Citation : 2006 Local Law (CG) 9
In a significant ruling on state taxation powers, a division bench of the Chhattisgarh High Court, led by Chief Justice S.R. Nayak, has declared Section 35 of the Chhattisgarh Vanijyik Kar Adhiniyam, 1994 unconstitutional and beyond the legislative competence of the State. The court ordered that any amounts collected under that provision be refunded to affected taxpayers, and each party was directed to bear its own costs.
The challenge arose from a writ petition filed by a proprietary concern owned by Shri Krishana Mudliar, which performed works contracts for state departments and held a commercial tax registration. The petitioner argued that Section 35, which required a person letting out a works contract to deduct two percent from payments to contractors (when the contract value exceeded one lakh rupees) without distinguishing taxable and non-taxable components, unlawfully extended the State’s taxing authority into areas reserved for Parliament.
The State defended the provision as a necessary administrative measure. Government counsel told the court that contractors frequently moved across state lines or disappeared after payment, leaving the commercial tax department with no realistic way to recover sales tax later. The State pointed to analogous provisions in other states and a 1996 Madhya Pradesh High Court decision that had upheld the validity of similar deductions.
Chief Justice Nayak’s judgment rejected those arguments. The court’s reasoning rested on constitutional boundaries and a line of Supreme Court precedent. The Constitution assigns to state legislatures the power to tax the sale or purchase of goods, but that power does not extend to inter-state sales, outside sales, or imports and exports. The court emphasized Article 286 and the Central Sales Tax Act, which set out when transactions qualify as inter-state or outside sales.
The High Court reviewed Supreme Court precedents including Bhawani Cotton Mills Ltd. v. State of Punjab and later decisions that have consistently required that only the taxable portion of a works contract be taken into account for state sales tax. In practical terms, when a works contract involves transfers of goods that are inter-state or otherwise outside the taxing power of a state, those components must be excluded from any state tax computation. The court found that Section 35 made no provision for such exclusions and instead required blanket deductions at source based on gross contract payments.
The court also considered and dismissed the earlier Madhya Pradesh High Court decision relied upon by the State. The Chhattisgarh bench held that the Madhya Pradesh ruling was per incuriam, meaning it was rendered in ignorance of binding Supreme Court decisions and legislation that should have been considered. The Chhattisgarh court emphasized that a provision that functions as a collection or recovery mechanism cannot stand if the underlying power to tax the subject matter is absent.
Citing Supreme Court rulings such as Steel Authority of India Ltd. v. State of Orissa and Nathpa Jhakri Joint Venture v. State of Himachal Pradesh, the court concluded that machinery provisions which compel advance deductions without a proper legal basis amount to an overreach of state legislative authority. The judgment reaffirmed the principle that mere possibility of later refund does not cure an initial invalid levy, and that arbitrary, uncircumscribed powers to deduct from contractors were constitutionally impermissible.
As a result of the decision, Section 35 of the Chhattisgarh Vanijyik Kar Adhiniyam, 1994 has been struck down. The High Court ordered that any amounts collected under the provision, if paid by the petitioner, must be refunded forthwith by the State. The order underscores that states cannot rely on blunt withholding mechanisms to preempt assessment issues that belong to the central framework for inter-state trade.
Tax practitioners and contractors will watch closely for follow-up actions by the State, including whether the legislature will propose a revised, constitutionally tailored collection mechanism or whether administrative practice will change pending any appeal. For now, this ruling strengthens the line of authority that demands precise separation between taxable local sales and transactions beyond a state’s taxing sphere.
Case Details : Writ Petition No. 661 of 2002, V.T.P. Constructions vs. State of Chhattisgarh and Ors. (21.02.2006)
Counsels:
For Appellant/Petitioner/Plaintiff: Neelabh Dubey, Adv. For Respondents/Defendant: Utkarsha Verma, Deputy Govt. Adv.
