Pandit Banarsi Das Bhanot vs The State Of Madhya Pradesh and Others

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

Court: supreme-court

Case Number: Civil Appeals Nos. 253 to 255 of 1955

Decision Date: 3 April 1958

Coram: S. R. Das, Venkatarama Aiyar, S. K. Das, A. K. Sarkar, Bose

In this case the Supreme Court of India delivered its judgment on 3 April 1958 in the matter styled Pandit Banarsi Das Bhanot versus The State of Madhya Pradesh and Others. The petition was filed by Pandit Banarsi Das Bhanot and the respondents were the State of Madhya Pradesh together with other connected parties. The Court sat as a full bench consisting of Justice T. L. Venkatarama Aiyar, Chief Justice Sudhi Ranjan, Justice Bose, Justice Vivian Das, Justice S. K. Das, Justice A. K. Sarkar, and Justice A. K. Sarkar, and the decision was reported in 1958 AIR 909 and 1959 SCR 427. The dispute concerned the validity and constitutional soundness of provisions in the Central Provinces and Berar Sales Tax Act, 1947 (CP & Berar 21 of 1947), particularly sections 2, 4(a) and 6(1)(2), which dealt with the levy of sales tax on building contracts and the tax on the supply of materials used therein. Section 4(a) of the Act provided that any dealer whose turnover exceeded prescribed limits would be liable to pay tax on all sales made after the commencement of the Act, while section 2(g) defined “sale” to include any transfer of property in goods, even when such transfer occurred in the course of executing a contract. Under section 6(1) the Act exempted from tax the sale of goods listed in Schedule 11, and section 6(2) authorised the State Government to amend that schedule by issuing a notification.

Item 33 of Schedule 11, as amended by Act XV of 1949 and incorporated by the Adaptation Order of 1950, originally read “Goods sold to or by the State Government”. Exercising the power conferred by section 6(2), the Government issued a notification on 18 September 1950 substituting the words to read “Goods sold by the State Government”. The appellant, who was a contractor engaged in constructing buildings and roads for the Military and Public Works Department of Madhya Pradesh, contested the assessment that the respondent intended to make under the provisions of the 1947 Sales Tax Act. He raised two principal grounds of challenge. First, he argued that the Provincial Legislature lacked the authority under Entry 48 of List II of Schedule VII of the Government of India Act, 1935, to impose a tax on the supply of materials in works contracts, contending that treating such supply as a “sale” was beyond the legislative competence and therefore ultra vires. Second, he maintained that he was entitled to the exemption provided in Item 33 of Schedule 11, and that the 1950 notification withdrawing that exemption represented an unconstitutional delegation of legislative power.

The Court held that the expression “sales of goods” in Entry 48 must be understood in the same sense as it was defined in the Indian Sale of Goods Act, 1930. Consequently, the Court concluded that a building contract does not involve a sale of materials as such, rendering the provincial tax on the supply of those materials beyond the scope of the Legislature’s authority. The decision further addressed the permissibility of the executive’s power to amend the exemption schedule, finding that such delegation was consistent with accepted legislative practice and not unconstitutional.

In the present appeal, the Court observed that the term “sales of goods” as used in the Goods Act of 1930 meant that a building contract does not involve a sale of the materials themselves; consequently, the Provincial Legislature did not possess the authority to levy a tax on the mere supply of those materials. The Court relied on the earlier decision of the State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., reported in 1959 S.C.R. 379, and affirmed that precedent. The judgment further explained that it was not unconstitutional for a legislature to delegate to the executive the responsibility for working out specific details of tax law, such as deciding which persons would be subject to the tax, determining the rate applicable to each class of goods, and making similar administrative choices. The Court emphasized that the power given to the State Government by section 6(2) of the Central Provinces and Berar Sales Tax Act, which allowed the Government to amend the Schedule dealing with exemptions, conformed to accepted legislative practice and therefore did not violate the Constitution. It was explained that subsections (1) and (2) of section 6 formed an integral part of a single enactment whose purpose was to grant exemptions from tax on specified goods, with the extent of the exemption to be varied from time to time by the State Government. Accordingly, any exemption granted under section 6(1) was conditional and could be altered or withdrawn by a notification issued under section 6(2). The Court concluded that the notification issued on 18 September 1950, which withdrew a previously enjoyed exemption, was within the legislative competence and therefore was intra vires.

