
VENKATARAMIAH, J. Jn this batch of Writ Petitions and Civil
Appeals two questions arise for consideration. The first question
relates to the constitutional validity of the Constitution (Forty-sixth
Amendment) Act, 1982 (hereinafter referred to as 'the 46th Amendment') by which the Legislafores of the States were empowered to levy
~
sales tax on certain transactions described in sub-clauses (a) to (f) of
clause: (29-A) of Article 366 of the Constitution and the second ques0
tion is whether the power of the State Legislature to levy tax on the
transfer of property in goods involved in the execution of works contracts referred to in subcclause (b) of clause (29-A) of Article 366 of
the Constitution is subject to the restrictions and conditions contained
in Article 286 of the Constitution.
H
.An account of the history of the relevant constitutional and
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BUILDERS ASSCN,·;v. U.0.1. [VENKATARAMIAH, J.]
325
Jr.
., ~··
statutory provisions and of judicial decisions having a bearing on the
said provisions has to be set out at this stage to appreciate· the contenA
lions of the parties. Prior to the commencement of the Constitution of
India the power to levy sales tax had been conferred on the Provincial
Legislatures by Entry 48 of the List II of the Seventh Schedule to the
Government of India Act, 1935 which read as "Taxes on the sale of
-l
goods and on advertisements". In exercise of the said power some of
B
'""
the Provincial Legislatures had passed laws levying sales tax on the
sale or purchase of certain commodities. There was no specific restric~
tion or condition on the exercise of the said power under the Governa
ment of India Act, 1935. The Provincial Legislatures exercised the
power to levy sales tax acting on the principles of the territorial nexus,
thatis to say, they picked out one or more of the ingredients constitut- c
-~ ing a sale and made them the basis of the levy of sales tax under the
legislation. Assam and Bengal made among other things the actual
existence of the goods in the province at the time of the contract of sale
the test of taxability. In Bihar the production or manufacture of the
goods in the Province was made an additional ground. A net of the
widest range perhaps was laid in Central Provinces and Berar where it
D
was sufficient if the goods were actually found in the Province at any
time after the contract of sale or purchase in respect thereof was made.
Whether the territorial nexus put forward as the basis of the taxing
'
power in each case would be sustained as sufficient was a matter of
Jr doubt not having been tested _in a court of law. Such claims to taxing
power led to multiple taxation of the same transaction by different
E
Provinces and cumulation of the burden falling ultimately on the consuming public. By the time the Constituent Assembly took up for
.consideration the provisions relating to the power of the State Legislalures to levy sales tax the difficulties created by the sales tax laws
~ passed by the various Provinces and their effect on inter-State trade
and commerce had come to be felt throughout the country. In order to
F
minimise the adverse effects of the sales tax laws passed by the Legislaf ·
tures of States the Constituent Assembly enacted Articles 236, 301 and
304 of the Constitution. Introducing an amendment to Article 264-A
to the draft Constitution, which ultimately became Article 286 of the
Constitution of India, Dr. Ambedkar observed on the floor of the
~-t Constituent Assembly thus:
G
"Sir, as everyone knows, the sales tax has created a
great deal of difficulty throughout India in the matter of
freedom of trade and commerce. It has been found that the
very many sales taxes which are levied by the various Provincial Governments either cut into goods which are the
H
326
SUPREME COURT REPORTS
[1989] 2 S.C.R.
subject matter of imports or exports, or cut into what is
;+,.
A
called inter-State trade or commerce. It is agreed that this
kind of chaos ought not to be allowed and that while the
provinces may be free to levy the sales tax there ought to be
some regulations whereby the sales tax levied by the provinces would be confined within the legitimate limits which
B
are intended to be covered by the sales tax. It is, therefore,
~
felt that there ought to be some specific provisions laying _l
down certain limitations on the power of the provinces to
levy sales tax.
The first thing that I would like to point out to the
c
House is that there are certain provisions in this article'
264A which are merely reproductions of the different parts iof the Constitution. For instance, in sub-clause (1) of article 264A as proposed by me, sub-clause (b) is merely a
reproduction of the article contained in the Constitution,
the entry in the Legislative List that taxation of imports and
D
exports shall be the exclusive province of the Central
Government. Consequently so far as sub-clause (l)(b) is
concerned there cannot be any dispute that this is in any
sense an invasion of the right of provinces to levy sales tax.
