Firm Of M/S. Peare Lal Hari Singh vs The State Of Punjab and Another

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

Court: Supreme Court of India

Case Number: Petition No. 128 of 1957

Decision Date: 07 April 1958

Coram: S.K. Das, A.K. Sarkar, T.L. Venkatarama Aiyar

In the case of Firm of M/S. Peare Lal Hari Singh versus The State of Punjab & Another, the Supreme Court of India delivered its judgment on 7 April 1958. The bench that heard the matter consisted of Justices S.K. Das and A.K. Sarkar, with the full bench comprising Justices Aiyyar, T.L. Venkatarama, Bose, Vivian Das, Sudhi Ranjan (Chief Justice), and again Justices Das, S.K. Sarkar and A.K. Sarkar. The decision is reported in the citations 1958 AIR 664 and 1959 SCR 438. The dispute centered on the power of the State of Punjab to levy a sales tax on the supply of materials used in building contracts, specifically whether a building contract could be treated as a separate agreement for the sale of those materials. The statutory framework involved the East Punjab General Sales Tax Act, 1948 (East Punjab XLVI of 1948), particularly sections 2(d)(j) and 4(1), and the relevant constitutional provision was Entry 48 in List II of Schedule VII of the Government of India Act, 1935.

The petitioners, who were building contractors operating in Punjab, had been assessed tax by the sales‑tax authorities on the basis that the supply of construction materials constituted a sale under the 1948 Act. They challenged the legality of the assessment on the ground that, under Entry 48 of Schedule VII, the provincial legislature possessed no authority to tax the supply of materials in construction works because, in their view, no sale of those materials occurred either in fact or in law. Consequently, they argued that the provisions of the Act seeking to impose such tax were ultra violet. The assessing authorities, however, contended that a proper construction of the building contract entered into with the Government revealed a distinct agreement for the sale of materials, and they relied heavily on Rule 33 of the printed General Conditions of Contracts issued by the Government.

The Court held that there was no sale of the materials used in the construction by the petitioners and therefore no tax could be lawfully levied on such supply. The Court explained that Rule 33, which provides that materials placed on the site become the property of the Government and that any surplus remaining after completion reverts to the contractor, is intended solely to ensure that appropriate materials are used in the construction. This rule does not transform a lump‑sum building contract into a contract for the sale of materials. The Court also followed the precedent set in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., [1959] SCR 379, and referred to earlier authorities such as Tripp v. Armitage (1839) 4 M. & W. 687 and Reid v. Macbeth.

The judgment arose from original jurisdiction under Petition No. 128 of 1957, filed under Article 32 of the Constitution for the enforcement of fundamental rights. Counsel for the petitioner was Gopal Singh, while N.S. Bindra and T.M. Sen represented the respondents. The judgment was delivered on 7 April 1958.

The judgment was delivered by Justice Venkatramana Aiyar. This petition was filed under Article 32 of the Constitution, and the matter for decision concerned the validity of certain provisions of the East Punjab General Sales Tax Act, 1948 (East Pb. XLVI of 1948), hereinafter referred to as the Act, which imposed a tax on the supply of materials in construction works by treating such supply as a sale. For convenience, the relevant provisions of the Act were set out. Section 2(c) defines the term “contract” as any agreement for carrying out, for cash or deferred payment or other valuable consideration, (i) the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property; or (ii) the installation or repair of any machinery affixed to a building or other immovable property. Section 2(d) defines “dealer” as any person engaged in the business of selling or supplying goods. Section 2(h) defines “sale” as any transfer of property in goods for cash or deferred payment or other valuable consideration, including a transfer of property in goods involved in the execution of a contract. Section 2(j) defines “turnover” as including the carrying out of any contract, less such portion as may be prescribed of such amount, representing the usual proportion of the cost of labour to the cost of materials used in carrying out such contract. Section 4(1) provides that every dealer whose gross turnover during the year immediately preceding the commencement of the Act exceeded the taxable quantum shall be liable to pay tax under the Act on all sales effected after the coming into force of the Act. Section 5 states that the tax shall be levied each year on the taxable turnover of a dealer at rates that the Provincial Government may fix by notification. Rule 28 prescribes the mode of computing the taxable consideration with reference to contracts as provided in sub‑clause (ii) of element (i) of Section 2. The petitioners were a firm of building contractors. In December 1956 they entered into a contract with the Military Engineering Services Department of the Government for the construction of certain buildings known as “Married accommodation” at Ambala Cantonment, and they received an advance of Rs 32,000 on 31 January 1957. On 14 February 1957 the assessing authority of Jullundur District issued a notice informing the petitioners that, having failed to apply for registration under Section 7 of the Act, assessment would be made under Section 18, sub‑section (2), for periods commencing from 1 April 1955 onwards, and that they were required to produce their account books and attend a hearing on 16 February 1957. Consequently, the petitioners filed the present petition under Article 32 of the Constitution, challenging the legality of the assessment proceedings, the principal ground of attack being that the legislature of the Province of Punjab had, under Entry 48 in List II of Schedule VII to the Government of India Act, 1935, no authority to impose tax on the supply of materials in construction works because there was no sale, in fact or in law, of those materials, and that the provisions of the Act seeking to impose such tax were ultra vires.

