Mithan Lal vs The State of Delhi and Another

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Petitions Nos. 15 and 16 of 1955

Decision Date: 7 April 1958

Coram: S.K. Das, A.K. Sarkar, T.L. Venkatarama Aiyyar, Bose, Vivian Das, Sudhi Ranjan (CJ), Venkatarama Aiyyar

Mithan Lal filed a petition against the State of Delhi and another respondent, and the case was decided by the Supreme Court of India on 7 April 1958. The bench that heard the matter included Justice S.K. Das, Justice A.K. Sarkar, Justice T.L. Venkatarama Aiyyar, Justice Bose, Justice Vivian Das, Justice Sudhi Ranjan (Chief Justice), and Justice Das, S.K. Sarkar, A.K. Sarkar. The judgment is reported in 1958 AIR 682 and 1959 SCR 445. The dispute concerned the levy of sales tax on building contracts, specifically the tax on the supply of materials used in construction work, and raised questions of Parliament’s competence to enact such tax, the delegation of authority to extend taxation law by a government notification, and the validity of the Bengal Finance (Sales Tax) Act, 1941 (Bengal VI of 1941) as applied to Delhi through the Part C States (Laws) Act, 1950 (XXX of 1950), Section 2, in light of Articles 246(4) and 248(2) of the Constitution of India. The petitioners, who were building contractors conducting business in Delhi, argued that Delhi had become a Part C State under the Constitution and that the Chief Commissioner of Delhi, exercising power under the Part C States (Laws) Act, 1950, had issued a notification extending the Bengal Finance (Sales Tax) Act, 1941 to Delhi. Acting under that notification, the sales‑tax officer demanded tax on the materials supplied for the petitioners’ building contracts, and the petitioners had paid the tax for several years before challenging the assessment. Their challenge was based on two grounds: first, that there was no sale of the materials used in the execution of the building contracts and therefore no authority to tax such materials; second, that the statutory provisions under which the tax was levied were unconstitutional and invalid. The Court held that Parliament is fully competent to impose a tax on the supply of materials in building contracts and to label it as a sales tax, and that because Parliament has legislative authority over Part C States, the tax imposed on the petitioners was valid. The Court rejected the applicability of State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., [1939] S.C.R. 379. The Court further held that Section 2 of the Part C States (Laws) Act does not conflict with Article 248(2) because it authorises the government to extend a taxation law to a Part C State; when a notification under Section 2 extends the law of a Part A State to a Part C State, the provisions of the extended law are incorporated by reference into the Act, making any tax imposed thereafter a tax imposed by Parliament. Additionally, the Court found that Section 2 of the Act does not represent an unconstitutional delegation of legislative power, following the precedent set in In re The Delhi Laws Act, 1912, [1951] S.C.R. 747. Finally, the Court clarified that the expression “enactment which is in force in a Part A State” in Section 2 must be understood as referring to a statute that is currently operative in a Part A State, not to a repealed statute or to individual sections of a statute.