-.J..
Similarly, sub-clause (2) is merely a reproduction of
E
Part XA which we recently passed dealing with provisions
regarding inter-State trade and commerce. Therefore so far
as sub-clause (2) is concerned there is really nothing new in
it. It merely says that if any sales tax is imposed it shall not
be in conflict with the provisions of Part XA.
F
With regard to sub-clause (3) it has also been agreed
·-rthat there are certain commodities which are so essential
for the life of the community throughout India that they -\
should not be subject to sales tax by the province in which
they are to be found. Therefore it was felt that if there was
any such article which was essential for the life of the comG
munity ihrougbout India, then it is necessary that, before r
the province concerned levies any tax upon such a commodity, the law made by the province should have the
assent of th!! President, so that it would be possible for the
President and the Central Government to see that no hardship is created by the particular levy proposed by a particuH
lar province.
BUILDERS ASSCN. v. U.0.1. IVENKATARAMIAH, J.]
327
' .+
The proviso to sub-clause (2) is also important and
..
A
'!;~
the attention of the House might be drawn to it. It is quite
true that some of the sales taxes which have been levied by .
the provinces do not quite conform to the provisions contained in article 264-A. They probably go beyond the provisions. It is therefore felt that when the rule of law as
-1
embodied in the Constitution comes into force· all laws
B
which are inconsistent with the provisions of the Constitu-
~
tion shall stand abrogated. On the date of the inauguration
of the Constitution this might create a certain amount of
financial difficulty or embarrassment to the different provinces which have got such taxes and on the proceeds of
which their finances to a large extent are based. It is there- c
-}
fore proposed as an explanation to the general provisions
of the Constitution that notWithstanding the inconsistency
of any sales tax imposed by any province with the provisions of article 264A, such a law will continue in operation
until the 31st day of March 1951, that is to say, we practically propose to give the provinces a few months more to
D
make such adjustments as they can .and must in order to
bring their law into conformity with the provisions of this
article."
+
Article 286 of the Constitution, as it was originally enacted, read
as follows:
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"286. Restrictions as to imposition of tax on the sale or
purchase of goods-(1) No law of a State shall impose, or
authorise the imposition of, a tax on the sale or purchase of
--....
goods where such sale or purchase takes placeF
(a) outside the State; or
..
(b) in the course of the import of the goods into, or
export of the goods out of, the territory of India.
-~
Explanation-For the purposes of sub-clause (a), a.
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sale or purchase shall be deemed to have taken place in the
State in which the goods have ·actually been delivered as a
direct result of such sale or purchase for the purpose of
consumption in that State, notwithstanding the fact that
under the general law relating to sale of goods the property
in the goods has by reason of such sale or purchase passed
H
in another State.
•
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SUPREME COURT REPORTS
[1989) 2 S.C.R.
(2) Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise
the imposition of, a tax on the sale or purchase of any
goods where such sale or purchase takes place in the course
of inter-State trade or commerce.
Provided that the President may by order direct that
any tax on the sale or purchase of goods which was being
lawfully levied by the Government of any State immediately before the commencement of this Constitution
shall, notwithstanding that the imposition of such tax is
contrary to the provisions of this clause, continue to be
levied until the thirty-first day of March, 1951.
(3) No law made by the Legislature of a State imposing, or authorising the imposition of, a tax on the sale or
purchase of any such goods as have been 'declared by Parliament by law to be essential for the life of the community
shall have effect unless it has been reserved for the cu»sideration of the President and has received his assent."
Articles 301 and 304 of the Constitution which were incorporated
in Part XIII of the Constitution read thus:
"301. Freedom of trade, commerce and intercourse-Subject to the other provisions of this Part, trade,
commerce and intercourse throughout the territory of
India shall be free"
"304. Restrictions on trade, commerce and intercourse among States-Notwithstanding anything in article
301 or article 303, the Legislature of a State may by law-
(a) impose on goods imported from other States any
tax to which similar goods manufactured or produced in that State are subject, so, however, as
not to discriminate between goods so imported
and goods so manufactured or produced; and
(b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or
without that State as may be required in the
H
public interest:
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BUILDERS ASSCN. v. U.0.1. (VENKATARAMIAH, J.]
