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TMI Blog1957 (1) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... he second quarter and a further payment of Rs. 354-9-0. On 24th November, 1954, the respondent No. 2 as the Commercial Tax Officer made an assessment in respect of the Bengali year 1358 holding that the petitioner was liable to pay a tax of Rs. 39,182-9-0. He also imposed a penalty of Rs. 1,000 upon the petitioner. Against both the orders of assessment the petitioner has filed appeals to the Assistant Commissioner, Commercial Taxes. In spite of the appeals being pending the respondents have proceeded under the Public Demands Recovery Act and a certificate has been filed in respect of Rs. 14,187-13-0 said to be due on the basis of the assessment order dated 11th May, 1954, and this certificate is being enforced against the petitioner. This Rule has been issued on 22nd February, 1955, upon the respondents to show cause why an order in the nature of a writ of certiorari should not be made quashing the assessment orders dated 11th May, 1954, and 24th November, 1954, mentioned above, and why an order in the nature of a writ of certiorari should not be made quashing the certificate filed in the office of the certificate officer of 24 Perganas mentioned in the petition, and why the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner. The contract itself requires the contractor to undertake works like filling earth, carting cinders, laying boulders, excavating cinders, cleaning certain stores etc. In contract No. (3), the Union of India was to supply the necessary bricks, cement, steel etc., while the contractor was to supply sand, gravel etc. In contract No. (4) the Commissioners of the Port of Calcutta were to supply certain materials the remainder being supplied by the contractor. In contract No. (5) the Union of India was to supply cement, steel, bricks etc., while the contractor was to supply sand, lime etc. In all these contracts, the contractor, besides supplying materials, was to supply work and labour. In the petitioner's books, the contract No. (1) is entered under the heading "Building Repair Accounts"; contract No. (2) is entered under the heading "Kharagpur Works"; contracts Nos. (3) and (5) are entered under the heading "Bank City Concrete Works" and contract No. 4 is entered under the heading "Kidderpore Works, Calcutta Port Commissioners". The bricks required for the above constructions and repairs are entered under the heading "Brickfield Job Account". The Commercial Tax Officer has consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans all kinds of movable property other than actionable claims, stocks, shared, securities and includes all materials, articles and commodities whether or not to be used in the construction, fitting out, improvement or repair of immovable property Goods" includes all material commodities or articles but does not include actionable claims, stocks, shares, securities or money. Explanation:-Goods supplied in the execution of a contract shall be deemed to be goods for the purpose of this Act. Goods" means all kinds of movable property other than actionable claims, stocks, shares or securities and includes all material, articles and commodities whether or not to be used in the construction, fitting out, improvement or repair of immovable property. Section 2 (g). Sale" means any transfer of property in goods for cash or deferred payment or other valuable consideration including transfer or property in goods involved in the execution of a contract but does not include a mortgage, hpothecation, charge or pledge. Sale" means any transfer of property in goods for money consideration and includes a transfer of property in goods supplied in the execution of a contract but does not includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses for consideration is this: The contractor entered into a contract for the construction of a building and/or its repair. Either it supplies the entire material required, or part thereof. It, of course, supplies work and labour in any case. The Act provides that the supply of materials is to be considered as a sale of goods, and the consequence is that the contractor has to pay sales tax on all such materials supplied. It is argued that, as a matter of law, these are not sale of goods and the State Legislature and its predecessor, the Provincial Legislature, had no power or jurisdiction to declare such transactions as sale of goods, or to make them taxable as such. It is consequently argued that these provisions in the Act, in so far as they construe goods supplied in the execution of a contract for the construction and fitting out or repair of any building, road, bridge or other immovable property, as sale of goods liable to sales tax, are ultra vires and void. It is further argued that the rule which has been prescribed in order to calculate the price of goods in a contract which includes price of goods as well as work and labour, is arbitrary and that the State Legislature had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then understood in law as the sale of goods. As the existing law has laid down what amounted to sale of goods, the State Legislature or the Provincial Legislature could not, for the purposes of taxation, enlarge the scope