The Court held that the expression “statute which is in operation in a Part A State” must be understood to refer only to a law that is currently effective in a Part A State, and it must be distinguished from a law that has been repealed. The term could not be read as pointing to particular sections or provisions of such a statute. The Court further observed that, irrespective of whether the notification under consideration is viewed as extending an existing statute to Delhi or as extending it with certain modifications, the effect of the notification as it relates to the challenged provisions is within the authority granted by section 2 of the Act. The matter therefore fell within the legislative competence of Parliament. The Court then set out the procedural posture of the cases. Petitions numbered 15 and 16 of 1955 were filed under Article 32 of the Constitution of India for the enforcement of fundamental rights. Counsel for the petitioners represented the applicants. Counsel for the respondents represented the Union of India. Counsel for the intervening States of Madras and Mysore appeared on behalf of those states. Counsel for the intervening State of Uttar Pradesh appeared on behalf of that state. Counsel for the intervening State of Kerala appeared on behalf of that state. Counsel for the intervening private company, Raipur Provincial Engineering Co., appeared on its behalf. The judgments were handed down on 7 April 1958, and the opinion of the Court was delivered by Justice Venkatarama Aiyar. The petitioners were building contractors carrying on business in Delhi. They challenged, by way of the present applications under Article 32, the validity of certain provisions of the Bengal Finance (Sales Tax) Act, 1941 (Bengal VI of 1941), which had been extended to the State of Delhi by a notification dated 28 April. The Court noted that the provisions under attack could be identified in section 2 of the Act. Section 2(d) defined “goods” to include all materials, articles and commodities, whether or not they were to be used in the construction, fitting‑out, improvement or repair of immovable property. Section 2(g) defined “sale” as any transfer of property in goods for cash, deferred payment or other valuable consideration, including a transfer of property in goods involved in the execution of a contract. Section 2(b) defined “contract” as any agreement for carrying out, for cash, deferred payment or other valuable consideration, the construction, fitting‑out, improvement or repair of any building, road, bridge or other immovable property. Section 2(h)(ii) defined “sale price” as the valuable consideration for the performance of any contract, less the portion, if any, that may be prescribed to represent the usual proportion of labour cost to material cost in that contract. Section 2(i) defined “turnover” as, for any period, the aggregate of the sale‑prices or parts of sale‑prices receivable, or, if the dealer so elects, actually received during that period, after deducting any amounts refunded by the dealer for goods returned by purchasers within the same period. Finally, section 4, the charging provision, stipulated that every dealer whose gross turnover during the year immediately preceding the commencement of the Act exceeded the taxable threshold would be liable to pay tax under the Act on all sales effected after the date of the notification.

The Court explained that the provision stating that a person whose turnover exceeded a prescribed quantum would be liable to pay tax under the Act on all sales effected after the date so notified applied only to the jurisdiction of the statute that imposed the tax. The Bengal Finance (Sales Tax) Act, 1941, was enacted by the Legislature of the Province of Bengal and, after the partition of the country, continued to apply solely to sales made within the State of West Bengal. Under the Government of India Act, 1935, Delhi had the status of a Chief Commissioner’s Province administered directly by the Governor‑General, and after the adoption of the Constitution it became a Part C State. Article 239 of the Constitution vested the administration of a Part C State in the President acting through a Chief Commissioner or a Lieutenant‑Governor, as he thought appropriate. Article 246(4) was relevant because it vested Parliament with the power to make laws for any part of the territory of India that was not included in Part A or Part B of the First Schedule, even if the subject matter fell within the State List. Exercising that power, Parliament enacted the Part C States (Laws) Act No. XXX of 1950. Section 2 of that Act provided that the Central Government could, by publication of a notification in the Official Gazette, extend to any Part C State (with the exception of Coorg and the Andaman and Nicobar Islands) or to any part of such a State, any enactment that was in force in a Part A State on the date of the notification, subject to any restrictions or modifications deemed necessary. Accordingly, on 28 April 1951 the Chief Commissioner of Delhi issued a notification under this section, extending the operation of the Bengal Finance (Sales Tax) Act, 1941, to Delhi effective from 1 November 1951. Proceeding under the authority of the Act, the Sales Tax Officer at Karolbagh, Delhi, served notices on 12 June 1952 to the petitioners, directing them to file returns of their receipts from building contracts and to deposit the tax due thereon. The petitioners complied by submitting quarterly returns of their taxable turnover, and assessment orders were made for the financial years 1951‑1952 and 1952‑1953, with the corresponding taxes paid. For the year 1953‑1954 the petitioners also filed quarterly returns and deposited the tax, although assessment for that year was still pending. This factual backdrop existed when the Madras High Court delivered its judgment in Gannon Dunkerley & Co. v. State of Madras, holding that the provisions of the Madras General Sales Tax Act, 1939, which imposed tax on the supply of materials used in construction works, were beyond the competence of the Provincial Legislature under Entry 48(1) of List II, Schedule VII to the Government of India Act, 1935, as reported in [1954] 5 S.T.C. 216. Relying on that decision, the petitioners, who had hitherto believed that the provisions of the Bengal Finance (Sales Tax) Act, 1941, imposing tax on construction contracts were valid and had been paying tax accordingly, initiated Civil Writs Nos. 244‑D and 247 of 1954 in the Punjab High Court. They challenged the validity of those provisions on the ground that no sale of materials occurred in the execution of a building contract and that a tax thereon was not authorized by Entry 48. Their prayer sought (a) a writ of certiorari to set aside the assessments for the years 1951‑1952 and 1952‑1953, (b) a writ of prohibition to restrain any assessment or recovery of sales tax for the year 1953‑1954, and (c) a writ of mandamus directing the respondents to refrain in the future from assessing sales tax under the impugned provisions. The Punjab High Court dismissed both petitions summarily on 18 October 1954, and, because the orders of dismissal were not challenged in the proper proceedings, they became final. The petitioners now sought to revive the question that had already been answered against them by the High Court.

