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“GPA” Sale’ – Held ‘NO SALE’ - >>>>……………….

https://indiankanoon.org/doc/1565619/

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Supreme Court of India

Suraj Lamp & Industries (P) ... vs State Of Haryana & Anr on 11 October, 2011

Author: R V Raveendran

Bench: R.V. Raveendran, A.K. Patnaik, H.L. Gokhale

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

SPECIAL LEAVE PETITION (C) NO.13917 OF 2009

SurajLamp&IndustriesPvt.Ltd. .....Petitioner

Vs.

StateofHaryana&Anr. ....Respondents

J J U D G M E N T

R. V. Raveendran J.

By an earlier order dated 15.5.2009 [reported in Suraj Lamp & Industries Pvt.Ltd. vs. State of Haryana & Anr. - 2009 (7) SCC 363], we had referred to the ill - effects of what is known as General Power of Attorney Sales (for short `GPA Sales') or Sale Agreement/General Power of Attorney/Will transfers (for short `SA/GPA/WILL' transfers). Both the descriptions are misnomers as there cannot be a sale by execution of a power of attorney nor can there be a transfer by execution of an agreement of sale and a power of attorney and will. As noticed in the earlier order, these kinds of transactions were evolved to avoid prohibitions/conditions regarding certain transfers, to avoid payment of stamp duty and registration charges on deeds of conveyance, to avoid payment of capital gains on transfers, to invest unaccounted money (`black money') and to avoid payment of `unearned increases' due to Development Authorities on transfer.

2. The modus operandi in such SA/GPA/WILL transactions is for the vendor or person claiming to be the owner to receive the agreed consideration, deliver possession of the property to the purchaser and execute the following documents or variations thereof:

(a) An Agreement of sale by the vendor in favour of the purchaser confirming the terms of sale, delivery of possession and payment of full consideration and undertaking to execute any document as and when required in future.

Or An agreement of sale agreeing to sell the property, with a separate affidavit confirming receipt of full price and delivery of possession and undertaking to execute sale deed whenever required.

(b) An Irrevocable General Power of Attorney by the vendor in favour of the purchaser or his nominee authorizing him to manage, deal with and dispose of the property without reference to the vendor.

Or A General Power of Attorney by the vendor in favour of the purchaser or his nominee authorizing the attorney holder to sell or transfer the property and a Special Power of Attorney to manage the property.

(c) A will bequeathing the property to the purchaser (as a safeguard against the consequences of death of the vendor before transfer is effected).

These transactions are not to be confused or equated with genuine transactions where the owner of a property grants a power of Attorney in favour of a family member or friend to manage or sell his property, as he is not able to manage the property or execute the sale, personally. These are transactions, where a purchaser pays the full price, but instead of getting a deed of conveyance gets a SA/GPA/WILL as a mode of transfer, either at the instance of the vendor or at his own instance.

Ill-Effects of SA/GPA/WILL transactions

3. THE EARLIER ORDER DATED 15.5.2009, NOTED THE ILL-EFFECTS OF SUCH SA/GPA/WILL TRANSACTIONS (THAT IS GENERATION OF BLACK MONEY, GROWTH OF LAND MAFIA AND CRIMINALIZATION OF CIVIL DISPUTES) AS UNDER:

"RECOURSE TO `SA/GPA/WILL' TRANSACTIONS IS TAKEN IN REGARD TO FREEHOLD PROPERTIES, EVEN WHEN THERE IS NO BAR OR PROHIBITION REGARDING TRANSFER OR CONVEYANCE OF SUCH PROPERTY, BY THE FOLLOWING CATEGORIES OF PERSONS:

(A) VENDORS WITH IMPERFECT TITLE WHO CANNOT OR DO NOT WANT TO EXECUTE REGISTERED DEEDS OF CONVEYANCE.

(B) PURCHASERS WHO WANT TO INVEST UNDISCLOSED WEALTH/INCOME IN IMMOVABLE PROPERTIES WITHOUT ANY PUBLIC RECORD OF THE TRANSACTIONS. THE PROCESS ENABLES THEM TO HOLD ANY NUMBER OF PROPERTIES WITHOUT DISCLOSING THEM AS ASSETS HELD.

(C) PURCHASERS WHO WANT TO AVOID THE PAYMENT OF STAMP DUTY AND REGISTRATION CHARGES EITHER DELIBERATELY OR ON WRONG ADVICE. PERSONS WHO DEAL IN REAL ESTATE RESORT TO THESE METHODS TO AVOID MULTIPLE STAMP DUTIES/REGISTRATION FEES SO AS TO INCREASE THEIR PROFIT MARGIN.

WHATEVER BE THE INTENTION, THE CONSEQUENCES ARE DISTURBING AND FAR REACHING, ADVERSELY AFFECTING THE ECONOMY, CIVIL SOCIETY AND LAW AND ORDER. FIRSTLY, IT ENABLES LARGE SCALE EVASION OF INCOME TAX, WEALTH TAX, STAMP DUTY AND REGISTRATION FEES THEREBY DENYING THE BENEFIT OF SUCH REVENUE TO THE GOVERNMENT AND THE PUBLIC. SECONDLY, SUCH TRANSACTIONS ENABLE PERSONS WITH UNDISCLOSED WEALTH/INCOME TO INVEST THEIR BLACK MONEY AND ALSO EARN PROFIT/INCOME, THEREBY ENCOURAGING CIRCULATION OF BLACK MONEY AND CORRUPTION.

THIS KIND OF TRANSACTIONS HAS DISASTROUS COLLATERAL EFFECTS ALSO. FOR EXAMPLE, WHEN THE MARKET VALUE INCREASES, MANY VENDORS (WHO EFFECTED POWER OF ATTORNEY SALES WITHOUT REGISTRATION) ARE TEMPTED TO RESELL THE PROPERTY TAKING ADVANTAGE OF THE FACT THAT THERE IS NO REGISTERED INSTRUMENT OR RECORD IN ANY PUBLIC OFFICE THEREBY CHEATING THE PURCHASER. WHEN THE PURCHASER UNDER SUCH `POWER OF ATTORNEY SALES' COMES TO KNOW ABOUT THE VENDORS ACTION, HE INVARIABLY TRIES TO TAKE THE HELP OF MUSCLEMEN TO `SORT OUT' THE ISSUE AND PROTECT HIS RIGHTS. ON THE OTHER HAND, REAL ESTATE MAFIA MANY A TIME PURCHASE PROPERTIES WHICH ARE ALREADY SUBJECT TO POWER OF ATTORNEY SALE AND THEN THREATEN THE PREVIOUS `POWER OF ATTORNEY SALE' PURCHASERS FROM ASSERTING THEIR RIGHTS. EITHER WAY, SUCH POWER OF ATTORNEY SALES INDIRECTLY LEAD TO GROWTH OF REAL ESTATE MAFIA AND CRIMINALIZATION OF REAL ESTATE TRANSACTIONS."

It also makes title verification and certification of title, which is an integral part of orderly conduct of transactions relating to immovable property, difficult, if not impossible, giving nightmares to bona fide purchasers wanting to own a property with an assurance of good and marketable title.

4. This Court had therefore requested the learned Solicitor General to give suggestions on behalf of Union of India. This COURT ALSO DIRECTED NOTICE TO STATES OF DELHI, HARYANA, PUNJAB, UTTAR PRADESH TO GIVE THEIR VIEWS ON THE MATTER. THE FOUR STATES HAVE RESPONDED AND CONFIRMED THAT SA/GPA/WILL TRANSFERS REQUIRED BEING DISCOURAGED AS THEY LEAD TO LOSS OF REVENUE (STAMP DUTY) AND INCREASE IN LITIGATIONS DUE TO DEFECTIVE TITLE. THEY ALSO REFERRED TO SOME MEASURES TAKEN IN THAT BEHALF. THE MEASURES DIFFER FROM STATE TO STATE.

In general, the measures are: (i) to amend Registration Act, 1908 by Amendment Act 48 of 2001 with effect from 24.9.2001 requiring documents containing contract to transfer for consideration (agreements of sale etc.) relating to any immoveable property for the purpose of section 53A of the Act, shall be registered; and (ii) to amend the stamp laws subjecting agreements of sale with delivery of possession and/or irrevocable powers of attorney in favour of non-family members authorizing sale, to the same stamp duty as deed of conveyance. These measures, no doubt, to some extent plugged the loss of revenue by way of stamp duty on account of parties having recourse to SA/GPA/WILL transactions, instead of executing deeds of conveyance. But the other ill-effects continued. Further such transaction which was only prevalent in Delhi and the surrounding areas have started spreading to other States also. Those with ulterior motives either to indulge in black money transactions or land mafia continue to favour such transactions. There are also efforts to thwart the amended provisions by not referring to delivery of possession in the agreement of sale and giving a separate possession receipt or an affidavit confirming delivery of possession and thereby avoiding the registration and stamp duty. The amendments to stamp and registration laws do not address the larger issue of generation of black money and operation of land mafia. The four States and the Union of India are however unanimous that SA/GPA/WILL transactions should be curbed and expressed their willingness to take remedial steps.

5. The State of Haryana has however taken a further positive step by reducing the stamp duty on deeds of conveyance from 12.5% to 5%. A high rate of stamp duty acts as a damper for execution of deeds of conveyance for full value, and encourages SA/GPA/WILL transfers. When parties resort to SA/GPA/WILL transfers, the adverse effect is not only loss of revenue (stamp duty and registration charges) but the greater danger of generation of `black' money. Reducing the stamp duty on conveyance to realistic levels will encourage public to disclose the maximum sale value and have the sale deeds registered. Though the reduction of the stamp duty, may result in an immediate reduction in the revenue by way of stamp duty, in the long run it will be advantageous for two reasons: (i) parties will be encouraged to execute registered deeds of conveyance/sale deeds without any under valuation, instead of entering into SA/GPA/WILL transactions; and (ii) more and more sale transactions will be done by way of duly registered sale deeds, disclosing the entire sale consideration thereby reducing the generation of black money to a large extent. When high stamp duty is prevalent, there is a tendency to undervalue documents, even where sale deeds are executed.

WHEN PROPERTIES ARE UNDERVALUED, A LARGE PART OF THE SALE PRICE CHANGES HAND BY WAY OF CASH THEREBY GENERATING `BLACK' MONEY. EVEN WHEN THE STATE GOVERNMENTS TAKE ACTION TO PREVENT UNDERVALUATION, IT ONLY RESULTS IN THE RECOVERY OF DEFICIT STAMP DUTY AND REGISTRATION CHARGES WITH REFERENCE TO THE MARKET VALUE, BUT THE ACTUAL SALE CONSIDERATION REMAINS UNALTERED. If a property worth `5 millions is sold for `2 millions, the Undervaluation Rules may enable the state government to initiate proceedings so as to ensure that the deficit stamp duty and registration charges are recovered in respect of the difference of `3 millions. But the sale price remains `2 millions and the black money of `3 millions generated by the undervalued sale transaction, remains undisturbed.

