Brajendra Mishra v. State Of Orissa And Others Opp. Parties., Orissa High Court, Judgment, Law, casemine.com

Factual and Procedural Background

The writ application challenges the constitutional validity of section 13‑AA of the Orissa Sales‑tax Act, 1947. Section 13‑AA required specified persons (for example, Central or State Governments, local authorities, companies, cooperative societies and certain other statutory bodies) who pay sums to contractors for carrying out works contracts to deduct two per cent of such sums as sales‑tax at the time of payment or credit. The provision required issuance of a prescribed certificate to the contractor and transmission of a copy to the Sales‑Tax Officer, deposit of the deducted sum into the Government Treasury within one week, and adjustment of the deposit against the contractor's sales‑tax liability. Contravention exposed the deducting person to a penalty of up to twice the amount required to be deducted. The High Court (G.B. Patnaik, J., with B.N. Dash, J. concurring) heard the constitutional challenge and delivered the opinion allowing the writ.

Legal Issues Presented

Whether section 13‑AA of the Orissa Sales‑tax Act, 1947, which mandates a two per cent deduction at source from payments to works contractors, is constitutionally valid.

Whether the compulsory deduction mechanism in section 13‑AA, without any classification or mechanism to exclude transactions that are not sales (for example, pure labour contracts or service elements), violates Article 14 (equality before the law) and is confiscatory in character.

Whether the absence in section 13‑AA of a provision analogous to section 194‑C(4) of the Income‑tax Act (which permits the Assessing Officer to grant a certificate for lower or no deduction) renders the deduction provision arbitrary and thus unconstitutional.

Arguments of the Parties

Petitioner's Arguments (as presented by Mr. Mohanty)

No classification is made and no authority is empowered to decide whether a particular transaction is liable to sales‑tax; this absence infringes Article 14.

Section 5(2)(AA) of the Orissa Sales‑tax Act defines "taxable turnover" for works contracts by excluding labour and service charges, but section 13‑AA contains no mechanism to take those exclusions into account when effecting the two per cent deduction; consequently, even purely labour contracts (which may attract no sales‑tax) would suffer mandatory deduction.

The mandatory deduction, when it applies to transactions not liable to sales‑tax, produces a confiscatory result and is therefore unconstitutional.

Respondent / Department's Arguments (as presented by the learned Standing Counsel)

The two per cent deduction under section 13‑AA functions as an advance tax which will be adjusted at the stage of determining the contractor's ultimate liability; that feature removes any confiscatory character.

Sub‑section (4) of section 13‑AA indicates that the deduction is to be adjusted towards the sales‑tax liability of the contractor, so the issue of deduction arises only when the transaction in question constitutes a sale.

By implication, the provision can be read so that where a transaction is not liable to sales‑tax, deduction should not be required (the Department urged a reading down of the provision to this effect).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Builders Association of India v. Union of India, (1989) 2 SCC 645; AIR 1980 SC 1371 (referred)	Held that the 46th Amendment enabled States to levy sales‑tax on the price of goods and materials used in works contracts as if there were a sale, but this power remains subject to the restrictions and conditions in Article 286 (and is exercisable only under Entry 54 of the State List).	The court relied on this authority to accept that works contracts involving transfer of property in goods are within State taxing power, but emphasised that such taxation is circumscribed by constitutional limits; the decision framed the background for assessing the scope of section 13‑AA.
Kunnath t Thathunni Naopil Nair etc. v. State of Kerala, A.I.R. 1961 Supreme Court 552	Principle that courts ordinarily do not examine the policy underlying a taxing statute, but a taxing statute may be struck down under Article 14 if no guiding principle or policy is provided for any conferred discretion; tax must be levied by authority of law (Article 265) and within legislative competence.	The court applied this principle to hold that section 13‑AA lacks any principle or policy to guide the deducting authority (or to provide a mechanism for exclusion), and therefore may be struck down as violative of Article 14 where the statute arbitrarily widens the incidence of taxation.