The judgment was recorded under the heading “Civil Appellate Jurisdiction” and concerned Civil Appeals numbered 253 to 255 of 1955, which were filed against the decree dated 30 November 1954 pronounced by the former Nagpur High Court in miscellaneous petitions numbered 245, 279 and 308 of 1954. Counsel for the appellant in appeal 253 of 1955 comprised the learned advocates who appeared on behalf of the company, while counsel for the appellant in appeals 254 and 255 of 1955 appeared separately. For the respondents in appeals 253 and 254 of 1955, as well as for the State of Madhya Pradesh acting as an intervener, the respondents were represented by a team of senior counsel. The State of Bombay, also intervening in appeal 255 of 1955, was represented by the Solicitor‑General of India together with another learned counsel. Additionally, the State of Punjab intervened in the proceedings and was represented by its own counsel. The judgment was pronounced on 3 April 1958. The delivery of the judgment was undertaken by the Chief Justice of the Supreme Court, S.R. Das, together with Justices Venkatarama Aiyar, S.K. Das and A.K. Sarkar, while Justice Venkatarama Aiyar authored the main opinion. Justice Bose delivered a separate concurring judgment. The case arose from writ applications filed by the appellants challenging the validity of certain provisions of the Central Provinces and Berar Sales Tax Act, 1947 (referred to as “the Act”), which imposed a sales tax on materials used in construction projects. To facilitate discussion, the Court referred to the relevant definitions contained in the Act. In particular, Section 2(b) of the Act defined the term “contract” to include any agreement for carrying out work for cash or deferred payment, thereby laying the foundation for the Court’s analysis of the tax provisions.

Section 2(b) of the Act defines “contract” to mean any agreement for carrying out, for cash or deferred payment or other valuable consideration, the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property, or the installation or repair of any machinery affixed to a building or other immovable property. Section 2(c) defines “dealer” as a person who carries on the business of supplying goods. Section 2(d) expands the meaning of “goods” to include all materials, articles and commodities whether or not they are to be used in the construction, fitting out, improvement or repair of immovable property. Section 2(g) provides a definition of “sale” stating that “sale”, with all its grammatical variations and cognate expressions, means any transfer of property in goods for cash or deferred payment or other valuable consideration, including a transfer of property in goods made in the course of the execution of a contract, but expressly excludes a mortgage, hypothecation, charge or pledge; the word ‘purchase’ is to be construed accordingly. Section 2(h) defines “sale price” as the amount payable to a dealer as valuable consideration for the carrying out of any contract, reduced by that portion representing the proportion of the cost of labour to the cost of materials used in carrying out such contract, as may be prescribed. Section 2(j) defines “turnover” as the aggregate amount of the sale price received or receivable by a dealer in respect of the supply of goods in the performance of any contract.

The charging provision is contained in section 4(a), which provides that a dealer whose turnover exceeds the prescribed limits shall be liable to pay tax under the Act on all sales effected after the commencement of the Act. Rule 4 of the Sales Tax Rules, 1947, further stipulates that, in calculating the sale price for the purpose of sub‑clause (ii) of clause (h) of section 2, a dealer may be permitted to deduct from the amounts payable to him as valuable consideration for carrying out a contract a sum not exceeding the percentages fixed by the Commissioner for different areas, subject to the maximum percentages laid down in a schedule that differentiates various classes of contracts. Acting upon these statutory provisions, the authorities created under the Act required contractors throughout the State to file returns showing the receipts they obtained from contract work so that the tax authorities could assess sales tax liability. The appellants responded to these requisitions by instituting legal proceedings, which ultimately gave rise to the present appeals. The appellant in Civil Appeal No. 253 of 1955 is a contractor engaged in constructing buildings and roads for the Military and Public Works Department of Madhya Pradesh. He filed Miscellaneous Petition No. 245 of 1954 challenging the validity of the assessment that the respondents intended to make, asserting two grounds of challenge. His first ground contended that the Provincial Legislature had…