6. In this background, we will examine the validity and legality of SA/GPA/WILL transactions. We have heard learned Mr. Gopal Subramanian, Amicus Curiae and noted the views of the Government of NCT of Delhi, Government of Haryana, Government of Punjab and Government of Uttar Pradesh who have filed their submissions in the form of affidavits.

Relevant Legal Provisions

7. Section 5 of the Transfer of Property Act, 1882 (`TP Act' for short) defines `transfer of property' as under:

"5. Transfer of Property defined: In the following sections "transfer of property" means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself [or to himself] and one or more other living persons; and "to transfer property" is to perform such act." xxx xxx Section 54 of the TP Act defines `sales' thus:

"SALE" IS A TRANSFER OF OWNERSHIP IN EXCHANGE FOR A PRICE PAID OR PROMISED OR PART-PAID AND PART-PROMISED.

Sale how made. Such transfer, in the case of tangible immoveable property of the value of one hundred rupees and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument.

In the case of tangible immoveable property of a value less than one hundred rupees, such transfer may be made either by a registered instrument or by delivery of the property.

Delivery of tangible immoveable property takes place when the seller places the buyer, or such person as he directs, in possession of the property.

Contract for sale.-A contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties.

It does not, of itself, create any interest in or charge on such property."

Section 53A of the TP Act defines `part performance' thus :

"Part Performance. - Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract : Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."

8. We may next refer to the relevant provisions of the Indian Stamp Act, 1999 (Note : Stamp Laws may vary from state to state, though generally the provisions may be similar). Section 27 of the Indian Stamp Act, 1899 casts upon the party, liable to pay stamp duty, an obligation to set forth in the instrument all facts and circumstances which affect the chargeability of duty on that instrument. Article 23 prescribes stamp duty on `Conveyance'. In many States appropriate amendments have been made whereby agreements of sale acknowledging delivery of possession or power of Attorney authorizes the attorney to `sell any immovable property are charged with the same duty as leviable on conveyance.

9. Section 17 of the Registration Act, 1908 which makes a deed of conveyance compulsorily registrable. We extract below the relevant portions of section 17.

"Section 17 - Documents of which registration is compulsory- (1) The following documents shall be registered, namely:--

xxxxx

(b) other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property.

xxxxx (1A) The documents containing contracts to transfer for consideration, any immovable property for the purpose of section 53A of the Transfer of Property Act, 1882 (4 of 1882) shall be registered if they have been executed on or after the commencement of the Registration and Other Related laws (Amendment) Act, 2001 and if such documents are not registered on or after such commencement, then, they shall have no effect for the purposes of the said section 53A.

Advantages of Registration

10. In the earlier order dated 15.5.2009, the objects and benefits of registration were explained and we extract them for ready reference :

"The Registration Act, 1908, was enacted with the intention of providing orderliness, discipline and public notice in regard to transactions relating to immovable property and protection from fraud and forgery of documents of transfer. This is achieved by requiring compulsory registration of certain types of documents and providing for consequences of non-registration.

Section 17 of the Registration Act clearly provides that any document (other than testamentary instruments) which purports or operates to create, declare, assign, limit or extinguish whether in present or in future "any right, title or interest" whether vested or contingent of the value of Rs. 100 and upwards to or in immovable property.

Section 49 of the said Act provides that no document required by Section 17 to be registered shall, affect any immovable property comprised therein or received as evidence of any transaction affected such property, unless it has been registered. Registration of a document gives notice to the world that such a document has been executed. Registration provides safety and security to transactions relating to immovable property, even if the document is lost or destroyed. It gives publicity and public exposure to documents thereby preventing forgeries and frauds in regard to transactions and execution of documents. Registration provides information to people who may deal with a property, as to the nature and extent of the rights which persons may have, affecting that property. In other words, it enables people to find out whether any particular property with which they are concerned, has been subjected to any legal obligation or liability and who is or are the person/s presently having right, title, and interest in the property. It gives solemnity of form and perpetuate documents which are of legal importance or relevance by recording them, where people may see the record and enquire and ascertain what the particulars are and as far as land is concerned what obligations exist with regard to them. It ensures that every person dealing with immovable property can rely with confidence upon the statements contained in the registers (maintained under the said Act) as a full and complete account of all transactions by which the title to the property may be affected and secure extracts/copies duly certified."

Registration of documents makes the process of verification and certification of title easier and simpler. It reduces disputes and litigations to a large extent.

Scope of an Agreement of sale

11. Section 54 of TP Act makes it clear that a contract of sale, that is, an agreement of sale does not, of itself, create any interest in or charge on such property. This Court in Narandas Karsondas v. S.A. Kamtam and Anr.

(1977) 3 SCC 247, observed:

A contract of sale does not of itself create any interest in, or charge on, the property. This is expressly declared in Section 54 of the Transfer of Property Act. See Rambaran Prosad v. Ram Mohit Hazra [1967]1 SCR

293. The fiduciary character of the personal obligation created by a contract for sale is recognised in Section 3 of the Specific Relief Act, 1963, and in Section 91 of the Trusts Act. The personal obligation created by a contract of sale is described in Section 40 of the Transfer of Property Act as an obligation arising out of contract and annexed to the ownership of property, but not amounting to an interest or easement therein." In India, the word `transfer' is defined with reference to the word `convey'. The word `conveys' in section 5 of Transfer of Property Act is used in the wider sense of conveying ownership... ...that only on execution of conveyance ownership passes from one party to another...."

In Rambhau Namdeo Gajre v. Narayan Bapuji Dhotra [2004 (8) SCC 614] this Court held:

"Protection provided under Section 53A of the Act to the proposed transferee is a shield only against the transferor. It disentitles the transferor from disturbing the possession of the proposed transferee who is put in possession in pursuance to such an agreement. It has nothing to do with the ownership of the proposed transferor who remains full owner of the property till it is legally conveyed by executing a registered sale deed in favour of the transferee. Such a right to protect possession against the proposed vendor cannot be pressed in service against a third party."

It is thus clear that a transfer of immoveable property by way of sale can only be by a deed of conveyance (sale deed). In the absence of a deed of conveyance (duly stamped and registered as required by law), no right, title or interest in an immoveable property can be transferred.

12. Any contract of sale (agreement to sell) which is not a registered deed of conveyance (deed of sale) would fall short of the requirements of sections 54 and 55 of TP Act and will not confer any title nor transfer any interest in an immovable property (except to the limited right granted under section 53A of TP Act). According to TP Act, an agreement of sale, whether with possession or without possession, is not a conveyance. SECTION 54 OF TP ACT ENACTS THAT SALE OF IMMOVEABLE PROPERTY CAN BE MADE ONLY BY A REGISTERED INSTRUMENT AND AN AGREEMENT OF SALE DOES NOT CREATE ANY INTEREST OR CHARGE ON ITS SUBJECT MATTER.

SCOPE OF POWER OF ATTORNEY

13. A power of attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property. The power of attorney is creation of an agency whereby the grantor authorizes the grantee to do the acts specified therein, on behalf of grantor, which when executed will be binding on the grantor as if done by him (see section 1A and section 2 of the Powers of Attorney Act, 1882). It is revocable or terminable at any time unless it is made irrevocable in a manner known to law. Even an irrevocable attorney does not have the effect of transferring title to the grantee. In State of Rajasthan vs. Basant Nehata - 2005 (12) SCC 77, this Court held :

"A grant of power of attorney is essentially governed by Chapter X of the Contract Act. By reason of a deed of power of attorney, an agent is formally appointed to act for the principal in one transaction or a series of transactions or to manage the affairs of the principal generally conferring necessary authority upon another person. A deed of power of attorney is executed by the principal in favour of the agent. The agent derives a right to use his name and all acts, deeds and things done by him and subject to the limitations contained in the said deed, the same shall be read as if done by the donor. A power of attorney is, as is well known, a document of convenience.

Execution of a power of attorney in terms of the provisions of the Contract Act as also the Powers-of-Attorney Act is valid. A power of attorney, we have noticed hereinbefore, is executed by the donor so as to enable the donee to act on his behalf. Except in cases where power of attorney is coupled with interest, it is revocable. The donee in exercise of his power under such power of attorney only acts in place of the donor subject of course to the powers granted to him by reason thereof. He cannot use the power of attorney for his own benefit. He acts in a fiduciary capacity. Any act of infidelity or breach of trust is a matter between the donor and the donee."

An attorney holder may however execute a deed of conveyance in exercise of the power granted under the power of attorney and convey title on behalf of the grantor.

Scope of Will

14. A will is the testament of the testator. It is a posthumous disposition of the estate of the testator directing distribution of his estate upon his death. It is not a transfer inter vivos. The two essential characteristics of a will are that it is intended to come into effect only after the death of the testator and is revocable at any time during the life time of the testator. It is said that so long as the testator is alive, a will is not be worth the paper on which it is written, as the testator can at any time revoke it. If the testator, who is not married, marries after making the will, by operation of law, the will stands revoked. (see sections 69 and 70 of Indian Succession Act, 1925).

Registration of a will does not make it any more effective.

Conclusion

15. Therefore, a SA/GPA/WILL transaction does not convey any title nor create any interest in an immovable property. The observations by the Delhi High Court, in Asha M. Jain v. Canara Bank - 94 (2001) DLT 841, that the "concept of power of attorney sales have been recognized as a mode of transaction" when dealing with transactions by way of SA/GPA/WILL are unwarranted and not justified, unintendedly misleading the general public into thinking that SA/GPA/WILL transactions are some kind of a recognized or accepted mode of transfer and that it can be a valid substitute for a sale deed. Such decisions to the extent they recognize or accept SA/GPA/WILL transactions as concluded transfers, as contrasted from an agreement to transfer, are not good law.

16. WE THEREFORE REITERATE THAT IMMOVABLE PROPERTY CAN BE LEGALLY AND LAWFULLY TRANSFERRED/CONVEYED ONLY BY A REGISTERED DEED OF CONVEYANCE.

Transactions of the nature of `GPA sales' or `SA/GPA/WILL transfers' do not convey title and do not amount to transfer, nor can they be recognized or valid mode of transfer of immoveable property. The courts will not treat such transactions as completed or concluded transfers or as conveyances as they neither convey title nor create any interest in an immovable property.

They cannot be recognized as deeds of title, except to the limited extent of section 53A of the TP Act. Such transactions cannot be relied upon or made the basis for mutations in Municipal or Revenue Records. What is stated above will apply not only to deeds of conveyance in regard to freehold property but also to transfer of leasehold property. A lease can be validly transferred only under a registered Assignment of Lease. It is time that an end is put to the pernicious practice of SA/GPA/WILL transactions known as GPA sales.