In the belief that their contracts were valid, the petitioners paid the tax and subsequently filed Civil Writs Numbers 244‑D and 247 of 1954 in the Punjab High Court, challenging the validity of the tax provisions on the ground that the materials used in the execution of a building contract were not sold and that the tax was therefore not authorised by Entry 48. They prayed for three specific remedies: first, a writ of certiorari to quash the assessments for the fiscal years 1951‑1952 and 1952‑1953; second, a writ of prohibition to restrain any assessment or collection of sales tax for the year 1953‑1954; and third, a writ of mandamus directing the respondents to refrain from imposing sales tax on them under the impugned provisions in the future.

The Punjab High Court summarily dismissed both petitions on 18 October 1954, and because no appeal was filed against those dismissals, the orders became final. The petitioners now seek to revive the issue, which the High Court settled against them, by invoking proceedings under Article 32 of the Constitution. In response, the learned Solicitor General, appearing for the respondents, raised several preliminary objections of a serious nature concerning the maintainability of these petitions.

He argued that the petitioners had already filed petitions under Article 226 seeking exactly the same reliefs that they now pursue, that those petitions had been dismissed, and that, in the absence of any appeal, they possessed no right to approach this Court under Article 32 for the same reliefs. He further contended that the petitioners’ claim that the assessments, being unauthorised, interfered with their fundamental right to carry on business under Article 19(1)(g) could not be sustained because the assessment proceedings had been completed and the tax had been realised.

The Solicitor General also maintained that, even if the petitioners were correct that the assessments were unauthorised, their proper remedy lay in filing a suit for refund of the taxes paid, and that the applications for writs of certiorari to set aside the assessment orders were therefore misconceived. Moreover, he submitted that the payments had been made voluntarily, perhaps under a mistaken belief about their rights, and consequently the petitioners had no right to claim a refund of those amounts, even by way of an action.

These objections raise questions of considerable importance; however, the Court found it unnecessary to express an opinion on them because the petitioners also request a writ of mandamus directing the respondents to refrain from imposing sales tax in the future. Consequently, the Court determined that it would be more satisfactory to decide the case on its merits. The petitioners rely on the decision of the Madras High Court in Gannon Dunkerley & Co. v. State of Madras, arguing that State Legislatures acting under Entry 48 lack competence to enact laws imposing tax on the supply of materials in execution of works contracts, as there is no sale of those materials by the contractor.

In this case, the Court examined the contention that a tax on the supply of materials used in executing a works contract could not be levied because the contractor did not sell those materials. The petitioners relied on the decision in Gannon Dunkerley & Co. v. State of Madras (1) [1954] 5 S.T.C. 216, which had been appealed to this Court in Civil Appeal No. 210 of 1956 and affirmed by our judgment in The State of Madras v. Gannon Dunkerley & Co., (Madras) Ltd. (2) [1959] S.C.R. 379 pronounced on 1 April 1958. The petitioners argued that, if the present case were governed by that earlier judgment, they would clearly succeed in their claim.