Punjab was said to have no authority under Entry 48 in List II of Schedule VII to the Government of India Act, 1935, to levy a tax on the supply of materials used in construction work because, according to the argument, there was neither a factual nor a legal sale of those materials. The contention further asserted that the provisions of the Act attempting to impose such a tax were beyond the legislative competence of the province. This issue has been settled by this Court in the case of The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1). In that decision the Court held that the term “sale of goods” appearing in Entry 48 carries the same meaning as the expression in the Indian Sale of Goods Act, 1930. The Court observed that a building contract does not involve a sale of the construction materials themselves, and consequently the Provincial Legislature could not exercise a taxing power over such materials under Entry 48.

Having accepted that principle, the Court turned to the submission made by Mr Bindra on behalf of the respondents. He argued that the contract entered into by the petitioners with the Government was not merely an agreement to carry out construction work, but that, when properly construed, it contained a separate agreement for the sale of the materials required for the works. If that characterization could be proved, the respondents would be entitled to tax the transaction irrespective of the contested statutory provisions. The essential question, therefore, was whether the contract for construction was a single, indivisible agreement, or whether it could be split into two distinct components – one for the sale of materials and the other for labour and workmanship. The evidence placed before the Court removed any doubt about the nature of the contract. The tenders that had been invited and received were for the execution of the work for a fixed lump‑sum amount. In the acceptance letter dated 15 December 1956, the Deputy Chief Engineer wrote: “The above tender was accepted by me on behalf of the President of India for a lump sum of Rs 9,74,961.” The manner in which this sum was computed is set out in Annexure E to the reply statement, which shows that the petitioners were required to construct nine separate blocks and that the total amount was arrived at by calculating the cost of each block individually and then aggregating the figures. On the basis of this evidence the Court found it impossible to sustain any claim that the petitioners had entered into a separate agreement to sell the materials to the Government. For the respondents, reliance was placed on the printed General Conditions of Contracts issued by the Government, particularly Rule 33, which states: “All stores and materials brought to the Site shall become and remain the property of Government and shall not be removed off the Site without the prior written approval of the G. E. But whenever the works are finally completed, the contractor shall at his own expense forthwith remove from the Site.”