17. It has been submitted that making declaration that GPA sales and SA/GPA/WILL transfers are not legally valid modes of transfer is likely to create hardship to a large number of persons who have entered into such transactions and they should be given sufficient time to regularize the transactions by obtaining deeds of conveyance. It is also submitted that this decision should be made applicable prospectively to avoid hardship.

18. We have merely drawn attention to and reiterated the well-settled legal position that SA/GPA/WILL transactions are not `transfers' or `sales' and that such transactions cannot be treated as completed transfers or conveyances. They can continue to be treated as existing agreement of sale.

Nothing prevents affected parties from getting registered Deeds of Conveyance to complete their title. The said `SA/GPA/WILL transactions' may also be used to obtain specific performance or to defend possession under section 53A of TP Act. If they are entered before this day, they may be relied upon to apply for regularization of allotments/leases by Development Authorities. We make it clear that if the documents relating to `SA/GPA/WILL transactions' has been accepted acted upon by DDA or other developmental authorities or by the Municipal or revenue authorities to effect mutation, they need not be disturbed, merely on account of this decision.

19. We make it clear that our observations are not intended to in any way affect the validity of sale agreements and powers of attorney executed in genuine transactions. For example, a person may give a power of attorney to his spouse, son, daughter, brother, sister or a relative to manage his affairs or to execute a deed of conveyance. A person may enter into a development agreement with a land developer or builder for developing the land either by forming plots or by constructing apartment buildings and in that behalf execute an agreement of sale and grant a Power of Attorney empowering the developer to execute agreements of sale or conveyances in regard to individual plots of land or undivided shares in the land relating to apartments in favour of prospective purchasers. In several States, the execution of such development agreements and powers of attorney are already regulated by law and subjected to specific stamp duty. Our observations regarding `SA/GPA/WILL transactions' are not intended to apply to such bonafide/genuine transactions.

20. We place on record our appreciation for the assistance rendered by Mr. Gopal Subramaniun, Senior Counsel, initially as Solicitor General and later as Amicus Curiae.

21. As the issue relating to validity of SA/GPA/WILL has been dealt with by this order, what remains is the consideration of the special leave petition on its merits. List the special leave petition for final disposal.

.................................J (R. V. Raveendran) .................................J (A. K. Patnaik) .................................J (H. L. Gokhale) New Delhi;

October 11, 2011.

SC in re. Hume Pipe - A Study

SC in re Hume Pipe

FACTS

Xtracts >

"....However, the same was rejected by the Commercial Tax Officer vide his order dated September 26, 1994 making it clear to the assessee that the pipes manufactured and supplied by it fall within the definition of ‘sale of goods’ and that the contract is divisible in nature. 75% value of the contract was treated as consideration for sale of goods."

"......In addition, relying upon Rule 10B of the 1955 Rules, Mr. Datar contended that the assessee was entitled to characterisation of its contract under the said Rule and once this exercise is undertaken, it would be apparent that the contract in question was works contract, which was indivisible in nature.

countered the aforesaid submissions and maintained that the works contract involved in this case is rightly held to be divisible in nature. According to him, two types of work orders had been issued by the State Government. As per those orders, the work of supply of pipes and the works for contract of civil work are two different contracts in which the first part is concerned with sale of pipes on which tax has been imposed in accordance with the rates applicable to the pipes, and for which exemption certain cannot be issued as supply in such cases falls within the definition of ‘sale’…"

ASIDE (own observations):

On a tentative perusal of the SC Judgment, so far as is seen, the levy of sales tax has been made on "75% value of the contract was treated as consideration for sale of goods."

.....................

https://indiankanoon.org/doc/150881995/

Gannon

https://indiankanoon.org/doc/557776/

Builders Asscn.

https://indiankanoon.org/doc/732612/

XTRACTS

The interpretation which is to be assigned to clause 29-A of Article 366 is stated with remarkable clarity in M/s Larsen Toubro and another v. State of Karnataka and another[7], by a three Judge Bench in the following words:

61. Viewed thus, a transfer of property in goods under Clause 29A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made.

62. The States have now been conferred with the power to tax indivisible contracts of works. This has been done by enlarging the scope of "tax on sale or purchase of goods" wherever it occurs in the Constitution. Accordingly, the expression "tax on the sale or purchase of goods" in Entry 54 of List II of Seventh Schedule when read with the definition Clause 29A, includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract. The taxable event is deemed sale.

11. Prior to the Amendment of Article 366, in view of the judgment of this Court In State of Madras v Gannon Dunkerley and Co., the State could not levy sales-tax on sale of goods involved in a work's contract because the contract was indivisible. All that has happened In law after the 46th Amendment and the judgment of this Court in Builders case (supra) is that it is now open to the States to divide the works contract into two separate contracts by a legal fiction (i) contract for sale of goods involved in the said works contract and (it) for supply of labour and service. This division of contract under the amended law can be made only if the works contract involved a dominant intention to transfer the property in goods and not in contracts where the transfer in property takes place as an incident of contract of service. The Amendment, referred to above, has not empowered the State to indulge in microscopic division of contracts involving the value of materials used incidentally in such contracts. What is pertinent to ascertain in this connection is what was the dominant intention of the contract. Every contract, be it a service contract or otherwise, may involve the use of some material or the other in execution of the said contract. State is not empowered by the amended law to impose sales-tax on such incidental materials used in such contracts. This is clear from the judgment of this Court in Hindustan Aeronautics Ltd. v. State of Karnataka [1984]2SCR248, where it was held thus:

Hindustan Aeronautics Ltd. v. State of Karnataka [1984]2SCR248, where it was held thus:

...Mere passing of property in an article or commodity during the course of performance of the transaction in question does not render the transaction to be transaction of sale. Even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work, and property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials. In every case, the Court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it...."

The photographs are not marketable or saleable commodity and as such no tax can be levied. Entry 25 of the Sixth Schedule to the Karnataka Sales Tax Act, 1957, therefore is beyond the scope of Article 466 of the Constitution of India.

17) Within one year of the said judgment, this very issue again cropped up for discussion and decision before a three Judge Bench in ACC Ltd. case. The issue arose under the Customs Act, 1962 viz. whether the drawings, designs etc. relating to machinery or industrial technology were goods which were leviable to duty of customs on their transaction value at the time of their report. However, since the issue related to meaning that has to be given to the expression "goods", the case law on this aspect including Gannon Dunkerley & Kame's case were specifically taken note of and discussed. The Court also noticed the effect of 46th Amendment and in the process commented upon the judgment in the Rainbow Colour Lab's case. The Court specifically remarked that Gannon Dunkerley & Kame's judgments were of pre 46th Amendment era which had no relevance after the said Constitutional amendment. It can be discerned from the following discussion contained therein:

…

"15. Thus, it is clear that unless there is sale and purchase of goods, either in fact or deemed, and which sale is primarily intended and not incidental to the contract, the State cannot impose sales tax on a works contract simpliciter in the guise of the expanded definition found in Article 366(29A)(b) read with Section 2(n) of the State Act. On facts as we have noticed that the work done by the photographer which as held by this Court in Kame case is only in the nature of a service contract not involving any sale of goods, we are of the opinion that the stand taken by the respondent State cannot be sustained."

22. Even though in our opinion the decisions relating to levy of sales tax would have, for reasons to which we shall presently mention, no application to the case of levy of customs duty, the decision in Rainbow Colour Lab case (supra) requires consideration. As a result of the Forty-sixth Amendment, sub-article 29A of Article 366 was inserted as a result whereof tax on the sale or purchase of goods was to include a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Taking note of this amendment this Court in Rainbow Colour Lab at page 388-389 observed as follows:

23. In arriving at the aforesaid conclusion the Court referred to the decision of this Court in Hindustan Aeronautics Ltd. vs. State of Karnataka (1984) a SCC 706 and Everest Copier (supra). But both these cases related to pre-Forty-sixth Amendment era where in a works contract the State had no jurisdiction to bifurcate the contract and impose sales tax on the transfer of property in goods involved in the execution of a works contract. The Forty-sixth Amendment was made precisely with a view to empower the State to bifurcate the contract and to levy sales tax on the value of the material involved in the execution of the works contract, notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract. Even if the dominant intention of the contract is the rendering of a service, which will amount to a works contract, after the Forty-sixth Amendment the State would now be empowered to levy sales tax on the material used in such contract. The conclusion arrived at in Rainbow Colour Lab case, in our opinion, runs counter to the express provision contained in Article 366 (29A) as also of the Constitution Bench decision of this Court in Builders' Association of India and Others vs. Union of India and Others (1989) 2 SCC 645." [emphasis supplied]

18) It is amply clear from the above and hardly needs clarification …

19) In view of the above, the argument of the respondent assessees that ACC Ltd. case did not over-rule Rainbow Colour Lab's case is, therefore, clearly misconceived. In fact, we are not saying so for the first time as a three member Bench of this Court in M/s Larsen and Toubro has already stated that ACC Ltd. had expressly over-ruled Rainbow Colour Lab while holding that dominant intention test was no longer good test after 46th Constitutional Amendment. We may point out that learned counsel for the respondent assessees took courage to advance such an argument emboldened by certain observations made by two member Bench in the case of C.K. Jidheesh v. Union of India[8], wherein the Court has remarked that the observations in ACC Ltd. were merely obiter. In Jidheesh, however, the Court did not notice that this very argument had been rejected earlier in Bharat Sanchar Nigam Ltd. v. Union of India[9]. Following discussion in Bharat Sanchar is amply demonstrative of the same:

"46. This conclusion was doubted in Associated Cement Companies Ltd. v. Commissioner of Customs, (2001) 4 SCC 593 saying:

47. We agree. After the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of Clause (29A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying. Therefore, in 2005, C.K. Jidheesh v. Union of India - (2005) 8 SCALE 784 held that the aforesaid observations in Associated Cement (supra) were merely obiter and that Rainbow Colour Lab (supra) was still good law, it was not correct. It is necessary to note that Associated Cement did not say that in all cases of composite transactions the 46th Amendment would apply"

66. It then clarified that Gannon Dunkerley-I survived the Forty-sixth Constitutional Amendment in two respects. First, with regard to the definition of "sale" for the purposes of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Article 366(29A) operate and second, the dominant nature test would be confined to a composite transaction not covered by Article 366(29A). In other words, in Bharat Sanchar, this Court reiterated what was stated by this Court in Associated Cement that dominant nature test has no application to a composite transaction covered by the clauses of Article 366(29A). Leaving no ambiguity, it said that after the Forty- sixth Amendment, the sale element of those contracts which are covered by six Sub-clauses of Clause 29A of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying.