However, counsel for the respondent countered that the earlier decision was inapplicable because the law challenged in the present petitions was not enacted by a State Legislature exercising the power conferred by Entry 54 in List II, but rather by Parliament under the authority granted by Article 246(4) of the Constitution. The respondent further maintained that Parliament possessed the competence, by virtue of that constitutional provision, to impose a tax on the supply of materials in building contracts even though such supply did not constitute a sale within the meaning of Entry 54.

The Court agreed that the respondent’s contention was well founded. Article 246, clauses (2) and (3), allocate to the Legislatures of States listed in Parts A and B the power to legislate on matters enumerated in Lists II and III of Schedule VII, including “Tax on the sale of goods” under Entry 54 in List II. In The State of Madras v. Gannon Dunkerley & Co., Madras Ltd. (1), the Court had held that the power to tax the sale of goods under that entry related only to sales defined by the Indian Sale of Goods Act, 1930. The present dispute, however, does not involve a law of a Part A or Part B State but concerns a law applicable to a Part C State.

Under Article 246(4), Parliament alone may legislate for Part C States, and that power is not limited by the restrictions imposed on State Legislatures by Article 246, clauses (2) and (3), or by Entry 54 of List II. Parliament’s authority is plenary and absolute, subject only to constitutional restrictions, none of which bear on the question before the Court. Consequently, Parliament could validly impose a tax on the supply of materials in building contracts and could label that levy as a “sales tax,” following the practice of the Parliament of the Commonwealth of Australia and the legislatures of the American States.

Therefore, the Court concluded that the decision in The State of Madras v. Gannon Dunkerley & Co., Madras Ltd., which interpreted a statute passed by a Provincial Legislature under the Government of India Act, 1935, does not apply to the present case, because the present tax law derives its source from a Parliament‑enacted statute affecting a Part C State.

The Court observed that the earlier reasoning has no application to the present case. It was argued that Parliament, although possessing power under Article 246(4) to enact legislation imposing a tax on construction contracts, is limited by Article 248, which says that Parliament has exclusive power to legislate on matters not listed, including taxation, and that such power may be exercised only by Parliament directly imposing a tax, not by extending a state taxation law. It was further argued that section 2 of the Part C States (Laws) Act should be held invalid because it contravenes Article 48(2) to the extent that it gave the Government authority to extend a taxation law to Part C States. The Court held that this argument rests on a misunderstanding of the true scope of Article 248. Article 248 deals with the allocation of legislative powers between the Centre and the States mentioned in Parts A and B under the three Lists in Schedule VII, and it provides that, in respect of matters not enumerated in any of the Lists, including taxation, Parliament has the power to enact laws. That provision does not apply to Part C States, for which the governing provision is Article 246(4). Moreover, when a notification is issued by the appropriate Government extending the law of a Part A State to a Part C State, the law so extended derives its force in the receiving State from section 2 of the Part C States (Laws) Act, which was enacted by Parliament. Consequently, a notification under that section incorporates the provisions of the extended law into the Act itself by reference, and therefore any tax imposed under those provisions is a tax imposed by Parliament. The Court therefore found no substance in the contention that Parliament’s power is limited in the manner described.