The rule in question provides that “all surplus stores and materials originally supplied by him and upon such removal, the same shall retest in and become the property of the Contractor.” It was argued that the true effect of this provision, by vesting the materials in the Government, was to treat the materials as having been sold to the Government. The Court observed that this interpretation would be inconsistent with other provisions contained in the same set of rules. Specifically, the rules require that the materials used in construction must be approved by the authorities as being of the correct quality, and they may be condemned after the works are finished if they are found to be of inferior quality or not in conformity with the contract. In such an event, the contractor is obliged to remove the condemned materials and to replace them with proper ones. Terms of this nature and those in rule 33 are normally inserted in building contracts with the purpose of ensuring that suitable materials are employed in the construction, not with the purpose of effecting a purchase of the materials. If rule 33 were to be read as effecting a sale of the materials to the Government when they are brought to the site, then it would follow that any surplus material remaining after the work is completed must be regarded as having been resold by the Government to the contractor, a contention that was not put forward in the present case. The Court referred to the authority in Tripp v. Armitage (1) (1839) 4 M. & W. 687; 150 E. R. 1597, 1603, where a builder engaged to construct a hotel became insolvent and a dispute arose between the bankruptcy assignees and the hotel proprietors concerning the title to certain wooden sash‑frames that had been delivered to the hotel premises, approved by the clerk and returned to the insolvent for fixing. The proprietors contended that the approval by their surveyor meant that the goods were appropriated to the contract and that title had passed to them. In rejecting this contention, Parke B. observed that the surveyor’s approval was not given “eo animo” as an acceptance, but merely to ascertain that the materials were suitable for the purpose; and that despite such approval, payment was due only when the materials were actually installed as part of the larger contract. The Court also cited Reid v. Macbeth & Gray (1), where a similar dispute concerned plates prepared by contractors for a ship. The plates had been examined by the surveyor, marked with the vessel’s number and with positions for each plate. The ship‑owners claimed title to the plates on the basis of the surveyor’s approval and the markings, asserting that the title had passed to them and that the contractors’ assignees in bankruptcy could not claim them. The House of Lords rejected that claim, holding that the facts did not establish a separate contract of sale of the materials apart from the contract to construct the ship, and therefore title to the plates did not pass to the owners. The Court applied the same reasoning to the present matter, concluding that rule 33 does not transform a lump‑sum construction contract into a contract for the sale of the materials used therein. Accordingly, following the decision in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (2) [1959] S.C.R. 379, the Court held that there was no sale of the materials employed by the petitioners in their construction and consequently no tax could be imposed on such materials.

The Court observed that the petitioners argued that, because the surveyor had approved the materials and because the plates bore markings indicating the vessel and their positions, ownership of those materials should be deemed to have transferred to the ship‑owners, thereby preventing the assignees in the contractors’ bankruptcy from claiming them. The House of Lords rejected this contention, holding that the facts did not establish a separate contract of sale of the materials apart from the contract to construct the ship, and that title to the materials did not pass to the ship‑owners. The Court found the same principle applicable in the present case, noting that Rule 33 does not transform a lump‑sum construction contract for buildings into a contract for the sale of the materials used in the work. Accordingly, following the decision in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (2) [1959] S.C.R. 379, the Court held that no sale of the materials used by the petitioners in their constructions had occurred and consequently no tax could be levied on such materials. The petitioners’ counsel then raised two additional contentions, which the Court described as unsubstantial. The first contention argued that the definition of “turnover” in section 2(j), element (ii), applicable to the case, does not refer to the sale of goods; therefore, even if Entry 48 in List II were interpreted broadly, the provision as enacted would not tax the supply of materials in works contracts as a sale. The Court noted, however, that the charging provision is section 4(1), which makes clear that the tax is on gross turnover in respect of sales effected after the Act’s commencement, and that the evident intention is to include the supply of materials in works contracts within the taxable turnover category. The second contention asserted that the definition of “dealer” in section 2(d) requires a person to be engaged in the business of selling or supplying goods, and that the petitioners, being building contractors, were engaged in construction rather than in the sale or supply of goods, and therefore could not be deemed dealers for purposes of section 4. The Court rejected this argument, explaining that if the supply of materials in construction work is regarded as a sale, then building contractors are indeed engaged in the sale of materials and fall within the definition of “dealer” under the Act. Having found no merit in either contention, the Court concluded that the petitioners were entitled to succeed on the ground that the impugned provisions exceeded the authority conferred by Entry 48, and that a writ of prohibition should be issued to restrain the respondents from proceeding with the assessment of tax in respect of the materials supplied by the petitioners in construction contracts.

In the proceeding, the petition concerned the tax treatment of the materials that the petitioners had supplied under their construction contracts, and the Court examined whether such supplies fell within the scope of the statutory provisions challenged by the petitioners. After reviewing the arguments and the relevant statutory language, the Court determined that the petitioners’ claim was viable and that the assessment of tax on those supplied materials could not be sustained. Accordingly, the Court allowed the petition, thereby setting aside the assessment that had been sought against the petitioners. In addition to granting the substantive relief, the Court issued a direction on costs, holding that each party should bear its own costs of the litigation. The order therefore required the petitioners to pay their own expenses and the respondents to pay theirs, without any cost shifting between the parties. This conclusion concluded the matter, with the Court’s final directive reflecting both the substantive finding in favor of the petitioners and the allocation of costs to the respective parties.