67. In view of the statement of law in Associated Cement and Bharat Sanchar, the argument advanced on behalf of the Appellants that dominant nature test must be applied to find out the true nature of transaction as to whether there is a contract for sale of goods or the contract of service in a composite transaction covered by the clauses of Article 366(29A) has no merit and the same is rejected.

70. The Forty-sixth Amendment leaves no manner of doubt that the States have power to bifurcate the contract and levy sales tax on the value of the material involved in the execution of the works contract. The States are now empowered to levy sales tax on the material used in such contract. In other words, Clause 29A of Article 366 empowers the States to levy tax on the deemed sale."

21) To sum up, it follows from the reading of the aforesaid judgment that after insertion of clause 29-A in Article 366, the Works Contract which was indivisible one by legal fiction, altered into a contract, is permitted to be bifurcated into two: one for "sale of goods" and other for "services", thereby making goods component of the contract exigible to sales tax. Further, while going into this exercise of divisibility, dominant intention behind such a contract, namely, whether it was for sale of goods or for services, is rendered otiose or immaterial. It follows, as a sequitur, that by virtue of clause 29-A of Article 366, the State Legislature is now empowered to segregate the goods part of the Works Contract and impose sales tax thereupon. It may be noted that Entry 54, List II of the Constitution of India empowers the State Legislature to enact a law taxing sale of goods. Sales tax, being a subject-matter into the State List, the State Legislature has the competency to legislate over the subject.

23) It was also argued that photograph service can be exigible to sales tax only when the same is classifiable as Works Contract. For being classified as Works Contract the transaction under consideration has to be a composite transaction involving both goods and services. If a transaction involves only service i.e. work and labor then the same cannot be treated as Works Contract. It was contended that processing of photography was a contract for service simplicitor with no elements of goods at all and, therefore, Entry 25 could not be saved by taking shelter under clause 29-A of Article 366 of the Constitution. For this proposition, umbrage under the judgment in B.C. Kame's case was sought to be taken wherein this Court held that the work involving taking a photograph, developing the negative or doing other photographic work could not be treated as contract for sale of goods. Our attention was drawn to that portion of the judgment where the Court held that such a contract is for use of skill and labour by the photographer to bring about desired results inasmuch as a good photograph reveals not only the asthetic sense and artistic faculty of the photographer, it also reflects his skill and labour. Such an argument also has to be rejected for more than one reasons. In the first instance, it needs to be pointed out that the judgment in Kame's case was rendered before the 46th Constitutional Amendment. Keeping this in mind, the second aspect which needs to be noted is that the dispute therein was whether there is a contract of sale of goods or a contract for service. This matter was examined in the light of law prevaling at that time, as declared in Dunkerley's case as per which dominant intention of the contract was to be seen and further that such a contract was treated as not divisible. It is for this reason in BSNL and M/s Larsen and Toubro cases, this Court specifically pointed out that Kame's case would not provide an answer to the issue at hand. On the contrary, legal position stands settled by the Constitution Bench of this Court in Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu and Ors.[10]. Following observations in that case are apt for this purpose: "On the basis of the aforesaid elucidation, it has been deduced that a transfer of property in goods under Clause (29A)(b) of Article 366 is deemed to be a sale of goods involved in the execution of a Works Contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. One thing is significant to note that in Larsen and Toubro (supra), it has been stated that after the constitutional amendment, the narrow meaning given to the term "works contract" in Gannon Dunkerley-I (supra) no longer survives at present. It has been observed in the said case that even if in a contract, besides the obligations of supply of goods and materials and performance of labour and services, some additional obligations are imposed, such contract does not cease to be works contract, for the additional obligations in the contract would not alter the nature of the contract so long as the contract provides for a contract for works and satisfies the primary description of works contract. It has been further held that once the characteristics or elements of works contract are satisfied in a contract, then irrespective of additional obligations, such contract would be covered by the term "works contract" because nothing in Article 366(29A)(b) limits the term "works contract" to contract for labour and service only."

24) Another attack on the insertion of Entry 25 pertained to retrospectivity given to this provision. It was sought to be argued that amendment to the Act was made by Karnataka State Laws Act, 2004 which came into force w.e.f. 29.01.2004 and insertion of Entry 25 with retrospective effect i.e. w.e.f. 01.07.1989 was not permissible. To put it otherwise, the argument was that even if Entry 25 is held to be valid, it should be made prospective i.e. w.e.f. 29.01.2004. According to the learned senior counsel, Entry 25 with retrospective effect is onerous on the respondents and if the respondents are directed to pay these amounts, they will face severe financial crisis. Such an onerous provision, in their submission, would violate the fundamental rights of the respondents guaranteed under Article 19(1)(g) which guarantees freedom to carry on trade, business or profession.

25) We are afraid,

26) Position stated above has to be read in the context that the legislature is, otherwise, competent to pass amendments of this nature from retrospective effect. The principle that such a power exists with the legislature has been reiterated time and again by this Court. [See: (1) National Agricultural Co-operative Marketing Federation of India Ltd. and Anr. v. Union of India[11], (2) Shri Prithvi Cotton Mills Ltd. and Anr. v. Broach Borough Municipality and Ors.[12], (3) Indian Aluminium Co. etc. etc. v. State of Kerala and others, (4) Hiralal Rattanlal etc. etc. v. State of U.P. and Anr. etc. etc.[13] and (5) Union of India (UOI) and Anr. v. Raghubir Singh (Dead) by Lrs. Etc.[14]]. It is not necessary to discuss all these judments and our purpose would be served by extensively quoting from the case in National Agricultural Co-operative Marketing Federation of India Ltd.:

"13. That the Legislature can enact laws retrospectively is not in dispute. Nor is it disputed that the amendment is intended to be retrospective and that the amendment would at least prospectively exclude all cooperative societies except the primarily society from the benefit of Section 80P(2)(a)(iii) of the Income Tax Act. According to the appellants, the amendment cannot be considered to have retrospective operation in the absence of a validating provision nor could Parliament reverse the judgment of this Court by such statutory overruling. If the amendment is construed as having retrospective operation, then, it is submitted, the amendment is unconstitutional because it seeks to impose a tax on apex societies for the last 31 years, it was contended that by denying the deduction to the apex societies, the farmers and the primary societies would be vitally affected as it would be reflected in the returns obtained by them. This would be contrary to the legislative intent which was to benefit all societies which market agricultural produce.

xx xx xx

28. The test of the length of time covered by the retrospective operation cannot by itself, necessarily be a decisive test. Rai Ramkrishna and Ors. v. The State of Bihar, [1963] 50 ITR 171 (SC) Account must be taken of the surrounding facts and circumstances relating to the taxation and the legislative background of the provision. Jawahamal v. State of Rajasthan: [1966] 1 SCR 890 To recapitulate the legislative background of the particular statutory provision in question before us - the first authoritative interpretation of Section 80P(2)(a)(iii) was made in 1994 in Assam Cooperatives Supra when it held that the word "of" must be construed as "produced by". Therefore, the law as it stood from 1968 was, by the decision, required to be read in precisely this manner and presumably assessments of Apex Societies were commended and concluded on this basis. The situation continued till 1998 till this Court reversed Assam Cooperatives in Kerala Cooperative Marketing Federation Ltd. Supra. Before the assessment year was over, by the 1998 Amendment the word "of" was substituted with "given by". In real terms therefore there was hardly any retrospectivity, but a continuation of the status quo ante. The degree and extent of the unforeseen and unforeseeable financial burden was, in the circumstances, minimal and cannot be said to be unreasonable or unconstitutional.

27) We would also like to refer to the case of Hiralal Ratanlal v. State of U.P.[15], wherein it was observed "the source of the legislative power to levy sales or purchase tax on goods is Entry 54 of the List II of the Constitution. It is well settled that subject to Constitutional restrictions a power to legislate includes a power to legislate prospectively as well as retrospectively. In this regard legislative power to impose tax also includes within itself the power to tax retrospectively."

28) We would like to point out at this stage that the High Court in the impugned judgment has not dealt with the mater in its correct perspective. The reason given by the High Court in invalidating Entry 25 is that this provision was already held unconstitutional by the said High Court in Keshoram's case against which the SLP was also dismissed and in view of that decision, it was not permissible for the legislature to re-enact the said Entry by applying a different legal principle. According to us, this was clearly an erroneous approach to deal with the issue and the judgment of the High Court is clearly unsustainable. The High Court did not even deal with various facets of the issue in their correct perspective, in the light of subsequent judgments of this Court with specific rulings that Rainbow Colour Lab is no longer a good law.

29) The impugned judgment of the High Court is accordingly set aside, the present appeal is allowed and as a result thereof, the writ petitions filed by the respondents in the High Court are dismissed holding that Entry 25 of Schedule VI of the Act is constitutionally valid. There shall, however, be no order as to costs.

.............................................CJI (H.L. DATTU) .............................................J.

(A.K. SIKRI) .............................................J.

(ARUN MISHRA) NEW DELHI;

JANUARY 30, 2015.

[1] 121 (2001) STC 175 [2] (2000) 2 SCC 385 [3] (2001) 4 SCC 593 [4] ILR 2003 Kar 4883 [5] (1993) 1 SCC 364 [6] (1989) 2 SCC 645 [7] (2014) 1 SCC 708 [8] (2005) 13 SCC 37 [9] (2006) 3 SCC 1 [10] (2014) 7 SCC 1 [11] (2003) 5 SCC 23 [12] (1969) 2 SCC 283 [13] (1973) 1 SCC 216 [14] (1989) 2 SCC 754 [15] (1973) 1 SCC 216

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https://www.facebook.com/swaminathanv3/posts/1476350949107853?pnref=story

At the outset, the first and foremost point requiring to be made a special note is that the SC Judgment has been handed down in civil appeal proceedings. As such, in the proceedings both before the lower courts and the apex court, the deeming provisions have been addressed and argued on the premise that the constitutional validity / propriety of such provisions is no longer open to be agitated or re argued- that is, no longer res integra. To put it differently, if at all considered to be worth agitating or re agitating, then the only recourse is to have all the related issues taken , afresh, before the SC in writ proceedings.

For such a purpose, the input viewpoints as canvassed in the two write-ups @ the Links below, may be summoned for help/ made appropriate use of :

<> http://swaminathanv208.blogspot.in/…/deeming-legal-fiction.…
<> http://swaminathanv208.blogspot.in/…/deeming-legal-fiction-…

Now, Back to the instant case:

Needs a close study; having in mind the ongoing controversy wrt levy of service tax, on the 'deemed works contract' in respect of a realty transaction; that was contested to be an invisible contract, for sale of an 'immovable property. The common factor, if at all any, is that there is a 'deeming' concept invoked. But the fine points of distinction are more than one. In the instant case the main plank of argument on behalf of taxpayer has been that the contract is a composite 'works contract', indivisible ; and cannot be split so as to levy sales tax by deeming any part of it as for a 'sale of goods'. In contrast, in the other realty related case, the taxpayer's contention has been that the contract was for sale of 'immovable property'; and cannot be split by deeming any portion of it as a 'works contract', so as to levy VAT and SERVICE TAX on such portions as for 'sale of goods' and 'supply of services for construction', respectively.