thereof, which it could only do with the assent of the Governor-General, His Majesty or the President, which admittedly have not been obtained. The first question therefore to which we have to address ourselves is the question as to whether in a contract of building or repair, materials supplied by the contractor could be considered as sale of goods under the existing law. It is not only in the State of West Bengal that an attempt has been made to declare the supply of materials by contractors in such cases as sale of goods for the purpose of imposing sales tax. Attempts have been made in other States, e.g., Madras, Mysore, Madhya Pradesh and others. In several States such attempts have been resisted. We have legal decisions on this very point, although unfortunately, they are not uniform. I shall now proceed to consider some of the decisions relevant on the point. The first decision to be cited is the judgment of a Division Bench of the Madras High Court: D. Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral Sales Tax Act and were made subject to the levy of sales tax within the limitations provided in the said Act. The assessees, Messrs. Gannon Dunkerley and Co. (Madras) Ltd., carried on business as engineers and contractors. In the execution of contracts, materials were supplied and were held to be taxable as sales tax. It was argued that the amending Act was beyond the legislative competence of the Provincial Legislature, as the works contracts executed by the assessees were not contracts for sale of goods, and therefore the Provincial Legislature had no jurisdiction or power to enact the impugned provisions with a view to bring "works contracts" of such nature into the net of taxation. This contention was upheld. Rao, J., in an elaborate judgment has considered the various aspects of the case and a large number of authorities. The findings of the learned Judge may be summarised as follows: (1) The legislative power of the Province to enact the General Sales Tax Act and provide for the levy of the general tax on the sale of goods in the State of Madras was derived under the Government of India Act, 1935, the Constitution Act then in force. Under section 100, sub-section (3), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommodities and articles. This corresponds to Article 366(12) of the Constitution. But there is no definition of the words "sale of goods." The transaction denoted by the expression "sales of goods" had a well-defined meaning in law as it existed before Parliament enacted the Government of India Act of 1935, and even thereafter. The transaction denoted by a sale of goods as commonly understood under the law is that which is defined in section 1 of the English Sale of Goods Act and section 4 of the Indian Sale of Goods Act. The essential element in a sale of goods is the transfer of property in the goods to the buyer for a price. It is a consensual act and it requires an agreement to transfer property in the goods for a price. The goods may be existing goods or future goods. They may be ascertained goods or unascertained goods, but in any case, the transfer of property contemplated is in the goods which are the subject matter of the contract. (6) The power of the Legislature could not extend to anything other than a transaction of sale which is well-known to lawyers. If the transaction in question does not constitute in law a sale of goods, then the Legislature has no power to levy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and in pursuance of an agreement for sales which stipulates a price for the materials, but the property in the materials passes to the owner of the land because they are fixed in pursuance of the contract to build and along with the corpus which ultimately results by the construction of the superstructure, the materials also pass to the owner of the land. It therefore follows that building contracts, which the assessees entered into during the assessment year in which the turnover was calculated, did not involve any element of sale of the materials and are not in any sense contracts for the sale of goods as understood in law. The amendments introduced were therefore ultra vires of the Provincial Legislature (1)[1954] 5 S.T.C. 193; A.I.R. 1954 S.C. 549. (2)[1952] 3 S.T.C. 453; A.I.R. 1953 Orissa 23. and they had no power to tax the transactions which were not sale of goods. With great respect to the learned Judge, I agree with the reasoning and the conclusions arrived at by him, and in my opinion, the facts of the present case and the nature of the transactions which we are considering in this case are similar to that which was being considered by the learned Judge, and their is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Gannon Dunkerley's case[1954] 5 S.T.C. 216; A.I.R. 1954 Mad. 1130., he would have come to a different conclusion. In Gannon Dunkerley's case(1), it was held that the supply of materials for a construction was not a sale of the materials, and it was explained how the property in the goods passed. But it was conceded that it might be a sale if the parties agreed to treat it as a sale. All that was said in Ramaswami's case(2) was that a "sale" of paper by the printer could make it liable to sales tax. The particulars of the contract with the printer who supplied the paper were