Order
1. This matter arises on the provisions of the Karnataka Sales Tax Act, 1957. On 4-10-2005, a notice under Sections 29(1)(e) and 29(2)(e) of the Karnataka Sales Tax Act, 1957, came to be issued. It was addressed to the petitioner, M/s Larsen & Toubro Ltd. It was alleged that the petitioner is engaged in property development involving construction and building of flats and subsequent sale thereof. By a separate statement details of sale of flats were given. Those sales relate to the period 2000-2001 to 2004-2005.
2. According to the show-cause notice the Department alleged that the petitioner has not been paying taxes on sale transactions of flats on the ground that the same relates to sales of complete flats, claimed as sale of immovable property. The show-cause notice further goes on to state that in view of the recent judgment of this Court in K. Raheja Development Corpn. v. State of Karnataka (2005) 5 SCC 162 the consideration received towards sale of flats even though on ownership basis are also liable to tax for the reason that such transactions of construction and sales of individual flats are in the nature of works contract and thus liable to tax under the provisions of the said 1957 Act. In short, the entire controversy turns around the ratio of the judgment of this Court in Raheja Development Corpn. case (2005) 5 SCC 162.
3. Before coming to the abovesaid judgment in Raheja case (2005) 5 SCC 162 we quote hereinbelow Section 2(1)(t) which defines the word “sale”:
“2. (1)(t) ‘sale’ with all its grammatical variation and cognate expressions means every transfer of the property in goods other than by way of a mortgage, hypothecation, charge or pledge by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration, and includes,—
(i) a transfer otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration;
(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(iii) a delivery of goods on hire-purchase or any system of payment by instalments;
(iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;”
4. We also quote hereinbelow the definition of the word “contract” vide Section 2(1)(v-i):
“2. (1)(v-i) ‘works contract’ includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property;”
5. We may add that the charging section is Section 5-B of the 1957 Act which reads as under:
“5-B. Levy of tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of works contracts.—Notwithstanding anything contained in sub-section (1) or sub-section (3) or sub-section (3-C) of Section 5, but subject to sub-section (4), (5) or (6) of the said section, every dealer shall pay for each year, a tax under this Act on his taxable turnover of transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract mentioned in Column (2) of the Sixth Schedule at the rates specified in the corresponding entries in Column (3) of the said Schedule.”
6. It is important to bear in mind the distinction between two types of contracts'sale and works—which rests on the principle that a contract of sale is one whose object is transfer of property in and delivery of possession of a chattel as a chattel to the buyer. When the object of the work undertaken by the payee for a price is not the transfer of a chattel as a chattel the contract is one of work and labour.
7. In the present case M/s Larsen & Toubro was a developer having agreed to develop the plot owned by Dinesh Ranka (original owner). In the present case we have two agreements, one is the development agreement and the other is a tripartite agreement. The tripartite agreement is between the owner, the developer and the prospective flat buyer.
8. The question which arises for determination in this case is whether the petitioner Company herein had entered into a tripartite agreement to construct flats on its own behalf or on behalf of Dinesh Ranka or on behalf of the prospective flat purchaser.
9. The Department relied upon the judgment of the Division Bench of this Court in Raheja Development case (2005) 5 SCC 162 and has taken the position that the petitioner Company had constructed the flats on behalf of the prospective flat buyers.
10. In the present case the Department has placed reliance essentially on para 20 of the judgment in Raheja Development case (2005) 5 SCC 162 which reads as under:
“20. Thus the appellants are undertaking to build as developers for the prospective purchaser. Such construction/development is to be on payment of a price in various instalments set out in the agreement. As the appellants are not the owners they claim a ‘lien’ on the property. Of course, under Clause 7 they have right to terminate the agreement and to dispose of the unit if a breach is committed by the purchaser. However, merely having such a clause does not mean that the agreement ceases to be a works contract within the meaning of the term in the said Act. All that this means is that if there is a termination and that particular unit is not resold but retained by the appellants, there would be no works contract to that extent. But so long as there is no termination the construction is for and on behalf of the purchaser. Therefore, it remains a works contract within the meaning of the term as defined under the said Act. It must be clarified that if the agreement is entered into after the flat or unit is already constructed, then there would be no works contract. But so long as the agreement is entered into before the construction is complete it would be a works contract.”
(emphasis supplied)
We have prima facie some difficulty in accepting the proposition laid down in para 20 quoted above. Firstly, in our view, prima facie, M/s Larsen & Toubro, the petitioner herein, being a developer had undertaken the contract to develop the property of Dinesh Ranka. Secondly, the show-cause notice proceeds only on the basis that the tripartite agreement is a works contract. Thirdly, in the show-cause notice there is no allegation made by the Department that there is monetary consideration involved in the first contract which is the development agreement.
11. Be that as it may, apart from the disputes in hand, the point which we have to examine is whether the ratio of the judgment of the Division Bench in Raheja Development Corpn. (2005) 5 SCC 162 as enunciated in para 20, is correct. If the development agreement is not a works contract could the Department rely upon the second contract, which is the tripartite agreement and interpret it to be a works contract, as defined under the 1957 Act. The Department has relied upon only the judgment of this Court in Raheja Development Corpn. case (2005) 5 SCC 162 because para 20 does assist the Department. However, we are of the view that if the ratio of Raheja Development case (2005) 5 SCC 162 is to be accepted then there would be no difference between a works contract and a contract for sale of chattel as a chattel.
12. Lastly, could it be said that the petitioner Company was the contractor for prospective flat purchaser. Under the definition of the term “works contract” as quoted above the contractor must have undertaken the work of construction for and on behalf of the contractor for cash, deferred (sic payment) or any other valuable consideration. According to the Department, the development agreement is not a works contract but the tripartite agreement is a works contract which, prima facie, appears to be fallacious. There is no allegation that the tripartite agreement is sham or bogus.
13. For the aforestated reasons, we direct the Office to place this matter before the Hon'ble Chief Justice for appropriate directions in this regard, as we are of the view that the judgment of the Division Bench in Raheja Development (2005) 5 SCC 162 needs reconsideration by a larger Bench.