Full TEXT of the JUDGMENT @ https://indiankanoon.org/doc/91401411/

KEY Note (on a tentative perusal):

As noted, the eminent Advocate has, in addressing his arguments, cited/relied on case law, including the case of 'Kone Elevator' adjudicated upon by the SC. Nonetheless, the matter has been decided in Revenue's favor accepting the pleas on its behalf. In short, held that, - the judgment in Kone Elevator case is not applicable. Instead, the judgment in the matter of State of Karnataka and Others v. Pro Lab and Others has been followed, to be applicable.

Not unsurprisingly, the case law cited and relied upon by both the sides include all those leading earlier Judgments for or against the proposition (s) respectively urged by the disputant - taxpayer or the Revenue - not excluding the case law on the 'deemed works contract' in regard to transactions in Realty sector.

CROSS Refer:

https://www.facebook.com/swaminathanv3/posts/1469789339764014?pnref=story

On the Constitutional Amendment found repeatedly referred, if so itching to know more: https://www.google.co.in/url…

Briefly stated: This deserves to be specially marked as an instance, - rather as one more of the instances , galore, in which the vexing inconsistency in judicial views happened to have been touched upon; say @ -https://www.facebook.com/swaminathanv3/posts/1466739346735680?pnref=story

Xtracts from Bansals' case :

46. In Mathuram Agrawal v. State of M.P.: (1999) 8 SCC 667, the Supreme Court held as under:-

―In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter.‖

47. A similar view was expressed by the Supreme Court in Govind Saran Ganga Saran v. CST: (1985) 155 ITR 144 ( SC) wherein the Court held as under:-

―6. The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness ill the legislative scheme defining any of those components of the levy will be fatal to its validity.‖

48. In Commissioner Central Excise and Customs, Kerala v. Larsen & Toubro Ltd. (supra), the Supreme Court considered the question whether service tax could be levied on indivisible works contract under clauses (g), (zzd), (zzh), (zzq) and (zzzh) of sub-section 105 of Section 65 of the Act. The Court referred to various earlier decisions on the question whether a levy of tax could be sustained in absence of the machinery provisions and held that since neither the Act nor Rules provided for any machinery provisions to exclude the non-service element from a composite contract, the taxable services referred in clauses (g), (zzd), (zzh), (zzq) and (zzzh) of sub-section 105 of Section 65 of the Act could only refer to services in relation to a service contract simplicitor and not to composite contracts. The relevant extract of the said decision is quoted below:-

KEY Point (of poser) :

Is it not arguable that the levy of GST on 'ongoing' (building construction) project is illegal / illegitimate , hence ulra vires, in laying down that one-third of the consideration shall be 'DEEMED to be the 'cost of land', on a rule of thumb basis" ?

For, how /why such an arbitrary rule fixing the value of land to be excluded, and taxing the balance as for "DEEMED WORKS CONTRACT" ,- having no regard to the reality that the 'value' of land is quite likely - factually /actually - not be uniform, but vary, with no definiteness, on a case to case basis- be rightly regarded to squarely meet / fully satisfy one -the fourth -of the essential components , which, according to case law (see above), is required to be clearly and definitely ascertain -able (ed) !

KEY NOTE:

In L&T SC case @
https://indiankanoon.org/doc/38073485/

A Revisit (Is a MUST) >

REASON < Why so strong as not to justifiably regard otherwise, quite a few of the SC cases cited / followed, especially SC in Heinz case ( https://indiankanoon.org/doc/95535966/ )could be urged to more than amply support; and, the conclusive observations of the SC in para. 43, have to be regarded to lend adequate credence /credibility for taking such a stance (?!).

<> Para 35 (excerpt) - ".... However, in cases where the statute was completely discriminatory or provides no procedural machinery for assessment and levy of tax OR WHERE IT WAS CONFISCATORY , THE COURT WOULD BE JUSTIFIED IN STRIKING IT DOWN AS UNCONSTITUTIONAL. In such cases the character of the material provisions of the impugned statute may be such as may justify the Court taking the view that in substance the taxing statute IS A CLOAK ADOPTED BY THE LEGISLATURE FOR ACHIEVING ITS CONFISCATORY PURPOSE " (FONT supplied- with double emphasis on "OR" )

The obvious implication is that, - even if were to proceed that the exclusion of land value on an arbitrary basis (see Key Point supra) meets with the mandated requirement of a procedural machinery for assessment and levy of tax, it could be still be validly urged , the levy is 'unconstitutional' on inter alia the ground that it is 'confiscatory' (verging on detestable 'tax terrorism' (extortion-ism !)of its kind, - having been rooted on convoluted logic)!

(Better the apex court so declares,to restore the constitutional propriety, fully and finally,in a time-bound manner; in preference to leaving it to being litigated until the D'day of redemption!)

CROSS refer (related topic) @

http://vswaminathan-swamilook.blogspot.in/2018/01/levy-of-st-gst-on-housing-complex-contd.html

<><><><>
RESOURCES (related) >

"Law Makers" - in changed times WHO ARE THEY ?

Legslators

Judicary
- i.e, BENCH

and /or BAR

REF. NAP's

Archangels as

PROVIDENCE - Obedience to

RELATED

b/f FB

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IMP

Previous-
http://vswaminathan-swamilook.blogspot.in/2017/11/law-makers-in-changed-times-who-are-they.html

>>>>
https://www.facebook.com/swaminathanv3/posts/1480710705338544?pnref=story

<> Who are the progressive 'lawmakers' reported to have joined the public rally !- Going by honorable guess, - it could not just be any of , or none of those, who are formally elected and supposed to act as PEOPLE's representatives in the Legislative bodies; perhaps, most probably, belonging to those other categories of !!

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GST- BACK Drop >

To serve as a back drop :

EXTRACTS from the landmark Judgment of the SC ..

@
In L&T SC case @
https://indiankanoon.org/doc/38073485/

3. The Law Commission of India in its 61st Report elaborately examined the law laid down in Gannon Dunkerley’s case and suggested that the relevant entry contained in the 7th Schedule to List II to the Constitution of India - Entry 54 - could either be amended; or a fresh entry in the State List could be added; or Article 366 which is a definition clause could be amended so as to widen the definition of “sale”, and include therein indivisible composite works contracts. Having regard to the said recommendation of the Law Commission, the Constitution (46th Amendment) Act was passed in 1983 by which Parliament accepted the 3rd alternative of the Law Commission, and amended Article 366 by adding sub-clause (29A). We are concerned with sub-clause (b) of Article 366 (29A) which reads as follows:-

366 (29A) “tax on the sale or purchase of goods” includes-

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;

4. The Constitutional amendment so passed was the subject matter of a challenge in Builders' Assn. of India v. Union of India, (1989) 2 SCC 645 *. This challenge was ultimately repelled and this Court stated:-

“… After the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into in two distinct and separate parts as stated above.” (at para 36)

5. This is the historical setting within which the present controversy arises.

6. Service tax was introduced by the Finance Act, 1994 and various services were set out in Section 65 thereof as being amenable to tax. The legislative competence of such tax is to be found in Article 248 read with Entry 97 of List I of the 7th Schedule to the Constitution of India. All the present cases are cases which arise before the 2007 amendment was made, which introduced the concept of “works contract” as being a separate subject matter of taxation. Various amendments were made in the sections of the Finance Act by which “works contracts” which were indivisible and composite were split so that only the labour and service element of such contracts would be taxed under the heading “Service Tax”.

* https://indiankanoon.org/doc/732612/

CROSS refer-

https://indiankanoon.org/doc/155272316/ (A)

READ paras 1 and 2 of above; and Xtract from para 2 (inset):

"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 the case of Raheja Development Corporation (supra) 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 Corporation(supra) case because para 20 does assist the Department. However, we are of the view that if the ratio of Raheja Development case is to be accepted then there would be no difference between works contract and a contract for sale of chattel as a chattel. Lastly, could it be said that 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 (sic.) for cash, deferred or any other valuable consideration. According to the Department, Development Agreement is not works contract but the Tripartite Agreement is works contract which, prima facie, appears to be fallacious. There is no allegation that the Tripartite Agreement is sham or bogus."

"DEEMED WORKS CONTRACT" - HIstory of related Consitutional Amendments > (B)

< within - Deemed Sale - Legal Services India

Xtract -
Thus, the 46th Constitutional Amendment widened the horizon of the term ‘sale’ which was conventionally understood as transfer of complete property in goods for valuable consideration. Now sales tax is levied on both sale as envisaged in the Sale of Goods Act, 1930 as well as that envisaged in Article 366 (29A) of the Constitution of India and the provisions as incorporated in Central Sales Tax Act and State VAT Acts. Now transactions in the nature of sale are also liable to sales tax like compulsory transfer, goods involved in works contract, right to use goods, transfer among members of unincorporated association, supply of food articles and hire purchase. This leads to confusion as to whether certain transactions are liable to both Sales as well as Service Tax and leads to escalation of prices.

Now we await the implementation of Goods and Services Tax, which is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level which aims to remove all doubts and multiple layers of taxation existing currently. This will benefit individuals as prices are likely to come down.

http://vswaminathan-swamilook.blogspot.com/2018/06/gst-back-drop.html

SC in re. Hume Pipe - A Study

SC in re Hume Pipe

FACTS

.....................

https://indiankanoon.org/doc/150881995/

Gannon

https://indiankanoon.org/doc/557776/

Builders Asscn.

https://indiankanoon.org/doc/732612/

XTRACTS

Hindustan Aeronautics Ltd. v. State of Karnataka [1984]2SCR248, where it was held thus:

…

18) It is amply clear from the above and hardly needs clarification …

"46. This conclusion was doubted in Associated Cement Companies Ltd. v. Commissioner of Customs, (2001) 4 SCC 593 saying:

25) We are afraid,

xx xx xx

.............................................CJI (H.L. DATTU) .............................................J.

(A.K. SIKRI) .............................................J.

(ARUN MISHRA) NEW DELHI;

JANUARY 30, 2015.

