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Builder liable to pay turnover tax on flats

Source : BUSINESS_STANDARD
Last Updated: Sun, Sep 29, 2013 20:39 hrs
​Income tax

A developer who constructs flats and sells them undertakes a works contract. Therefore, he is liable to pay a turnover tax to the states on the transfer of goods involved in such a contract, the Supreme Court stated last week in a batch of 26 appeals against the judgments of the Bombay and Karnataka high courts. The builders had argued that the flats were to be sold as flats and not an aggregate of its component parts. No work is carried out for the purchaser who gets title to the property only after all work is complete.



Rejecting this view, the Supreme Court ruled in the batch of petitions, led by Larsen & Toubro Ltd vs State of Karnataka, that "a contract may involve both a contract of work and labour and a contract of sale of goods. The distinction between contract for sale of goods and contract for work (or service) has almost diminished in the matters of composite contract involving both a contract of work/labour and a contract for sale."

The judgment further stated that taxing sale of goods in an agreement for sale of flat, which is to be constructed by the developer/promoter is permissible under the Constitution. When the agreement between the promoter/developer and the flat purchaser is to construct a flat and eventually sell the flat with the fraction of land, "it is obvious that such transaction involves the activity of construction in as much as it is only when the flat is constructed then it can be conveyed," the court said, and added: "We, therefore, think that there is no reason why such activity of construction is not covered by the term 'works contract'. Such activity has all the characteristics of works contract."

The judgment further stressed that whether the contract involved a dominant intention to transfer the property in goods was not at all material. It emphasised that the 46th Amendment to Article 366 of the Constitution left no manner of doubt that the states have the power to bifurcate the contract and levy sales tax on the value of the materials used.

Protection for bank depositors

The Supreme Court has dismissed the petitions of former directors of Vasavi Cooperative Urban Bank Ltd, challenging the constitutional validity of certain sections of the Andhra Pradesh Protection of Depositors of Financial Establishments Act. A large number of complaints were received from the depositors stating that the board of directors of the bank had swindled money of the depositors by creating false documents, amounting to crores of rupees. On receipt of the complaints, an enquiry was conducted and they were charge-sheeted.

They challenged their prosecution. The state government and the central government justified it. The accused persons argued that the state legislature did not have the competence to enact the Andhra Act since the subject "banking" is covered under Entry 45 of List I of Seventh Schedule. Hence, only the central government is entitled to enact the law relating to subject "accepting of deposit from the public and repayment of the same on demand". The court rejected the argument relying on earlier decisions on this point. It also pointed out that similar laws were passed by Tamil Nadu, Maharashtra and Pondicherry to protect the interests of small depositors from fraud perpetrated on unsuspecting investors, who entrusted their life savings to unscrupulous and fraudulent persons and who ultimately betrayed their trust.

Order to produce tax documents

The Supreme Court last week dismissed the appeal of Delta Distilleries Ltd against the judgment of the Bombay High Court, which had allowed the arbitration petition of United Spirits Ltd in a dispute between the liquor firms. The dispute was over amounts due and retired judges had acted as arbitrators, according to the terms of the contract. United Spirits wanted certain documents regarding the sales tax assessments to be produced before the arbitrator. Delta opposed it.

The arbitrator asked Delta to produce some documents demanded by the rival. The arbitrator, a former Supreme Court judge, resigned from the arbitration as Delta made certain allegations against her in certain correspondence. This led to the formation of a three-member arbitration tribunal consisting of two ex-judges of the Supreme Court and one from the high court. Delta maintained before the tribunal that it would not produce the documents as sales tax returns are confidential documents.

The tribunal insisted on implementing the order of the previous arbitrator and allowed United to move the high court to implement it. The high court ordered Delta to produce the documents. Therefore, it appealed to the Supreme Court. Delta reiterated that the documents were confidential, and later that they were not traceable. The sales tax commissioner pleaded that the records were destroyed as they were old. The Supreme Court upheld the order of the high court.

Blacklisting of medical suppliers

If a competent authority decides to blacklist a firm, the court will not normally interfere with the decision unless the firm was not given an opportunity to explain its stand. "Primarily it is for the authority competent to order blacklisting/debarring to decide, whether the facts and circumstances of the case justify blacklisting/debarring or not. The court cannot substitute its own views for the view of the competent authority in this regard," the Delhi High Court stated last week while dismissing the writ petitions of several firms, which were blacklisted by the Armed Forces Medical Services.

These persons and firms are facing prosecution after a CBI inquiry for supply of medicines to army hospitals on the basis of fake tenders in the name of top pharmaceutical companies. They argued that the inquiry is not complete and, therefore, the blacklisting was premature.

Rejecting this argument, the high court stated in its judgment, Sabharwal Medicos Ltd vs Union of India, that "if investigations are pending against the firm, the government cannot wait till the outcome of the probe for blacklisting it. It will pollute the tendering process itself. Once the investigation by a state agency is carried out and it culminates in filing of a charge-sheet, the state cannot be expected to wait for the outcome of the prosecution and in the meanwhile, continue to deal with persons whose conduct has come under a serious cloud. To take a different view will place unreasonable fetters on the right of the state not to enter into contracts with persons, whom it finds to be undesirable."

Foreign architect firm not barred

The Delhi High Court last week dismissed the writ petition of some architects seeking the quashing of the award given by the National Building Construction Corporation Ltd to a foreign firm for providing consultancy services for a Delhi project. The Indian architects argued that the foreign firm was neither registered under the Architects Act nor has it taken permission from the government in terms of Section 37 of the Act.

Rejecting the plea, the high court stated that Section 37, which appears under the heading "Prohibition against use of title" would show that though the provision barred a person other than a registered architect or a firm of architects from using the title and style; it did not prohibit him from rendering architectural services so long as he does not use the expression architect and does not describe his firm, if any, as a firm of architects. The court contrasted the provisions of the Architect Act against those of the Advocates Act and the Medical Council Act.

The court said: "The provisions of the Architects Act make it clear that persons who are not registered as architects can carry on and discharge the functions, which the architects normally discharge, provided they do not call themselves as architects."

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