The contractor argued that the State’s authority to levy a tax derived only from Entry 48 of List I, Schedule VII of the Government of India Act, 1935, which authorised tax on the sale of goods. He contended that the supply of materials in a works contract did not constitute a “sale” within the meaning of that entry, and therefore the provisions of the Act that treated such supplies as sales and imposed tax on them were beyond the legislative power, i.e., ultra vires. The contractor’s second contention was that he was entitled to an exemption under item 33 of Schedule 11 of the Act as it stood after the enactment of Act XVI of 1949, and that the Government’s notification dated 18 September 1950, which withdrew that exemption, was unconstitutional and void. To understand this contention, it is necessary to refer to section 6 of the Act. Section 6(1) provided that no tax shall be payable on the sale of goods listed in the second column of Schedule 11, subject to the conditions and exceptions set out in the corresponding entry of the third column. Section 6(2) authorised the State Government, after giving at least one month’s notice of its intention, to amend either Schedule by a subsequent notification, and such amendment would then be deemed effective. Originally, item 33 in Schedule 11 read “Goods sold by the Crown”. Act XVI of 1949 amended this wording to “Goods sold to or by the Crown”. An Adaptation Order of 1950 replaced the words “Crown” with “State Government”, thereby making item 33 read “Goods sold to or by the State Government”. Exercising the power conferred by section 6(2), the State issued a notification on 18 September 1950 that amended item 33 by substituting “Goods sold to or by the State Government” with “Goods sold by the State Government”. As a result, the contractor, who had previously been entitled to exemption under Act XVI of 1949 for goods sold to the Government, could no longer claim that exemption because of the new notification. The contractor’s ground of attack was that the Government, by invoking the authority under section 6(2), was not permitted to modify or alter the amendment made by the Legislature. Accordingly, he claimed that the assessment proceedings the respondents intended to initiate for sales tax were incompetent and he prayed for an appropriate writ to restrain the State from proceeding with those assessments. In Civil Appeal No. 254 of 1955, the appellants were the Jabalpur Contractors’ Association, a registered body, together with certain contractors, and they filed Madhya Pradesh No. 279 of 1954 challenging the validity of the proposed assessment on the same grounds as in Madhya Pradesh No. 245 of 1954. The appellant in Civil Appeal

No. 255 of 1955 was filed by the Madhya Pradesh Contractors’ Association, Nagpur, which is a registered body, and its petition, numbered M. P. No. 305 of 1954, challenged the legality of the assessment proceedings on the same grounds that were raised in M. P. No. 245 of 1954. The three petitions were heard together, and by the judgment dated 30 November 1954 the learned judges held that the expression “sale of goods” in Entry 48 was sufficiently wide to encompass all transactions in which ownership of movable property passed from one person to another for a monetary consideration. Consequently, they concluded that in a building contract there existed a sale within Entry 48 of the materials employed in the contract and that the provisions of the Act imposing tax on such sales were valid. However, the judges also ruled that the tax could be levied only on the actual value of the materials, which value had to be ascertained through an enquiry into the matter. They further held that the definition of “price” contained in section 2(h)(ii) and rule 4 of the Sales Tax Rules, 1947, was ultra vires, because those provisions imposed artificial rules for fixing the price by deducting certain percentages from the total receipts on account of labour. Regarding the notification dated 18 September 1950, the learned judges found that it was made within the authority conferred by the statute and therefore was valid. In sum, the court declared the impugned provisions of the Act to be valid except for the definition of “price” in section 2(h)(ii) and rule 4 of the 1947 Rules. The appeals before this Court were filed against that judgment on a certificate granted by the High Court under Article 132(1) of the Constitution. Two principal contentions were advanced in support of the appeals: first, that the Provincial Legislature lacked authority, under Entry 48, to impose a tax on the supply of materials in works contracts because such a supply could not be characterised as a sale of those materials within the meaning of Entry 48; and second, that the notification of 18 September 1950 was unconstitutional because it amounted to an improper delegation of legislative power. Concerning the first contention, the matter had already been decided by this Court in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1), where it was held that the expression “sale of goods” in Entry 48 carries the same meaning as in the Indian Sale of Goods Act, 1930, and that in a building contract there is no sale of materials as such, rendering any tax on the supply of such materials ultra vires the Provincial Legislature’s powers. Counsel for the respondents, Mr. B. Sen, argued that even if the expression “sale of goods” in Entry 48 is construed in the same sense as in the Sale of Goods Act, that construction might still support the validity of the tax under certain circumstances.