FACEBOOK

https://www.facebook.com/swaminathanv3/posts/1476350949107853?pnref=story

For such a purpose, the input viewpoints as canvassed in the two write-ups @ the Links below, may be summoned for help/ made appropriate use of :

<> http://swaminathanv208.blogspot.in/…/deeming-legal-fiction.…
<> http://swaminathanv208.blogspot.in/…/deeming-legal-fiction-…

Now, Back to the instant case:

Full TEXT of the JUDGMENT @ https://indiankanoon.org/doc/91401411/

KEY Note (on a tentative perusal):

CROSS Refer:

https://www.facebook.com/swaminathanv3/posts/1469789339764014?pnref=story

On the Constitutional Amendment found repeatedly referred, if so itching to know more: https://www.google.co.in/url…

46. In Mathuram Agrawal v. State of M.P.: (1999) 8 SCC 667, the Supreme Court held as under:-

47. A similar view was expressed by the Supreme Court in Govind Saran Ganga Saran v. CST: (1985) 155 ITR 144 ( SC) wherein the Court held as under:-

KEY Point (of poser) :

Is it not arguable that the levy of GST on 'ongoing' (building construction) project is illegal / illegitimate , hence ulra vires, in laying down that one-third of the consideration shall be 'DEEMED to be the 'cost of land', on a rule of thumb basis" ?

For, how /why such an arbitrary rule fixing the value of land to be excluded, and taxing the balance as for "DEEMED WORKS CONTRACT" ,- having no regard to the reality that the 'value' of land is quite likely - factually /actually - not be uniform, but vary, with no definiteness, on a case to case basis- be rightly regarded to squarely meet / fully satisfy one -the fourth -of the essential components , which, according to case law (see above), is required to be clearly and definitely ascertain -able (ed) !

KEY NOTE:

In L&T SC case @
https://indiankanoon.org/doc/38073485/

A Revisit (Is a MUST) >

REASON < Why so strong as not to justifiably regard otherwise, quite a few of the SC cases cited / followed, especially SC in Heinz case ( https://indiankanoon.org/doc/95535966/ )could be urged to more than amply support; and, the conclusive observations of the SC in para. 43, have to be regarded to lend adequate credence /credibility for taking such a stance (?!).

<> Para 35 (excerpt) - ".... However, in cases where the statute was completely discriminatory or provides no procedural machinery for assessment and levy of tax OR WHERE IT WAS CONFISCATORY , THE COURT WOULD BE JUSTIFIED IN STRIKING IT DOWN AS UNCONSTITUTIONAL. In such cases the character of the material provisions of the impugned statute may be such as may justify the Court taking the view that in substance the taxing statute IS A CLOAK ADOPTED BY THE LEGISLATURE FOR ACHIEVING ITS CONFISCATORY PURPOSE " (FONT supplied- with double emphasis on "OR" )

The obvious implication is that, - even if were to proceed that the exclusion of land value on an arbitrary basis (see Key Point supra) meets with the mandated requirement of a procedural machinery for assessment and levy of tax, it could be still be validly urged , the levy is 'unconstitutional' on inter alia the ground that it is 'confiscatory' (verging on detestable 'tax terrorism' (extortion-ism !)of its kind, - having been rooted on convoluted logic)!

(Better the apex court so declares,to restore the constitutional propriety, fully and finally,in a time-bound manner; in preference to leaving it to being litigated until the D'day of redemption!)

New Company Law- Offences under - >

http://corporatelawreporter.com/2018/07/16/mca-has-constituted-a-10-member-committee-to-review-the-offences-under-the-companies-act-2013/

Instant share

"Rolling back" - 'DILUTION' seemingly of a significant nature, in the offing ! No sooner or rather even before the 'fear of.' if any,, comes to be felt ...given a chance to throttle - for good or bad of , or ....?!

Also, see Related Posts - 'ten ?) of them

Incidentally, so far as known, there , it appears, has been no statistics or periodical update or close monitoring on, - how many tax cases have cropped up and been decided /adjudicated upon, by invoking , successfully so, since sec 37 of the IT Act came to be amended by insertion of the Explanation under sub-sec (1) thereof.

A critical study of the implications of the referred amendment may be found discussed in the published Article - (2004) 270 ITR 33 (Journal)* .

*Copied File Text (For reference / read ONLY) >

EXPLANATION UNDER SECTION 37(1) OF INCOME-TAX ACT-

A STUDY

V. Swaminathan¹

Introduction

Under the Constitution of India is guaranteed, among others, the fundamental right of all citizens to practice any profession or carry on any business. Nonetheless, in the Income-tax Act (the Act), though it is basically a taxing statute, are embodied certain provisions imposing, in the interest of the general public, reasonable restraints or restrictions, either directly or indirectly, on the said fundamental right. As held by the apex court (In re, Attar Singh [1991] 191 ITR 667), in interpreting any such provision the court cannot be oblivious of the proliferation of black money which is in circulation in the country. Further, that any such restraint or restriction in the Act intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the citizen's fundamental right. One such instance of a restrictive or restraining provision may be found in the Explanation under section 37(1) of the Act.

The Explanation, inserted under section 37(1) by the Finance (No. 2) Act, 1998, with retrospective effect from, 1st April 1962, reads :

"For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of the business or profession and no deduction or allowance shall be made in respect of such expenditure."

Prima facie, the provision is, in effect, intended to curb, rather act as a deterrent against, anyone carrying on a profession or business in any illegal or illegitimate manner.

Having regard to the terms and tenor of the Explanation, one may reasonably infer that the provision was brought on the statute with a view to bypassing case law on certain related issues. In fact, there are, broadly speaking, two lines of court cases-one dealing with expenditure tainted with illegality (such as, penalty or fine for an infringement or infraction of law, or any illegal payment, e.g., to any Government servant). Another, with expenditure incurred for a business, or income therefrom, tainted with illegality, or an unlawful business (such as, sale of goods at more than control price, smuggling activity, illicit trafficking in liquor contrary to prohibition laws, trade involving fraud upon the customs). May be, the line of distinction between the two criteria is rather thin and not easy to readily comprehend. However, the Explanation, in terms, seems to be wide enough for the Assessing Officer to try and hold that the provision ropes in within its disallowing ambit, both-that is, any expenditure tainted with illegality, as well as expenditure incurred for any income or business so tainted, or an unlawful business.

In order to decide whether, in view of the Explanation, a particular expenditure disqualifies for deduction or allowance, the import of the words-"for any purpose", and the immediately succeeding words-"which is an offence or which is prohibited by law", needs to be carefully interpreted and understood.

The words "for any purpose" have to be necessarily understood in the light of and having regard to the expression "for the purposes of the business . . ." occurring in the main provision of sub-section (1) of section 37. Accordingly, "for any purpose" has to be taken to mean "for any purpose of the business".

Also the expression "which is an offence or which is prohibited by law", on a plain reading, and in the setting in which it finds place, should pose no problem in understanding what it seeks to convey. Prima facie, what is envisaged is that, the Assessing Officer himself has to examine and arrive at a finding. If he finds that the purpose for which a particular expenditure is incurred, is considered an offence or is prohibited by law ("law" may mean any statute/enactment, or any set of rules or regulations having the force of law, that govern and/or have a bearing, direct or indirect, on a particular business), then no deduction or allowance for such expenditure is permitted. The Assessing Officer will have no difficulty in this regard, especially if the applicable law clearly declares as to what is considered an offence or is prohibited thereunder. If so, there seems to be no warrant or support, either explicit or implied, for taking a view that the Assessing Officer can invoke the Explanation, only on the basis of an external finding under any applicable law, of a competent authority or court. Nonetheless, on this point, there appears to be a contrary view expressed.

Going by case law, what can come within the sweep of the Explanation, just as that of the main provision (sub-section (1) of section 37), is an item of expenditure, not an item of "loss". The reason is that, as held by courts, if it is an item of "loss", not "expenditure", its deductibility or otherwise is governed by, and has to be decided having regard to the general principles of, the concept of "income" and "profits and gains" as enshrined in section 28/29 ; not the residuary provisions of section 37(1).

One finds a plethora of court decisions, also on the interpretation of the expression-"for the purposes of the business". This has been widely construed, and uniformly held, to mean almost every conceivable activity connected with or incidental to the business. In the light of those decisions, but having regard to the terms/ tenor of the Explanation, one may have to proceed on the premise that a deduction or allowance is not permissible, should there be the taint of illegality or wrong-doing associated either with expenditure or with business.

If clinically analysed, it will be seen that the expression-"any expenditure incurred . . . for any purpose which is an offence or which is prohibited by law" necessarily contemplates that,-

(a) there is expenditure incurred ;

(b) such expenditure is incurred (wholly and exclusively) for any purpose (of the assessee's business) ; and

As such, generally speaking, for invoking the Explanation, all the above three criteria may have to be satisfied. However, that may not be necessary in every case ; for example, where the whole, or, perhaps, even substantially the whole, of the business is illegal. As, in that case, the Explanation may be found applicable to the whole lot of expenditure incurred for such business.

With the foregoing in the background, it has to be examined whether or not the Explanation comes into play in a particular case, and if the answer is "yes", to what extent.

To highlight and illustrate the scope for applying the Explanation, one may consider a typical case. It is noted that, in the guidelines on audit under section 44AB of the Act issued by the Institute of Chartered Accountants of India, dealing with the requirement of clause 17(e)(iii) of Form No. 3CD (this is a requirement in view of the subject Explanation under section 37(1) of the Act), the case of a builder engaged in construction business has been referred to. For illustration herein, the same business may be chosen, or more appropriately, that of a promoter ("promoter" as specially defined, refers to owner of the land and/or builder) carrying on the business of construction and sale of "flats" or "apartments", being independent units of a multistoried building that one comes across mostly in a metropolitan city.

Having regard to the very peculiar characteristics of such property, the respective State Governments (among them are, Maharashtra and Karnataka) have considered it essential and accordingly have brought about a special legislation : the Flats Act, the Apartments Act, and the Rules thereunder. The primary objective, as stated in the said Acts themself, is to declare that each such unit of a building is, for all purposes, to be regarded a heritable and transferable immovable property. This is to enable the buyer to enjoy exclusive ownership of his unit, but with an undivided interest in the common areas and facilities to be used and enjoyed by all the owners of the building jointly.

The several regulations in those Acts and Rules, besides the other related regulations and bye-laws as framed by the local authorities, are so devised as to safeguard and protect the lawful rights and interests of the buyers, individually as also in common. That being so, those Acts and Rules govern/embrace almost all the related activities of the promoter. That is, right from the initial stage of his deciding to develop and construct, for sale, a building comprising independent units, to the final stage of completing the construction as per the approved plan, obtaining a completion certificate, and conveying the property to the buyers. The said Acts provide that the conveyance has to be made by the promoter, either to the organization formed and registered by the buyers jointly, or to each of them individually, depending on whether the units are sold as "flats" or as "apartments".