329
Provided that no Bill or amendment for the purpose of
clause (b) shall be introduced or moved in the Legislature
of a State without the previons sanction of the President."
The Power to levy sales tax was conferred on the Legislatures of
States by the Constitution by Entry 54 of List II of the Seventh
Schedule to the Constitution of India which, as originally enacted,
read thus:
"54. Taxes on the sale or purchase of goods other than
newspaper."
The power to levy tax on purchase of goods was expressely stated in
Entry 54 even though it was implicit in the expression "taxes on the
sale" which was found in Entry 40 of List II of the Seventh Schedule to
the Government of India Act, 1935. In exercise of the power conferred
on it by Entry 54 of the State List the Legislature of Bombay passed an
Act called the Bombay Sales Tax Act, 1952 which imposed a _Jleneral
tax on every dealer whose turnover in respect of sales within .the State
of Bombay during the prescribed period exceeded Rs.30,000 an.d a
special tax on every dealer whose turnover in respect of sales of special
goods made within the State of Bombay exceeded Rs.5,000 during the
prescribed period. The term 'sale' was defined as meaning any transfer
of property in goods for cash or deferred payment or other veluable
. consideration, and an Explanation to this definition provided that the
sale of any goods which have actually been delivered 1n the State of
Bombay as a direct result of such sale for the purpose of consumption
in the said State shall be deemed, for the purposes of the Act, to have
taken place in the said State irrespective of the fact that the property in
the goods has, by reason of such sale, passed in another State. Rules 5
and 6 of the Bombay Sales Tax Rules, 1952, which were brought into
force on the same day on which sections 5 and 10 of the Bombay Sales
Tax Act came into force provided for the deduction of the following
sales in calculating the taxable turnover, viz., sales which took place
(a) in the course of the import of the goods into, or the export of the
goods out of, the territory of India, and (b) in the course of inter-State
trade or commerce (being the two kinds of sales referred to clauses
(l)(b) and (2) respectively of Article 286 of the Constitution). Rule
5(2)(i), however, required, as a conditfon of the aforesaid deductions,
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that the goods should be consigned by a railway, shipping or aircraft
company or country boat registered for carrying cargo or public motor
transport service or by registered post. In an application made under
Article 226 of the Constitution challenging the validity of the said Act H
330
SUPREME COURT REPORTS
[1989] 2 S.C.R.
A and praying inter alia for a writ against the State of Bombay and the
Collector of Sales Tax, Bombay, restraining them from enforcing the
provisions of that Act, the High Court of Bombay held that the definition of 'sale' in that Act was so wide as to include the three categories
of sale exempted by Article 286 of the constitution from the imposition
of tax by the States and thus not valid. On appeal to this Court the
B decision of the High Court of Bombay was reversed by the majority in
the State of Bombay and Another v. The United Motors (India) Ltd.
and Others, [1953] S.C.R. 1069. Soon doubts came to be entertained
about the correctness of the above decision and this Court got the
opportunity to reconsider the correctness of the decision in the United
Motors case (Supra) in the Bengal Immunity Company Limited v. The
C State of Bihar and Others, [1955 I 2 S.C.R. 503.
In the case of the Bengal Immunity Company Ltd. (supra) the
majority held that the operative provisions of the several pa,ts of
Article 286 of the Constitution, namely, clause l(a), clause l(b) and
clauses 2 and 3 were intended to deal with different topics and one.