not set out and there is nothing to show that it was of the kind that falls to be considered where a building contractor agrees to construct a building and supplies materials for the purposes thereof. The judgment is a very short one and the points raised and discussed in Gannon Dunkerley's case[1954] 5 S.T.C. 216; A.I.R. 1954 Mad. 1130. were neither raised nor discussed. I am unable to rely on either Ramaswami's case[1954] 5 S.T.C. 250; A.I.R. 1954 Mad. 980. or Mohamed Khasim's case[1955] 6 S.T.C. 211; A.I.R. 1955 Mys. 41. for the purpose of deciding the present case. The next case to be considered is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est that the expression 'sale of goods' received its full and final meaning by 1935 through legislation and decided cases. The cases cited there do not refer to taxation but deal with other matters. So also the Statutes. That building contracts are entire, that property in the building materials passes when they are part of immovable property and that payment is in a lump sum and not separately for the materials may be matters of consequence in some contexts. But there is always a sale if goods are transferred to another and paid for by him. It cannot be gainsaid that there is payment for materials, though the payment is not made separately but as part of a larger amount....... We are here concerned with a taxing measure and the power to levy the tax can only be determined by a fair consideration of the ambit of the entry by which the power is conferred. If the pith and substance of the Act come within that ambit, the power is there, otherwise not. If a building contract was not split up into its component parts, that is to say, materials and labour, in legislative practice relating to the ordinary regulation of sale of goods, there is no warrant for holding that it could not be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon the land and does nothing more, he has performed no part of the contract. The contract is to build the house, and when he affixes the brick and mortar to the land, the property therein passes by accession and not by sale. The contractor is not entitled to any payment, until he completes the structure which he has agreed to build. Interim payments are only by way of advances and the contracts specifically make this point clear. If the learned Judge was right, then surely at any given moment the contractor might refuse to do any further work and say that he must be paid for the materials supplied so far. If it is a sale of goods, the other party will have no answer. This however is far from being the correct legal position. The position therefore is as follows: The State Legislature has the power to tax sale of goods. Where there is a composite transaction it can assuredly break it up so as to separate that portion which constitutes sale of goods and proceed to tax it. But the question inevitably arises as to who is to decide what constitutes the sale of goods. If there is a valid law which defines what is sale of goods, then for the purposes of taxation, the State Legislature w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Amendment) Act, 1947 (XXII of 1947) which was a Central Act. The question arose whether this was a proper exercise of legislative power under entry 54 of List I of the Seventh Schedule of the Government of India Act, 1935, which empowered the Central Legislature to make laws relating to "taxes on income other than agricultural income ". It was argued that "income" did not signify capital gains, either according to its natural import or common usage or according to judicial interpretation of relevant legislation both in England and in India, and therefore the Central Legislature could not enlarge its taxing power by treating capital gains as income. This contention was negatived. Das, J., said as follows: "Our attention has not, however, been drawn to any enactment other than fiscal statutes like the Finance Act and the Income-tax Act where the word 'income' has been used and, therefore, it is not possible to say that the critical word had acquired any particular meaning by reason of any legislative practice. Reference has been made to several cases where the word 'income' has been construed by the Court. What is, therefore, described as legislative practice is nothing but judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of the Hyderabad General Sales Tax Rules in the construction for different contracts is arbitrary and illegal. On the first point, the learned Judges agreed with the decision of the Madras High Court in Gannon Dunkerley & Co. v. State of Madras[1954] 5 S.T.C. 216; A.I.R. 1954 Mad. 1130. and disagreed with the decision of the Nagpur High Court in Pandit Banarsi Das v. State of Madhya Pradesh[1955] 6 S.T.C. 93.Reddy, J., quotes Weaver on Constitutional Law, p. 77, James v. Commonwealth of Australia[1936] A.C. 578. (per Lord Wright at p. 614), State of Bombay v. F.N. Balsara[1951] A.I.R. 1951 S.C. 318. (per Fazl Ali, J., at p. 325), Sales Tax Officer v. Budh Prakash Jai Prakash[1944] 5 S.T.C. 193; A.I.R. 1954 S.C. 459., Bengal Immunity Co., Ltd. v. The State of Bihar[1954] A.I.R. 1955 S.C. 661; 6 S.T.C. 446. and State of Bombay v. United Motors (India) Ltd[1953] A.I.R. 1953 S.C. 252; 4 S.T.C. 133. (per Bose, J., at p. 264) and came