Precedent

Rule or Principle Cited For

Application by the Court

Builders Association of India v. Union of India, (1989) 2 SCC 645; AIR 1980 SC 1371 (referred)

Held that the 46th Amendment enabled States to levy sales‑tax on the price of goods and materials used in works contracts as if there were a sale, but this power remains subject to the restrictions and conditions in Article 286 (and is exercisable only under Entry 54 of the State List).

The court relied on this authority to accept that works contracts involving transfer of property in goods are within State taxing power, but emphasised that such taxation is circumscribed by constitutional limits; the decision framed the background for assessing the scope of section 13‑AA.

Kunnath t Thathunni Naopil Nair etc. v. State of Kerala, A.I.R. 1961 Supreme Court 552

Principle that courts ordinarily do not examine the policy underlying a taxing statute, but a taxing statute may be struck down under Article 14 if no guiding principle or policy is provided for any conferred discretion; tax must be levied by authority of law (Article 265) and within legislative competence.

The court applied this principle to hold that section 13‑AA lacks any principle or policy to guide the deducting authority (or to provide a mechanism for exclusion), and therefore may be struck down as violative of Article 14 where the statute arbitrarily widens the incidence of taxation.

Court's Reasoning and Analysis

The court proceeded in a structured manner:

Legislative competence and background: The court accepted (relying on the Builders Association decision) that, after the 46th Amendment, States can tax goods and materials used in works contracts as if there were a sale, but that power is subject to constitutional restrictions and must be exercised within Entry 54 of the State List and the limits of Article 286. Thus, works contracts involving transfer of property in goods may be taxable.

Identification of the constitutional complaint: The petitioner argued that section 13‑AA confers an unconditional power on persons responsible for payments to deduct two per cent at source, without any classification or mechanism to determine whether the particular transaction actually involves a sale or is within taxable turnover (for example, after excluding labour and service charges under section 5(2)(AA)). This, the petitioner said, violates Article 14 and results in a confiscatory effect for transactions that are not sales.

Analytical framework: The court invoked the teaching of Kunnath (A.I.R. 1961 SC 552) that, while courts should not normally question the policy of tax statutes, they will strike down taxing provisions when no guiding principle, policy or mechanism is provided to channel the exercise of discretion and avoid arbitrary or discriminatory results. The court emphasised that tax must be levied by authority of law and within legislative competence.

Examination of section 13‑AA: On analysis, section 13‑AA was found to make the two per cent deduction mandatory upon payment or credit in respect of works contracts, with no provision allowing the deducting authority to determine whether the particular transaction is a sale or to exclude purely labour/service elements. The provision gives no channelled discretion or procedure by which a contractor could obtain a certificate that deduction should not be made (contrast noted with the Income‑tax Act).

Comparison with Income‑tax law: The court compared section 13‑AA to section 194‑C of the Income‑tax Act, which is identically worded as to the two per cent deduction but which contains subsection (4) allowing the Assessing Officer, on application, to issue a certificate specifying that deduction should be at a lower rate or not at all. The presence of that remedial mechanism in income‑tax law was treated as an adequate safeguard against confiscation; its absence in the Orissa Sales‑tax Act was held to be material and determinative.

Conclusion of unconstitutionality: Because section 13‑AA mandates deduction even in cases where the transaction may not involve a sale (for instance, pure labour contracts or service components excluded from taxable turnover under section 5(2)(AA)), and because there is no mechanism to avoid or refund deduction in such cases, the provision was found to be arbitrary, discriminatory and confiscatory. The court held that section 13‑AA could not be read down to exclude non‑taxable transactions and that the court is not empowered to re‑enact or amend the legislation to supply a missing remedial mechanism. Consequently, section 13‑AA was struck down as unconstitutional.

Miscellaneous: The court noted that the deduction under section 13‑AA might be adjusted where a transaction is ultimately held to be liable for sales‑tax, but emphasised that this fact does not remedy the compulsory deduction where there is no liability to tax at all.