D could not have projected or read into another. The bans imposed by
Article 286 of the Constitution on the taxing powers of the States were
independent and separate and each one of them had to be got over
before a State Legislature could impose tax on transactions of sale or
purchase of goods. The Explanation to Article 286(1)(a) determined
by the legal fiction created therein the situs of the sale in the case of
E transactions coming within that category and once it was determined
by the application of the Explanation that a transaction was outside
the State, it followed as a matter of course that the State, with reference to which the transaction could thus be predicated to be outside it,
could never tax the transaction. After the judgment in the Bengal
Immunity Company Ltd. 's (supra) case on the recommendations of the
F
Taxation Enquiry Commission as regards the amendment of the constitutional provisions relating to sales tax, Parliament passed the Constitution (Sixth Amendment) Act, 1955 which received the assent of
the President on 11th September, 1956. By the said amendment the
Constitution was amended in the following way. In List I of the
Seventh Schudule to the Constitution En try 92A was added. It reads as
G follows:
"92A. Taxes on the sale or purchase of goods other than
newspapers, where such sale or purchase takes place in the
course of Inter-State trade or commerce."
H
In List II existing Entry 54 was substituted by the following
entry:
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BUILDERS ASSCN. v. U.0.1. IVENKATARAMIAH, J.]
331
"54. Taxes on the sale or purchase of .goods other than A
newspapers subject to the provisions of entry 92A of List
I."
Article 269 of the Constitution which em1merated the taxes that
were to be levied and collected by the Government of India but were
to be assigned to the States was amended by adding sub-clause (g) to · B
\
clause (1) and clause (3) to it. After such amendment Article 269 read
_,4, thus:
' f
,)
"269. (1) The following duties and taxes shall be levied
and collected by the Government of India but shall be
assigned to the States in the manner provided in clause (2),
C
namely:
(a) duties in respect of succession to property other
than agricultural land;
(b) estate duty in respect of property other than
D
agricultural land;
( c) terminal taxes on goods or passengers carried by
railway, sea or air;
(d) taxes on railway fares and freights;
( e) taxes other than stamp duties on transactions in
stock-exchanges and futures markets;
(f) taxes on the sale or purchase of newspapers and
E
on advertisements published therein;
F
(g) taxes on the sale ·or purchase of goods other than
newspapers, where such sale or purchases takes
place in the course of inter-State trade or
commer~.
(2) The net proceeds in any financial year of any such
G
duty or tax, except in so far as those proceeds represent
proceeds attributable to States specified in Part C of the
First Schedule, shall not form part of the Consolidated
Fund of India, but shall be assigned to the States within
which that duty or tax is leviable· in thafyear, and shall be
H
•
"
332
A
B
SUPREME COURT REPORTS
11989] 2 S.C.R.
distributed among those States in accordance with such
principles of distribution as may be formulated by Parliament bylaw.
(3) Parliament may by law formulate principles for
determining when a sale or purchase of goods takes place in
the course of Inter-State trade or commerce."
~
By the above amendment Parliament was empowered to levy tax }~
on the sale or purchase of goods other than newspapers where such
sale or purchase took place in the course of Inter-State trade or commerce. and was also empowered to formulate by law principles for
C
determining when a sale or purchase of goods took pface in the course
of Inter-State trade or commerce.
By the very same Sixth Amendment Article 286 of the Constitu·
ti on was amended. The Explanation to clause ( 1) was omitted by that
D Aiμendment. Clauses (2) and (3) of Article 286 were substituted by
two new clauses. After such amendment Article 286 of the Constitution read thus:
E
"286. Restrictions as to imposition of tax on the sale or
purchase of goods-(1) No law of a State shall impose, or
~
authorise the imposition of, a tax on the sale or purchase of
goods where such sale or purchase takes placeF
G
H
(a) outside the State; or
(b) in the course of the import of the goods into, or
export of the goods out of, the territory of India.
(2) Parliament may by law formulate principles for
determining when a sale or purchase of goods takes place in
any of the ways mentioned in clause ( 1).
(3) Any law of a State shall, in so far as it imposes, or
authorises the imposition of, a tax on the sale or purchase
of goods declared by Parliament by law to be of special
importance in Inter-State trade or commerce, be subject to
such.restrictions and conditions in regard to the system of
levy, rates and other incidents of the tax as Parliament. may
by law specify."
j
-
.-i-
'
-
,._.