The petitioners further contended that, even assuming Parliament was competent to impose a tax on the supply of materials in a building contract and that such a tax could be effected by a notification extending the law of a Part A State, the specific notification dated 28 April 1951 exceeded the authority conferred by section 2. Section 2 limits the central Government’s power to extend Part A State laws to Part C States to “any enactment which is in force” at the date of the notification. The petitioners argued that the impugned provisions of the Bengal Finance (Sales Tax) Act, 1941, were ultra vires Entry 48, under which the Legislature of the Province of Bengal derived its power to impose sales tax, and therefore those provisions were not “in force” in West Bengal at the date of the notification and could not be extended to the State of Delhi. According to the petitioners, …

The Court observed that the expression “enactment in force” in section 2 should be understood to refer to provisions of a statute that are valid and enforceable. The Court was unable to agree with the petitioners’ contention that the phrase could be given a narrow meaning. Although the wording of section 2 might, in theory, be susceptible to the construction sought by the petitioners, the Court held that, in the appropriate context, that is not the true meaning. According to the Court, the purpose of the section is that, when different Part A States have enacted various statutes on diverse subjects, the authority acting under section 2 must have the discretion to extend whichever statute from any Part A State is best suited to the conditions of the particular Part C State to which it is to be applied, and furthermore the authority must have the power to extend it with suitable restrictions and modifications. The Court emphasized that the section was not intended to require the authority to examine the validity of each individual provision of the statute and to extend only those it deemed valid. In the Court’s view, the phrase “enactment which is in force in a Part A State” must be read as “statute which is in operation in a Part A State,” distinct from a statute that has been repealed, and it cannot be interpreted as referring to individual sections or provisions of a statute. Even assuming the narrow construction advocated by the petitioners, the Court noted that such a construction would not alter the result, because the power conferred by section 2 on the Government to extend enactments in force in a Part A State includes the authority to do so with restrictions and modifications. Accordingly, it was within the Government’s competence, acting under this provision, to incorporate the impugned provisions by modifying the Bengal Finance (Sales Tax) Act, 1941. The petitioners argued that the notification merely extended the entire Bengal Act on the mistaken premise that it was all valid, and that the notification does not expressly modify the Bengal Act. The Court held that this argument does not affect the position, since the notification intends that all provisions of the Bengal Finance (Sales Tax) Act, 1941, should operate in the State of Delhi, and if this can be achieved by invoking any legislative power, that power must be used and the legislation upheld as falling within that power. The Court recalled the maxim “Ut res magis valeat quam pereat.” Finally, the petitioners contended that section 2 of the Part C States (Laws) Act is invalid because it grants the Government power to modify laws passed by State Legislatures, which they said constitutes an unconstitutional delegation of legislative authority to an external body to alter laws on matters that are essentially matters of policy. The Court considered this final ground in its analysis.

The Court observed that the issue concerned a question of policy. It noted that in the decision reported as re The Delhi Laws Act, 1912 etc. (1) one of the questions referred to this Court pertained to the constitutional validity of the very provision now under consideration, and that the majority of the Court held that the first portion of that section, which is the portion relevant to the present dispute, was valid. The petitioners’ counsel, however, relied upon the earlier judgment of this Court in Rajnarain Singh v. The Chairman, Patna Administration Committee, Patna and another (2). In that case the Court had held that a statute may empower an executive authority to modify either existing or future laws, but that such power cannot be used to alter any essential feature of the law, and that a modification involving a change of the policy of the enactment would be unconstitutional. The petitioners argued that whether taxes should be imposed on the supply of materials used in building contracts is a question of policy, and therefore they contended that the power conferred by section 2 on the Government to extend a law with modifications could not be exercised to alter the provision of the Bengal Finance (Sales Tax) Act, 1941 that dealt with that matter. The Court rejected that contention. It held that, assuming the modification was made by the Central Government, the alteration did not involve any change in the underlying policy of the Bengal Finance (Sales Tax) Act, 1941. Rather, the modification gave effect to the policy already contained in that enactment, a policy intended to bring construction contracts within the ambit of the State’s taxation powers but which could not be implemented because of a lack of legislative authority. Whether the notification is viewed as an extension of an existing statute to Delhi or as an extension with modifications, the Court found that the exercise remained within the authority granted by section 2. Consequently, the petitions were dismissed with costs, and the petitions were dismissed.