Those regulations and rules are mandatory and are required to be strictly complied with by the promoter. To mention a few : The promoter constructing a building for sale of its units as "apartments" has to-(i) initially execute and register a declaration in the prescribed form (this is a must, for the apartments to be governed by the Apartment Act and Rules), (ii) get the plan for the building duly approved by the competent authority, (iii) execute an agreement to sell and have it registered, and (iv) construct the building in accordance with the approved plan.

If the promoter fails to so comply with or contravenes any of the provisions of the said Acts, any such failure or contravention is, as explicitly provided therein, considered an offence. Of course, under the said Acts, the promoter is punishable with imprisonment or fine or both, but he can get away without punishment if he establishes reasonable cause for such failure. The possibility of either consequence, however, as pointed out elsewhere herein, might not be of relevance or a deciding factor for the Assessing Officer to invoke the Explanation to section 37(1) of the Act in a particular case.

To sum up : On the aforementioned facts and circumstances, the Assessing Officer could try and invoke the Explanation on the ground that all those purposes (that is, inclusive of all activities in the course of/incidental) of the business, that are either (a) not in compliance with or in contravention of, and declared an offence by, or (b) prohibited by, the statutory rules and regulations governing the business, are caught within the mischief of the provision. If so, he will deny deduction or allowance for all such expenditure as are found to have been incurred for one or more of the aforementioned purposes/activities.

According to expert commentary in the recent edition of a book on income-tax, for the purposes of the Explanation, the question whether there is any infraction of law, or whether the expenditure is incurred for any purpose which is an offence or which is prohibited by law shall have to be decided by the authority or the court empowered to do so under the respective law, and not by the income-tax authorities or the tribunal functioning under this Act. With regard to the stated proposition, certain case law has been referred to in the commentary.

The judgments so referred to are : [1993] 202 ITR 774 (Ker) ; [1979] 119 ITR 996 (SC) and [1995] 215 ITR 364 (SC).

K. N. Narayana Iyer v. CIT [1993] 202 ITR 774 (Ker), a private limited company, before it went into voluntary liquidation, made a gift to its managing director's daughter and also paid the gift-tax. The Income-tax Officer sought to treat the amounts of the gift and gift-tax as part of the accumulated profits available with the company at the time of its winding up, for the purpose of computing "dividend" under section 2(22)(c) of the Income-tax Act. The issue was decided against the Revenue holding that the gift, if at all, was avoidable only by the liquidator ; but as he has not chosen to do so, the Income-tax Officer cannot ignore the gift and treat the amount as accumulated profits available with the liquidator for distribution on a notional basis.

Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC), an internal audit party of the Income-tax Department, besides drawing the attention of the Income-tax Officer to a provision of law that had escaped his notice, also expressed its opinion on a point of law. The apex court held to the effect that the audit party was not competent to interpret the law and express its opinion, as it was the Income-tax Officer who must determine for himself what was the effect and consequence of the law, and whether in consequence of the law, which had come to his notice through the internal audit party note, he could reasonably believe that income had escaped assessment. Held that, therefore, the opinion of the audit party on a point of law cannot be "information" as envisaged in section 147(b), so as to justify the reopening by the Income-tax Officer of a completed assessment under that provision.

Asst. CIT v. A. K. Menon [1995] 215 ITR 364 (SC), the limited point at issue was whether the Special Court appointed under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, had power to examine and decide whether or not the tax liability of a "notified person", as assessed by the appropriate authority under the Income-tax Act, was reasonable or justified or enforceable. The apex court held to the effect that the Special Court had no power to do so, as, under the above referred to Act, it had only a limited power to determine as to whether and to what extent, having regard to the funds of the notified person available with the custodian, the tax liability of the notified person as already determined by a competent authority could be paid.

On a study of those judgments, however, one is not clear as to why they could be regarded to have any bearing or relevance, so as to support, even indirectly, the stated proposition.

Besides, the validity or otherwise of the proposition calls for a closer examination, also for the following reasons :

The proposition, by implication, means that the Assessing Officer can invoke the Explanation only if there be, and on the basis of, a finding under the relevant law from a competent authority or court. If so, it may happen that the Explanation can never be given effect to by the Assessing Officer in a particular case ; for instance, if there has been no prosecution against the assessee and hence no such finding is, or can ever be expected to be, available.

Further, there is a statutory time limit for the Assessing Officer to complete an assessment. In the general scheme of things, even if there be a finding given by the first authority/court under the relevant law, it could be challenged by the aggrieved party before higher forums. Obviously, it is not feasible for the Assessing Officer to defer his proceedings, until such time as there is a final finding.

It is thus seen that the proposition, if it were accepted, is bound to result in unintended consequences.

In this context, one may have to keep in view, certain observations of courts in decided cases.

The apex court has, in Prakash Cotton Mills Pvt. Ltd. v. CIT [1993] 201 ITR 684, as also in CIT v. Ahmedabad Cotton Mfg. Co. Ltd. [1994] 205 ITR 163, ruled to the effect that it is the Assessing Officer who is required to examine the relevant provisions of the applicable law or statute for ascertaining the real nature of a particular expenditure in terms of those (external) provisions, so as to decide upon the allowability or otherwise of that expenditure under the Income-tax Act.

In CIT v. H. Hirjee [1953] 23 ITR 427 (SC) and CIT v. Chaman Lal and Bros. [1970] 77 ITR 383 (Delhi), it has been held that if the purpose for which a particular expenditure has been incurred is illegal, it could not be regarded as wholly and exclusively a business purpose and the expenditure is, therefore, not deductible. What calls for a special noting is the courts' ruling to the effect that in such a case, for disallowing the expenditure, the possible final outcome of the proceedings under the applicable law/statute, be it for or against, in respect of the alleged illegality, is not relevant so as to be taken into consideration.

Those rulings in cases decided under the main provision (section 37(1) of the 1961 Act/section 10(2)(xv) of the 1922 Act) are necessarily of equal force to cases coming within the purview of the Explanation under that provision (section 37(1)).

Another vital aspect that ought not to be lost sight of is, should it not be possible for the Assessing Officer to successfully invoke the Explanation in the normal course of his proceedings, the Explanation might be rendered meaningless or futile, and consequently, inoperative. More so, should the Revenue be left with no other course open to redo the assessment, for invoking and giving effect to the Explanation at a later date ; in particular, if no action is possible under section 154 or 148 or 263 of the Income-tax Act.

On this aspect, certain settled rules of construction of the provisions of a statute call for attention. These, among others, are that the court should endeavour to (a) so interpret as will achieve the object of the provision, (b) make the law workable and enforceable, instead of reducing it to a redundant or dead letter, and (c) best harmonize with and effectuate the object of the legislation.

To conclude: For the reasons indicated hereinabove, certainly the better view is that the Assessing Officer will be within his powers to proceed and invoke the Explanation on the basis of his own examination of and finding(s) under any law governing/relevant for a particular business, without having to, for this purpose, seek and/or rely on a finding of an authority or court under that law.

In the explanatory memorandum on the Finance (No. 2) Bill, 1998, referring to the then proposed Explanation, it is mentioned that-"This proposed amendment will result in disallowance of the claim made by certain taxpayers of payments on account of protection money, extortion, hafta, bribes, etc., as business expenditure". The payments thus specified are all items appropriately falling under the category of expenditure that are prohibited by law as envisaged by one of the two limbs of the Explanation. On a close study, however, the Explanation seems to have, as discussed hereinbefore, a much wider implication and application, than what appears to be conveyed in the memorandum. For, as per the other limb of the Explanation, deduction or allowance is prohibited, also of any expenditure if it has been incurred for a purpose that is regarded an offence under any law. In the explanatory memorandum no item of expenditure that may be covered under this other category has been referred to.

No doubt, understanding the true intent and purpose of the Explanation may prove rather a difficult task, and therefore, the possibility of divergent opinions on any one or more of the relevant aspects cannot be ruled out. On that premise, for taking a suitable but defensible stand for the purposes such as, filing the tax return, and furnishing the required particulars, for example- under clause 17(e)(iii) of Form No. 3CD, as also in the assessment and further proceedings, it will be prudent for the assessee to take, and be guided by, legal advice of a competent tax counsel. More so, if the applicability or otherwise of the Explanation is considered to be doubtful or arguable, either in general or in respect of any particular expenditure.

Government servant). Another, with expenditure incurred for a business, or income therefrom, tainted with illegality, or an unlawful business (such as, sale of goods at more than control price, smuggling activity, illicit trafficking in liquor contrary to prohibition laws, trade involving fraud upon the customs). May be, the line of distinction between the two criteria is rather thin and not easy to readily comprehend. However, the Explanation, in terms, seems to be wide enough for the Assessing Officer to try and hold that the provision ropes in within its disallowing ambit, both-that is, any expenditure tainted with illegality, as well as expenditure incurred for any income or business so tainted, or an unlawful business.

If clinically analysed, it will be seen that the expression-"any expenditure incurred . . . for any purpose which is an offence or which is prohibited by law" necessarily contemplates that,-

(a) there is expenditure incurred ;

(b) such expenditure is incurred (wholly and exclusively) for any purpose (of the assessee's business) ; and

With the foregoing in the background, it has to be examined whether or not the Explanation comes into play in a particular case, and if the answer is "yes", to what extent.

The judgments so referred to are : [1993] 202 ITR 774 (Ker) ; [1979] 119 ITR 996 (SC) and [1995] 215 ITR 364 (SC).

On a study of those judgments, however, one is not clear as to why they could be regarded to have any bearing or relevance, so as to support, even indirectly, the stated proposition.

Besides, the validity or otherwise of the proposition calls for a closer examination, also for the following reasons :

It is thus seen that the proposition, if it were accepted, is bound to result in unintended consequences.

In this context, one may have to keep in view, certain observations of courts in decided cases.

Posted by vswaminathan at 3:31 AM

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RERA - Ongoing Projects >

https://taxguru.in/service-tax/opening-jugglery-work-contract-service-tax.html

< ca.sanjeevkumar@hotmail.com. Phone : 0124-4271552.)
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https://taxguru.in/goods-and-service-tax/taxation-builder-developer-rajasthan-part-1.html

< https://www.facebook.com/swaminathanv3/posts/1737087063034239

https://taxguru.in/goods-and.../vat-booking-flats-construction-big-question-mark.html

< within POSTS (selected):

August 29, 2012
August 22, 2012

<<<<

In SK Bansal's case, the following propositions were not specifically or adequately addressed; hence not gone into, and decided by court:

A) The implications of the spl. state law are of every relevance ; so much so, require to be considered and kept in focus for deciding why the property (i.e.Flat or Apartment) is, -

an immovable property;
indivisible composite property;
the agreement for 'sale' is a composite contract, likewise indivisible and inseparable in all respects; and
ascertainment of separate value of each of the three components of sale, including land, is a must; and, as no fool- and safe-proof machinery has been prescribed for the purpose, 'works contract' has to treated as a composite and indivisible contract. In other words, the attempted levy is a non-starter , hence must fail.
Further, provision of any such machinery, if critically viewed and analyzed, is most likely to prove well-nigh an impossible task.