Holding and Implications

The High Court struck down section 13‑AA of the Orissa Sales‑tax Act, 1947, as unconstitutional and void; the writ application was allowed.

Implications:

Direct effect on the parties: The challenged statutory provision (section 13‑AA) is declared void, so the mandatory two per cent deduction at source under that provision can no longer be enforced as law under the Orissa Sales‑tax Act.

Remedy and costs: The writ application was allowed and the court made no order as to costs. B.N. Dash, J. agreed with the judgment.

Broader precedent: The opinion rests its decision on statutory interpretation and established constitutional principles and referenced existing Supreme Court authority (Builders Association, Kunnath). The opinion does not purport to create or announce a new supra‑ordinate principle beyond the application of those precedents to section 13‑AA.

Brajendra Mishra v. State Of Orissa And Others Opp. Parties.

G.B Patnaik, J.:— The constitutional validity of section 13-AA of the Orissa Sales-tax Act, 1947, has been challenged in this writ application. Under the said provision, a person who is responsible for paying any sum to a contractor for carrying out any works contract is liable to deduct an amount towards sales-tax equal to two per cent of such sum in respect of the works contract at the time of making the payment in question and the said deducting authority is required to grant a certificate to the contractor in the form prescribed and send a copy thereof to the Sales-Tax Officer within whose jurisdiction the works contract is executed. The deduction in question will be adjusted by the Sales-Tax Officer towards the sales-tax liability of the works contractor. Contravention of the provision authorises the Sales-Tax Officer to impose penalty not exceeding twice the amount required to be deducted by the person responsible for making the payment to the contractor and deduction therefrom. For a proper appreciation of the grounds of challenge, it is appropriate to extract the provision of section 13-AA of the Orissa Sales-Tax Act in Extensa:—

“13-AA. Deduction of tax at source from the payment to works contractors.—

(1) Notwithstanding anything contained in section 13 or any other law or contract to the contrary, any person responsible for paying any sum to any contractor for carrying out any works-contract in pursuance of a contract between the contractor and—

(a) Central Government or any State Government, or

(b) any local authority, or

(d) any company incorporated under the Companies Act, 1956 including any State or Central Government undertaking, or

(e) any Co-operative Society or any other association registered under the Societies Registration Act, 1860 shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or any other mode, whichever is earlier, deduct an amount towards sales tax equal to two percentum of such sum in respect of the works contract:

Provided that if the value of the works contract does not exceed rupees one lakh, no such deduction shall be made.

(2) While making deduction as referred to in subsection (1), the deducting authority shall grant a certificate to the contractor in the form prescribed and shall send a copy thereof to the Sales Tax Officer within whose jurisdiction the works-contract is executed.

(3) The amount deducted from the Bills or invoices shall be deposited into the Government Treasury within one week from the date of deduction in such form or challan as may be prescribed.

(4) Such deposit into the Treasury shall be adjusted by the Sales Tax Officer towards the sales tax liability of the works contractor and would also constitute a good and sufficient discharge of the liability of the deducting authority to the contractor to the extent of the amount deposited.

(5) If any person contravenes the provisions of subsection (1) or sub-section (2) or sub-section (3) of this section, the Sales Tax Officer shall, after giving him an opportunity of being heard, by an order in writing, impose on such person penalty not exceeding twice the amount required to be deduction and deposited by him into Government Treasury…”

2. The power to levy sales-tax has been conferred upon the State legislature under Entry-54 of the State List. By the 46th. amendment of the Constitution introducing Clause (29A)(b) in Article 366 of the Constitution, it became possible for the States to levy sales-tax on the price of goods and materials used in works contract as if there was a sale of such good and materials, but that power is subject to the restrictions and conditions mentioned in Article 286 of the Constitution, as has been held by the Supreme Court in the case of Builders Association of India etc. etc. v. Union of India etc. etc., (1989) 2 SCC 645 : AI.R 1980 Supreme Court 1371. In the Builders Association case, the Supreme Court rejected the plea of the State Governments that the 46th. Amendment of the Constitution has conferred on the States a larger freedom than what they had before in regard to their power to levy sales-tax under Entry-54 of the State List and the Apex Court decided that the 46th Amendment does no more than making it possible for the States to levy sales-tax on the price of goods and materials used in works contract as if there was a sale of such goods and materials. The Court, therefore, finally observed:—