The Court observed that the impugned provisions of the Act would be ultra vires only insofar as they pertained to a building contract that was one single and indivisible agreement. It further recognised that certain contracts might in fact be composed of two distinct arrangements: one agreement for the sale of materials and a second agreement for work and labour. In such a circumstance, it would be within the competence of the State to levy tax on the sale of materials even when the word “sale” is construed in its narrow sense, as indicated by the citation (1) [1959] S.C.R. 379. The Court emphasized that the determination of whether a contract falls within this category must be left to the appropriate authorities for investigation. This position was affirmed as being consistent with the decision in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1). Accordingly, whenever a question arises as to whether a particular works contract may be subject to sales tax, the authorities empowered under the Act must examine the true construction of the agreement. If, after such examination, the authorities conclude that the contract combines an agreement to sell goods with an agreement to perform work, they are then empowered to tax the portion of the contract that constitutes a sale of goods. The Court thus placed the responsibility for such factual determinations on the statutory machinery rather than on the judiciary.

The Court next turned to the contention that the notification dated 18 September 1950 was invalid because it amounted to an unconstitutional delegation of legislative power. While the Court had previously held that a works contract does not, in its essence, involve a sale of materials, it noted that it would be merely academic to ignore the issue, since some building contracts can be structured so that the agreement for the sale of materials is separate from the agreement for work and labour. Counsel for the appellant in Civil Appeal No. 253 of 1955 argued that the notification was ultra vires because the question of whether an exemption should be granted under the Act is a matter of policy that must be decided by the Legislature and cannot be delegated to an external authority. The argument further asserted that, although the power to execute a law may be delegated to the executive, the power to make law must remain with the Legislature. To support this view, the counsel relied on observations in Hampton J R & Co. v. United States (2), Panama Refining Co. v. Ryan (3), and Schechter v. United States (4). Additionally, it was contended that granting an outside authority the power to repeal or modify a statutory provision—citing (1) [1959] S.C.R. 379, (2) 276 U.S. 394; 72 L.Ed. 624, 629, (3) 293 U.S. 388; 79 L.Ed. 446, 458, and (4) 295 U.S. 495; 79 L.Ed. 1570—was unconstitutional, and consequently the impugned notification must be held invalid. The Court indicated that a decision on this point was necessary because of the possibility of contracts where the sale of materials is distinctly separable from work obligations.

In this matter the Court examined the effect of a notification that cancelled the exemption previously granted under Act XVI of 1949, which had directed that sales to the Government were to be excluded from the operation of that Act. The cancellation therefore reversed the legislative policy embodied in Act XVI and removed the exemption that had been provided. The petitioners heavily relied upon the observations made in re The Delhi Laws Act, 1912 etc. (1) and on the decision in Rajnarain Singh v. The Chairman, Patna Administration Committee, Patna and another (2) to support their contention that the notification was unlawful. The counsel for the petitioner further pointed to specific remarks of Justice Bose recorded at page 301 of the Rajnarain Singh case, namely: “In our opinion, the majority view was that an executive authority can be authorised to modify either existing or future laws but not in any essential feature. Exactly what constitutes an essential feature cannot be enunciated in general terms, and there was some divergence of view about this in the former case, but this much is clear from the opinions set out above; it cannot include a change of policy.” On the basis of those observations the Court identified the principal question for determination as whether the impugned notification altered an essential feature of the law or effected a change in policy. The Court then noted that established authority holds that it is not unconstitutional for the legislature to entrust the executive with the determination of certain details necessary for the administration of taxation statutes, such as identifying the persons who are to bear the tax, fixing the rates applicable to different classes of goods, and analogous matters. To illustrate this principle the Court referred to the case of Powell v. Appollo Candle Company Limited, in which the issue was whether section 133 of the Customs Regulation Act of 1879 of New South Wales, which authorised the Governor to impose tax on specific articles of import, amounted to an unconstitutional delegation of legislative power. The Privy Council, in refusing to deem the provision unconstitutional, observed: “It is argued that the tax in question has been … imposed by the Governor and not by the Legislature who alone had power to impose it. But the duties levied under the Order‑in‑Council are really levied by the authority of the Act under which the Order is issued. The Legislature has not parted with its perfect control over the Governor, and has the power, of course, at any moment, of withdrawing or altering the power which they have entrusted to him. In these circumstances, their Lordships are of opinion that the judgment of the Supreme Court was wrong in declaring Section 133 of the Customs Regulation Act of 1879 to be beyond the power of the Legislature.” The Court also cited Syed Mohamed & Co. v. The State of Madras (1), where the validity of rules 4 and 16 made under the Madras General Sales Tax Act was challenged. Section 5(vi) of that Act had authorised the rule‑making authority to determine