BUILDERS ASSCN. v. U.0.1. [VENKATARAMIAH, J.I
333
Pursuant to the power conferred on it Parliament enacted the
Central Sales Tax Act 1956 which received the assent of the President
on 21st December, 1956. The said Act was passed to formulate principles for determining when a sale or purchase of goods took place in the
course of Inter-State trade or commerce of outside a State or in the
course of import into or export from India, to provide for the levy,
A
. collection and distribution of taxes on sales of goods -in the course of B
, Inter-State trade or commerce and to declare certain goods to be of
special importance in Jnter-State trade or commerce and specify the
restrictions and conditions to which State laws imposing taxes on the
sale, or purchase of such goods of special importance shall be subject.
Section 6 of the Central Sales Tax Act explained when a sale or purchase of goods in the course of lnter:State trade or commerce took
place-. Section 4 of the said ,Act explained when a sale or purchase of C
goods took place outside a State and Section 6 explained when a sale
or purchase of goods took place in the course of import or export for
purposes of that Act. Section 14. of the Central Sales Tax Act
enumerated the goods which were considered to be of special importance in Inter-State trade or commerce and section 15 of that Act set D
out restrictions and conditions· in fegard to tax on sale or purchase of
declared goods within a State. Secti1m 15 of the Central Sales Tax Act
as it is in force today reads thus:
"15. Restrictions and conditions in regard to tax on sale or
purchase of declared goods within a State. Every sales tax E
law of State shall, in so far as it imposes or authorises the
imposition of a tax on the sale or purchase of declared
goods, be subject to the following restrictions and conditiops, namely:
(a) the tax payable under that law in respect of any F
sale or purchase of such goods inside the State
shall not . exceed four per cent of the sale or
purchase price thereof, and such tax shall not be
levied at more than one stage;
_ (b) where a tax has been levied under that law in G
respect of the sale or purchase inside the State of
any declared goods and such goods are sold in the
course of Inter-State trade or commerce, and tax
has been paid under this Act in respect of the sale·
of such goods in the course of Inter-State trade or
. cominerce, the tax levied under such law shall be
H
334
SUPREME COURT REPORTS
[1989) 2 S.C.R.
reimbursed to the person making such sale in the +
A
course of Inter-State trade or commerce, in such
manner and subject to such conditions as may be
provided in any law in force in that State;
( c) where a tax has been levied under that law in
B
respect of the sale or p11rchase inside the State of
t--
any paddy referred to in sub-clause (i) of clause
>--
(i) of section 14, the tax leviable on rice procured
out qf such paddy shall be reduced by the amount
of tax levied on such paddy;
~
c
(d) each of the pulses>referred to in clause (vi-a) of
section 14, whether .whole or &eparated, and --twhether with or without husk, shall be treated as
..
a single commodity for the purposes of levy of tax
under that law."
D
By the time the Constitution (Sixth Amendment) Act and the
Central Sales Tax Act, 1956 came into force controversy had arisen
before some of the High Courts about the liability of contractors who
had undertaken to carry out works contracts to pay sales tax on the
transfer of property in the goods involved in works contracts.
......
E
In Gannon Dunkerley and Co. (Madras) Ltd. v. State of Madras,
A.LR. 1954 Mad. 1130 the assessees were carrying on business as
engineers and contractors. Their business consisted mainly of execution of contracts for constructons of buildings, bridges, dams, roads and
structural contracts of all kinds. During the assessment year the return
made by the assessees showed as many as 47 contracts, most of which
'r:-
F
were building contracts, which were executed by the assessees. From
th~ total· of the amount which the assessees received in respect of
sanitary contracts and other contracts 20% and 30% respectively were
_.,
deducted for labour and the balance was taken as the turnover of the
assessees for the assessment year in question. Sales tax was levied on
the said balance treating it as taxable turnover under the Madras
G
General Sales Tax Act, 1939. The assessees questfoped the levy of rsales tax on the said amount treated as taxable turnover on the ground
that there was no sale of goods as understood in India and, therefore,
no sales tax could be levied on any portion of the amount which was
•
received by the assessees from the persons for whose benefit they had
constructed buildings. It was urged on behalf of the assessees that
H
there was no element of sale of the materials in a building contract and
--
BUILDERS ASSCN. v. U.0.1. IVENKATARAMIAH, J.]