B) Levy of VAT requires to be held as ultra vires the Constitution for one and the same reason(s) as for VAT. For, evaluation called for is of the respective portions for levy of ST and VAT; and if there is no such mechanism for ST , then it goes without saying that there is no mechanism for VAT as well. In other words, the end result of any attempt at fixing, with reasonably acceptable accuracy, of the portion to levy ST, is in the nature of things amenable to being flawed on more than one ground; and if so, the remainder left , for levy of VAT, could be equally flawed, as a conundrum, with eventual success. On such reasoning, if pressed for, the Del HC Judgment may be regarded to have implicitly decided also the issue of VAT in taxpayers' favor.

And, the same proposition as in B) holds good, also for land, being one of the three components of the sale.

Now, almost after 6 yrs from, - the roller coaster wheels have taken a full round- but to be back only in the proverbial Sq. I - launching Pad !

KEY Note:What is abominably sad and deeply regrettable is that , however, the mostly gullible have remained to be awakened from feigned sleep; as said- even a man fast asleep, or in the midst of a mid-summer night dream or a state of coma, could be woken up, but never one feigning asleep ?!
In continuation /apropos of , -

https://cleartax.in/s/gst-impact-works-contract

Excerpts (as random selected)

>Input Tax Credit is NOT available *

Revised Model GST Law mentions that input tax credit is not available for-

works contracts services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service
goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business.

On analysis, one finds this provision is quite contradictory.
For example, any contractor/builder will not enjoy any input tax credit on the input services if he constructs any building. But he will enjoy input tax credit on input service for further supply of works contract service. These two sentences are confusing and contradictory.
Input tax credit is available to both a builder and a taxable person while constructing plant and machinery. But input tax credit is not available to any taxable person who constructs on his own account even if it is for business use.
In case no abatement/ composition is provided, it may lead to significant increase in tax burden, especially if such works contract is taxed at Standard GST rate (which is 18%) and even if subjected to lower tax rate (12%).>

* Now available - See Update >

https://housing.com/news/gst-real-estate-will-impact-home-buyers-industry/

CROSS Refer (Blogs) @

http://vswaminathan-swamilook.blogspot.com/2018/06/rera-nd-gst-contd-supplent.html

http://vswaminathan-swamilook.blogspot.com/2018/06/rera-phase-wise-completion.html

http://vswaminathan-swamilook.blogspot.com/2018/04/gst-india.html

http://vswaminathan-swamilook.blogspot.com/2018/03/sale-of-immovable-property-or-deemed.html

http://vswaminathan-swamilook.blogspot.com/2017/09/rera-gst-el-al-ref-links.html

http://swaminathanv208.blogspot.com/2016/07/deeming-legal-fiction-contd.html

http://swaminathanv208.blogspot.com/2016/07/deeming-legal-fiction-contd.html

https://www.proptiger.com/guide/post/understanding-service-tax-and-vat-on-under-construction-property?utm_source=facebook&utm_medium=social&utm_campaign=sharing

https://www.facebook.com/swaminathanv3/posts/1724806480928964

https://www.linkedin.com/pulse/opne-letter-fm-gst-more-reforms-needed-madhukar-hiregange/

To ADD: On a rapid glance through the overwhelmingly too large number of suggestions, mostly of a procedural nature, on aspects in respect whereof, without due acceptance and clarity, implementation and proper compliance may be rendered /prove a noon-starter ; but, except for a negligible number of them, the rest do not, so far as known, seem to have been made a conscious note of and acted upon.
Incidentally, wprt item F, in particular as regards the move to have "the inclusion of .....and stamp duty in GST", which needs to be completed, the purport or import of the suggestion is not at all clear, much less understood. Be that as it may, going by one's honest guess, mention of 'stamp duty in GST' is intended to yet again pin point the need for the duty to be subsumed by the GST; more specifically the duty paid on 'immovable property' . Premised so, as of now, levy of GST on immovable property is , at best a proposal, and left to be discussed. If so, on the strength of the Feed-input supplied through several Posts and available in public domain, the suggestion,in one's perspective, should, instead, have been to shelve, and eventually drop such a proposal .

<> Any other eminent view or insightful thoughts, with a different stroke, to share; to the end of making an appropriate suggestion for consideration by the government?

As per own tentative thoughts / view:

'Unit' (Flat/Apartment),inclusive of UDI, is an immovable property; and indisputably so, - and continue to be- under other laws / for several other purposes- mainly, for TP Act and Stamp Act.

It is only for GST, by introducing the newly invented concept of 'deemed works contract', -for which purpose the constitution had to be amended, hence so amended,- the extant status of 'immovable property' , excluding land, happens to receive a different treatment. Even so, it continues to be an immovable property for all other purposes- mainly TP Act and Stamp Act. In case, as suggested, if the idea of subsuming stamp duty in GST were to be gone ahead with, to put it with the least complicity, that may not be possible without first suitably amending the Constitution, and then, also all the other related laws.

Anyone with a different stroke of better thoughts?!

https://www.facebook.com/swaminathanv3/posts/1724603330949279

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COURTESY (out of sheer empathy)

OTHERS:

1. Seller principal debtor; implied in the mandate to gross-up for
     tax
2. Plant and machinery, on sale, a movable property
For buyer, when installed for use, is a capital asset, entitled to
   depreciation allowance.

May be worthwhile to keep in mind, the special definition of, among others, the terms- 'transfer', 'capital asset', and 'immovable property', in the IT Act; for those are of contextual relevance herein. For the plethora of published articles, discussing in details the significance and implication thereof. For, for purposes of accounting by a realtor , and audit of the books of account and the final accounts, those aspects should necessarily be kept in view and followed unscrupulously, with no qualms whatsoever.

In Comparison, -

A) A Unit , with UDI in land and common facilities, on sale, is an immovable property; for promoter -seller, his stock-in-trade, right from day to completion of construction .

No right to convert into and sell unsold Units, as 'capital asset'
(hence, not taxable as notional income from HP)

B) For GST, stamp duty is not proposed to be subsumed.

Reasons:

    For, at the time of conveyance, that is /could be conveyed only as
an immovable property. Hence stamp duty levy by state is
    incumbent / inevitable.

No possibility of it being subsumed by GST, even remotely ; as , to
do so, would require firstly an amendment of the Constitution,
    then of the Stamp Act , also drastic amendments of the TP Act ,
IT Act , and any other related - /interlinked -laws, even if
   remotely.

C) The proposition that 'deemed works contract' is a misconceived
   concept , that is to be regarded as immovable property is still
open;
      and, if not to be taken as already settled, would require to be
   seriously challenged / pursued for having the issue fully and
   finally settled. Precisely stated, it is the seller's obligation to do
   so, as he is the principal debtor for defraying the tax liability.

D) Seller is the person on whom the levy is made; and as the
   principal debtor, he is the one who should pursue contesting      the levy to the end of ultimate success.

Feed- Input made available through material shared, to be
    found in public domain, should be of immense guide and helpful    assistance for seller to do so; necessarily, of course, in
   consultation with and under advice of an eminent top
   counsel.

For a host of the material readily available for such purpose , -far more than adequate, which could be made use of, - suggest to look through the collation of the Blogs , -
@ https://www.linkedin.com/pulse/units-flatapt-all-swaminathan-venkataraman/

On the question of 'effective date' , for purposes of compliance or enforcement of any enactment in general, of any law such as for levy of ST/VAT or GST on 'deemed construction contracts', there appears to be a gross misconception on the part of the realtors.

To be precise:

A) Levy of GST, not yet enacted but still in a state of absolute flux; even if and when made law could apply only prospectively,on or after the specified date of its coming into force.

And, for this purpose, as per governing legal principles in general , and as concluded by apex and other court rulings in particular, the levy could be applicable to incomplete project(s) in respect of which the contract agreement (i.e. the agreement to sell) has been executed and signed, respectively, by each buyer of Unit, after such specified date.

B) For levy of ST /VAT, the same principles as in A) above, must equally good.

Further, having due regard to the legal implications of the abovecited Del. HC Judgment, and also of the other related Apex and other Court Judgments,etc., in any view of the matter, the said levy(ies) could not be applied - hence no demand or collection made- for any period earlier than the date on which a fresh enactment is / comes to be made effective; that is, the date on which the contract agreement is executed and signed by each buyer, in his individual case.

ST/VAT - now under migration > GST

https://www.facebook.com/swaminathanv3/posts/1768718609871084

Contents copied FOR ready read (:

To share own thoughts (in brief):
One more step, in a seemingly better direction, with no other choice or option left, - to fit into the recent unpalatable developments, of our times- aptly denoted as 'NEW NORMAL' by no less than a dignitary, the CJI, the top-notch judicial/constitutional authority , - to strive and create an awareness , if not awakening, and provoke pro-active steps being taken by one and all directly concerned and badly impacted- to be precise, the reference is to the 'realty sector' and the ongoing debate /discussion .on the propriety or other wise of indicated imposition of GST, - in the process of migration from 'ST/VAT'.
That could be expected, in one's own independent but longstanding conviction, provided every one of those hapless but helpless lot , being the mostly gullible 'purchasers' of 'UNITS' (in a housing complex)..
As repeatedly canvassed for, and in expectation of the real thing that needs to percolate through is, - as to why purchasers , so also the consulting/advising professionals, in its inclusive sense, ought not but realize that it is time now, though inordinately late, to interact with the RERA (in place and functioning in each STATE) to press for and ensure that the old horrid practice of executing two / dual agreements, one for sale of land and another for 'construction' is put an end to .
It is expected -to- be-commonly known, such an idea was the brainwave of some unscrupulous promoters,- may be, some purchasers as well,- with a view to illegally avoid stamp duty on the part of the total consideration for 'sale/purchase', And, that, why the referred wretched practice should be continued even after , under compulsion from the registering authority, stamp duty is being collected on the total consideration by treating it as a single / only transaction of - sale and purchase of 'UNIT' , an "IMMOVABLE PROPERTY' IN ITS LEGAL AND COMMON SENSE meaning AS WELL.
MASTER Note(: In the context, it has to be inescapably recalled, with remorse, that, it is only the unethical practice of 'twin agreements' that influenced the governments both central and states) , and the henchmen (i.e.the FM and other ministries) , and triggered the ill-conceived further developments , leading to imposition of ST/VAT on such transactions,
Cross Refer (selectively): Previous Posts resting with, -
https://www.facebook.com/swaminathanv3/posts/1765654773510801
https://www.facebook.com/swaminathanv3/posts/1765654773510801
Pending,- invite to, EDIT