“...... As the Constitution exists today the power of the States to levy tax on sales and purchases of goods under Cl. (89 A) of Art. 366 is to be found only in Entry 54 and not outside it”

3. The Supreme Court, therefore, declared that the sales-tax laws passed by the Legislature of the States levying tax 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 Article 236 of the Constitution. Mr. Mohanty, the learned counsel for the petitioner, in assailing the constitutional validity of section 13-AA contends that the very fact that no attempt has been made to make any classification and no power has been conferred upon the authority on whom the liability to deduct tax from the sum payable to the contractor to decide whether the impugned transaction is liable for levy of sales tax, infringes the equality clause in Article 14 and makes the provision confiscatory in character and effect and, therefore, the provision is liable to be struck-down. He further contends that while under section 5(2)(AA) “taxable turnover” in respect of works contract has been defined to be “the gross value received or receivable by a dealer for carrying out such contract, less the amount of labour charges and service charges incurred for the execution of the contract”, but under section 13-AA, there is no provision or mechanism to take into considertion the provisions of section 5(2)(AA) and in effect, therefore, even in case of a purely labour contract where no tax would be ultimately payable in view of the definition of “works contract” in section 5(2)(AA)(i), but yet, there will be deduction at the rate of two per cent by the concerned authority while making a payment as provided in section 13-AA. Such a confiscatory provision is, therefore, unconstitutional and cannot be sustained.

4. The learned Standing Counsel appearing for the Department, on the other hand, contends that section 13-AA undoubtedly has not made any provision at the time of deducting two per cent from out of the sum to be paid to the contractor to take into consideration the labour charges and service charges, but that does not make the provision unconstitutional as the deduction in question is in the nature of an advance tax which is to be adjusted finally while deciding the ultimate liability of the dealer. He further contends that the fact that sub-section (4) of section 13-AA indicates that the deduction in question is towards the sales-tax liability of the works contractor, it must be held that the question of deduction would arise only when the transaction constitutes a sale and, therefore, the provision cannot be said to be confiscatory in nature.

5. The rival contentions require a careful examination of the provisions in question as well as the points urged by the counsel for parties.

6. In view of the decision of the Apex Court in Builders Association case (supra) a ‘works contract’ in which transfer of property in goods takes place is liable to be taxed is not in dispute.

7. But the question that arises for consideration is whether by conferring power on the person who has to make payments to the contractor to deduct two per cent from the sum due where the contract relates to a works contract, can be said to be violative of Article 14 as it infringes the equality clause. It is well settled in view of the decision of the Supreme Court in the case of Kunnath t Thathunni Naopil Nair etc. v. State of Kerala, A.I.R 1961 Supreme Court 552, that the Courts are not concerned with the policy underlying a taxing statute, but at the same time a taxing statute is not wholly immune from attack on the ground that it infringes the equality clause in Article 14. In view of the limitations contained in Article 265 of the Constitution on the taxing power of the State, the State is not empowered to levy or collect a tax except by authority of law. In other words, tax proposed to be levied must be within the legislative competence of the Legislature imposing tax and authorising the collection thereof. In determining the question of validity or otherwise of a taxing statute, the Court will not strike down the law merely because no classification appears on the face of the statute, but on the other hand, the Court may examine and ascertain if the statute has laid down any principle or policy for the guidance for the exercise of discretion by the appropriate authority in the matter of section or classification and if on such examination, the Court comes to the conclusion that no principle or policy for guiding the exercise of the discretion has been laid down, then there would be no other option than to strike down the provision. If section 13-AA is examined from the aforesaid stand-point, there cannot be two opinions that it does not provide any mechanism to exclude a transaction from its purview, even if ultimately the transaction is not at all liable to levy of sales-tax. In other words, even in case of a pure and simple labour contract or service contract where question of sale will not arise, yet the person responsible for making any payment to the contractor has no other option than to deduct two per cent of such sum towards sales-tax. Thus though a transaction which may not be “sale” at all liable for levy of sales-tax, yet in respect of the said transaction power has been conferred to make deduction of two per cent from the amount which should be paid. In the absence of any discretion with the authority or in the absence of any mechanism by which the contractor can approach any authority and obtain a certificate to the effect that the transaction does not amount to sale, deduction of two per cent from the amount due cannot but be held to be grossly discriminatory and confiscatory in nature and, therefore, the same must be struck down.