Acts/Rules/Orders:
Central Sales Tax Act, 1956 – Section 14, Central Sales Tax Act, 1956 – Section 15, Central Sales Tax Act, 1956 – Section 3, Central Sales Tax Act, 1956 – Section 4, Central Sales Tax Act, 1956 – Section 5; Constitution Of India – Article 19(1)(g), Constitution Of India – Article 246, Constitution Of India – Article 265, Constitution Of India – Article 286, Constitution Of India – Article 286(1), Constitution Of India – Article 286(1)(a) ,Constitution Of India – Article 286(1)(b) , Constitution Of India – Article 286(2), Constitution Of India – Article 286(3), Constitution Of India – Article 301, Constitution Of India – Article 366, Constitution Of India – Article 366(29A)
Cases Referred:
Punj Lloyd Ltd. v. State of M.P. [1996] 102 STC 299 : (1996) 29 VKN 533; Steel Authority of India Ltd. v. State of Orissa [2000] 118 STC 297; Nathpa Jhakri JT. Venture v. State of Himachal Pradesh [2000] 118 STC 306 (SC); Larsen & Toubro Ltd. v. State of Karnataka [2003] 129 STC 401; Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204; Brajendra Mishra v. State of Orissa [1994] 92 STC 17; Bhawani Cotton Mills Ltd. v. State of Punjab [1967] 20 STC 290 (SC) : [1967] 3 SCR 577; Hudders field Police Authority v. Watson (1947) 2 All ER 193; Morelle Ltd. v. Wakeling (1955) 1 All ER 708; Municipal Corporation of Delhi v. Gurnam Kaur AIR 1989 SC 38; Punjab Land Development & Reclamation Corporation Ltd. v. Presiding Officer, Labour Court (1990) 3 SCC 682; Commissioner for Hindu Religious and Endowments v. C. Lakshminarasinhaiah (1990) Supp. SCC 164; Union of India v. Indian Railways SAS Staff Association (1995) Supp 3 SCC 600; A.R. Antulay v. R.S. Nayak (1988) 2 SCC 602; Richards v. Richards (1990) Fam 194; Wellcome Trust Ltd. v. Hamad (1998) QB 638; Larsen and Tourbo v. State of Bihar [2000] 117 STC 41; National Building Construction Corporation Ltd. v. State of Bihar [2000] 118 STC 370; Larsen & Tourbo Ltd. v. Commissioner of Sales Tax, Gujarat [2001] 124 STC 162
Authorities Referred:
Black’s Law Dictionary (Eighth Edition); Rupert Cross & J.W. Haris, Precedent in English Law 149 (4th Edition, 1991)
Supreme Court Status:
Judgment challenged vide AIR 2008 SC 714 : ( 2008 ) 2 SCC 578 : [ 2007 ] 12 SCR 1148 dated: 07.12.2007
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संविधान – अधिनियम – वैधता – छत्तीसगढ़ वाणिज्यिक कर अधिनियम, 1994 की धारा 35
याचिकाकर्ता एक ठेकेदार था जिसने राज्य सरकार के विभिन्न विभागों के लिए निर्माण कार्य (वर्क्स कॉन्ट्रैक्ट) किए। इन कार्यों के भुगतान में से 2 प्रतिशत राशि, अधिनियम की धारा 35 के तहत स्रोत पर बिक्री कर (Sales Tax) के रूप में काट ली गई। याचिकाकर्ता ने इस कटौती को चुनौती दी, यह तर्क देते हुए कि उसके अनुबंधों में ऐसी वस्तुएं भी शामिल थीं जो अंतर-राज्यीय व्यापार (inter-State trade) के दौरान आपूर्ति की गई थीं और जिन पर राज्य कर नहीं लगा सकता।
मुख्य प्रश्न: क्या छत्तीसगढ़ वाणिज्यिक कर अधिनियम, 1994 की धारा 35 संवैधानिक रूप से वैध है?
निर्णय (Held): न्यायालय ने कहा कि यह एक स्थापित सिद्धांत है कि राज्य विधायिका को अंतर-राज्यीय बिक्री, आयात के दौरान बिक्री, या राज्य के बाहर होने वाली बिक्री पर कर लगाने का अधिकार नहीं है। इस प्रकार, यदि राज्य को किसी प्रकार के कर पर अधिकार नहीं है, तो अग्रिम कर (advance tax) वसूली की कोई भी व्यवस्था संवैधानिक रूप से टिकाऊ नहीं हो सकती।
निष्कर्ष: धारा 35, राज्य की विधायी शक्तियों की सीमा से परे है और संविधान के अनुरूप नहीं है। अतः यह अवैध और अमान्य घोषित की गई। याचिका स्वीकृत (Allowed) की गई।