to the following conclusion: "In our view the true test must always be the actual language used, and though legislative practice is not conclusive, yet if it is helpful in determining the intention of the framers of the Constitution as to the scope and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been made in it in 1950 and 1954 by the State Legislature of West Bengal, under powers given to it under entry 54 of List II of Schedule VII of the Constitution. Both of these entries inter alia relate to taxation on sale of goods. (2) Both under the Government of India Act, 1935, and the Constitution of India, the word "goods" has been defined [section 311 and Article 366(12)] but not "sale of goods". (3) In India, sale of goods and the incidences thereof are governed by the Sale of Goods Act, being Act IX of 1930 passed by the Indian Legislature. It is based on the English Sale of Goods Act. (4) Both under the Government of India Act, 1935, and under the Constitution, the Provinces and/or the States could make a law in respect of taxation of sale of goods but had no exclusive right to make a law in respect of sale of goods which is a concurrent subject. Such a law, if it is repugnant to the provisions of an existing law would now require the assent of the President. In any event, no such law has been passed in respect of the sale of goods. (5) Under the Sale of Goods Act (section 4), the contract of sale of goods is a contract whereby the seller transfers or agrees to tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay v. F.N. Balsara(3), Sales Tax Officer v. Budh Prakash Jai Prakash[1954] 5 S.T.C. 193; A.I.R. 1954 S.C. 459., Bengal Immunity Co. Ltd. v. State of Bihar[1955] 2 S.C.R. 603; 6 S.T.C. 446., and State of Bombay v. United Motors[1953] 4 S.T.C. 133; A.I.R. 1953 S.C. 252. (10) Thus, there having existed at the time of the enactment of the Government of India Act, 1935, or the Constitution, a well established definition of the transaction known as sale of goods, in the Indian Sale of Goods Act, which in its turn is based on the English Sale of Goods Act, it would be proper to interpret the expression "sale of goods" in entry 48 of the Government of India Act, 1935, as also in entry 54 of the Constitution of India, in the sense in which it was used in the Sales of Goods Act: see cases cited under (9). (11) Judged from this point of view, in the absence of a contract to the contrary, the supply of materials by a contractor, who agrees to build a house (or any other structure) or repair the same, does not amount to a sale of such materials and such supply does not come within the concept of the transaction known as sale of goods. (12) Contracts of building may be generally classified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down in the Sale of Goods Act. The ultimate result of executing a contract is to bring into existence immovable property and not movable property and the contract therefore has not become a contract relating to sale of goods but is a contract to build: Tripp v. Armitage[1839] 150 E.R.1597. , Reeves v. Barlow[1884] 12 Q.B.436., Cotterell v. Apsey[1815] 6 Tanut 322., Clark v. Bulmar[1843] 11 M. and W. 243., Chanter v. Dickinson[1843] 5 M. and G. 253.. A contract whereby a chattel is to be made and affixed by a workman to land or to another chattel before the property therein is to pass, is not a contract to sell but a contract for work, labour and materials, for the contract does not contemplate the delivery of a chattel as such: Benjamin on Sale, 6th Edition, page 190. Thus, if the contractor fails to implement his contract to build, he has no right to recover the price of the materials as such. If before the building is completed it is destroyed by fire, or falls down due to faulty construction, the contractor could not recover the price of the same. Thus, all the elements of the transaction known as sale of goods are lacking. (14) In a composite transaction, the Legislature for p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the contract was a structural contract. It is but manifest that these calculations are arbitrary. The learned Advocate-General does not argue that it is possible to arrive at a mathematically correct answer. He, however, says that if a contractor does not do his duty by submitting the proper materials before the assessing authority, what else can be done but to calculate it upon a rule-of-thumb basis? It is clear, however, that in either case, the calculation is on an arbitrary basis. It may be that from experience of working these matters, the Government has discovered that by using the prescribed formula, results are obtained which are every nearly accurate. Assuming that this is so, how does the matter stand? It is conceded that the State Legislature can only tax what is sale of goods and cannot tax what is work and labour. If we have an arbitrary method, which however approximate is not wholly correct, then the inevitable result is that the calculation of the money value of what is called the price of goods supplied, will in the majority of instances contain, or include, a part of the consideration for work done and labour supplied. In so far as this will be so, the State ..... X X X X Extracts X X X X X X X X Extracts X X X X
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