In that case the Court observed that the rule‑making authority under section 5 (vi) of the Madras General Sales Tax Act was authorised to determine at which single point in the chain of successive dealers the tax should be imposed, and that rules 4 and 16 therefore made the purchaser liable to pay the tax on sales of hides and skins. The validity of those rules was challenged on the ground that only the legislature was competent to decide who should be taxed and that the rule‑making body’s determination was ultra vires. The Madras High Court rejected this contention, holding on a review of the authorities that the delegation of power under section 5 (vi) fell within permissible constitutional limits. The Court then referred to the decision in Hampton J.R. & Co. v. United States, where the question was whether section 315(b) of the Tariff Act, 1922, which permitted the President to adjust duty rates in accordance with statutory policy, amounted to an unconstitutional delegation; the Court in that case held that such delegation was not unconstitutional. Accordingly, the Court expressed the view that the power conferred on the State Government by section 6(2) of the Central Provinces and Berar Sales Tax Act, 1947, to amend the schedule relating to exemptions was consistent with accepted legislative practice and was not unconstitutional. The appellant’s argument that the notification was ultra vires was rejected on a further ground. The appellant assumed that the power to amend the schedule under section 6(2) was entirely independent of the exemption power under section 6(1), and therefore that an exemption granted under section 6(1) could remain while an amendment under section 6(2) might be invalid. The Court disagreed, holding that the two subsections together form integral parts of a single enactment whose purpose is to grant exemption from tax to certain goods to the extent that the State Government may determine from time to time. Consequently, section 6(1) cannot operate independently of section 6(2); any exemption is conditional and subject to modification by a notification made under section 6(2). In this view the impugned notification is intra vires and not open to challenge. However, because the Court had earlier found that the impugned provisions of the Act were ultra vires the powers of the Provincial Legislature under Entry 48 in List III of the Seventh Schedule, it ordered that the decisions of the lower court be set aside and directed that the respondents be restrained from enforcing the provisions of the Central Provinces and Berar Sales Tax Act, 1947, insofar as they attempt to impose a tax.

In the matter before the Court, it was observed that the State authorities were attempting to levy a tax on construction work. The Court clarified that, based on its earlier analysis, the statutory prohibition on imposing a tax applies solely to contracts that are single and indivisible. The prohibition does not extend to arrangements that consist of a combination of separate contracts, one for the supply of materials and another for the execution of work. Furthermore, the Court emphasized that nothing in its present judgment should prevent the sales‑tax officials from determining, on a case‑by‑case basis, whether a specific agreement falls within the category of a single indivisible contract or within the mixed category, and consequently from taxing the portion of the agreement that relates to the sale of materials where the latter classification is appropriate. The Court ordered that each party shall bear its own costs for the entire proceedings. Justice Bose expressed agreement with the majority opinion but noted a preference to refrain from pronouncing on the constitutionality of the power granted to the State Government by section 6(2) of the Central Provinces and Berar Sales Tax Act, 1947, to amend the schedule in the manner effected in this case. He therefore left that particular question open for determination at a later stage. The appeals were consequently allowed.