8. If the provision of section 13 AA of the Orissa Sales Tax Act is compared and examined in relation to section 194-C of the Income-Tax Act, it would appear that under the Income-Tax Act also a similar provision has been made to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein. In fact, section 13-AA of the Orissa Sales-Tax Act is identically worded as section 194-C of the Income-Tax Act. But under the Income-Tax Act, provision had been engrafted in sub-section (4) of section 194-C conferring power on the Assessing Officer to give a certificate to the contractor on an application being made by him to the effect that either the deduction of income-tax in his case should be at a lower rate or that there should be no deduction at all, as would be appropriate, and on production of such certificate, the person responsible for deducting two per cent under sub-section (1) is not entitled to deduct or deduct at the rate specified in the certificate until the certificate is cancelled by the Assessing Officer. Thus, adequate safeguard had been taken by the Legislature by which Government while enacting Income-Tax Act would is having for remedies so that deduction under section 194-C(1) may not become confiscatory in nature. But under the Orissa Sales Tax Act in absence of any such provision and by conferring arbitrary, unbriadled and unchannelised power on the person concerned, to deduct two per cent from the sum payable to the contractor irrespective of the question whether ultimately the transaction is liable for payment of any sales-tax at all or not, cannot be held to be a levy of tax under any valid legal provision. It is no doubt true that the said deduction of the per cent under section 13-AA is to be ultimately adjusted where the transaction in question is liable for levy of sales-tax but where the transaction is not at all liable for levy of sales-tax, there the question of adjustment would not arise and, therefore, the said deduction would be confiscatory in character and effect and cannot be held to be a valid provision within the legislative competence of the Legislature imposing a tax and authorising the collection thereof. The impugned provision, therefore, is liable to be struck down.

9. The constitutional validity of a statute has to be determined on the basis of its provisions and on the ambit of its operation as reasonably construed and if so judge, it does not pass the test of constitutionality, it cannot be pronounced valid, merely because it is administered in a manner which might not conflict with the constitutional requirements. The argument of the learned Standing Counsel that the provisions of section 13-AA must be read down and it must be held that “where the transaction is not at all liable for levy of sales-tax, the question of deduction will not arise”, is difficult to be accepted, as section 13-AA is not susceptible of any reading down of the provision. It is a well-known construction of interpretation of statutes that the Court will not be justified in re-enacting a legislation. A bare reading of section 13-AA makes it explicitly clear that the amplitude of the incidence of tax had been widened so as to include transactions which are outside the sphere of taxation available to the State Legislature under entry-54, inasmuch as even in respect of a purely labour contract or service charges, section 13-AA authorises deduction of two per cent from the bills of the contractor. Such a provision cannot but be held to be unconstitutional and void. We accordingly, strike down section 13-AA of the Orissa Sales Tax Act as unconstitutional. The writ application is allowed. There will, however, be no order as to costs.

B.N Dash, J.:— I agree.

10. Writ application allowed.

O.J.C No. 641 of 1987

Brajendra Mishra v. State Of Orissa And Others Opp. Parties.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments (as presented by Mr. Mohanty)

Respondent / Department's Arguments (as presented by the learned Standing Counsel)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Brajendra Mishra v. State Of Orissa And Others Opp. Parties.

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