335
that such a contract was one entire and indivisible. Unless the contract
was completed, the builder was not entitled to the price fixed under I\
the contract or ascertainable under the terms of the contract. The
property in the materials passed to the owner of the land not by virtue
of the delivery of the materials as goods under and in pursuance of an.
1,
agreement of sale which stipulated a price for the materials. The pro-
~
perty in the materials passed to the owner of the land because they B
'j were fixed in pursuance ·of the contract to build and along with the
corpus, which ultimately· resulted by the erection of the superstructure, the materials also passed to the owner of the land. It was
urged thafa contract to build was not a contract to sell goods used in
the construction ofa building. The High Court of Madras on a consideration of the submissions made before it came to the conclusion that
the transactions in question were not contracts for sale of goods as C
defined under the provisions of the Sale of Goods Act, 1930 which was
in force on the date on which the Constitution came into force and
therefore the assessees were not liable to pay sales tax on the amounts
received by them from the persons for whom they had constructed
buildings etc. during the year of assessment. But a petition filed by the o
very same assessees for similar relief in the Gannon Dunkerley & Co.
Madras (Private) Ltd. v. Sales Tax-Officer, Mattancheri, A.LR. 1957
Kerala 146 was dismissed by the Kerala High Court affirming the
imposition of sales tax on the turnover relating to construction works
and upholding the rules providing for apportionment of the,determination of the taxable turnover on a percentage basis. In Mohamed E
Khasim v. State of Mysore, [19551 VI Sales Tax Cases 211, the Mysore
High Court held that the provisions of the Mysore Sales Tax Act
imposing sales tax on construction of buildings under works contract
"'"'(
we_re valilf and further upheld the determination of the· iaxable
turnover on percentage basis. The competence of the State Legislature
,
to levy sales tax on the supply of building materials for execution of F
, building contracts came up for consideration before the Nagpur High
Court in Pandit Banarsi Das v. State of Madhya Pradesh and brs.,
[19551 VI Sales Tax Cases 93. The ass~ssees in the said case were.
Madhya Pradesh Contractors' Association and the Jabalpur
Contractors' Association. They instituted a petition before the Nagpur
High Court through their President and Secretary questioning the G
power of the State Legislature to levy sales tax on the turnover consisting of the amounts received by the. building contractors from the
persons for whom they had constructed buildings by supplying the
required· materials·. They relied upon the decision of the High Court of
Madras in Gannon Dunkerley's case (supra). The Nagpur High Court
while declining tofollow the decision of the High Court of Madras was
H
336
SUPREME COURT REPORTS
11989] 2 S.C.R.
A of opinion that the State Legislature could pick out a sale from the
composite transaction of a building contract which included transfer of
property in materials and could make the portion attributable to the
cost of such materials subject to payment of sales tax in exercise of its
undoubted and plenary po:wers. Jubilee Engineering Co. Ltd. v. Sales
Tax Officer, Hyderabad City and Ors., A.LR. 1956 Hyd. 79 was a case
B
decided by the High Court of Hyderabad. In that case that High Court
held that in a works contract where a person undertook to build a
particular building or to make a particular thing, the materials
involved in the building or making of the finished product, could not
be the subject matter of sale because there was no agreement to sell
the materials nor was price of the goods fixed. It was also found that in
c such cases there wa~ no passing of the title in those goods as such
except as part of the building or the thing in which they were embedded. It accordingly held that the amount received by a building contractor from the person for whom he had constructed the building
could not be taxed under the sales tax law of the State of Hyderabad.
A similar question aro~ before the High Court of Rajasthan in
Q
Bhuramal and Ors. v. State of Rajasthan, A.LR. 1957 Rajasthan 104.
The High Court of Rajasth;m held that the defmition of "dealer" in
the Rajasthan Sales Tax Act .• 1954 included not only those who sold
goods, but also those who supplied goods, whether on commission, or
for remuneration or otherwise· and the said definition was very wide
and included persons like the building contractors who in the course of
E their business as building contractors supplied goods to those who gave
them contracts.