1. This is a reference under Section 44(1) of the Madhya Pradesh General Sales Tax Act, 1958. The Sales Tax Tribunal (Board of Revenue, Madhya Pradesh), at the instance of the assessee, has referred the following two questions for our decision:
'(1) Is that word 'contract' occurring in the proviso in Sub-section (1) of Section 4 of the Central Provinces and Berar Sales Tax Act, 1947, to be interpreted according to the Indian Contract Act or is it to be interpreted according to Section 2(b) of the Central Provinces and Berar Sales Tax Act, 1947?
(2) Under the facts and circumstances of the case, are the sales amounting to Rs. 13,06,449-3-0 liable to the payment of sales tax under Explanation II in Clause (g) of Section 2 of the Central Provinces and Berar Sales Tax Act. 1947?'
2. The assessment period is from 1-10-1947 to 31 12-1948. The assessee-company is a manufacturer of certain stone-wares, junctions, gully traps, channels, etc. of various sizes and dimensions as also domestic pottery. After the C.P. and Berar Sales Tax Act, 1947, (hereinafter referred to as the Act) came into force, the assessee had supplied the goods manufactured by it to the tune of Rs. 2,50,514-3-9 in fulfilment of the contracts entered into prior to 1-6-1947. The assessee claimed that the abovesaid sale price could not have been included in the turnover in view of the proviso to Section 4(1) of the Act. Exemption was also claimed in respect of sales amounting to Rs. 13,05,449-3-0 on the ground that the sales took place outside the State of Madhya Pradesh Both the contentions were negatived by the Sales Tax Authorities and the findings of those authorities were confirmed by the Sales Tax Tribunal The Tribunal has, however, referred the abovesaid questions for our decision.
3. The Act came into force on 1st June, 1947. Section 4 of the Act provides that every dealer, whose turnover during the year preceding the commencement of the Act. exceeded the taxable quantum, shall be liable to pay tax in accordance with the provisions of fee Act on all sales effected after the commencement of the Act The proviso to Section 4(1), however, exempts certain sales effected after the commencement of the Act in execution of contracts entered into before the commencement of the Act. The proviso reads:
''Provided that the tax shall not be payable on sales made in the course of the execution of a contract which is shown to the satisfaction of the Commissioner to have been entered into before the commencement of the Act.'
'Contract' is defined in Section 2(b) of the Act as under:
'2. In this Act, unless there is anythingrepugnant in the subject or context,--
* * * *
(b) 'Contract' means any agreement for carrying out for cash or deferred payment or other valuable consideration-
(i) the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property, or
(ii) the installation or repair of any machinery affixed to a building or other immovable property, or
(iii) the overhaul or repair of any motor vehicle;'
4. It is admitted that the sales in questions were not in execution of the contracts as defined in Section 2(b) of the Act. The contention of the assessee, however, it that the word 'contract' used in the proviso to Section 4(1) must be given general meaning as understood under the Indian Contract Act. This contention was repelled by the Tribunal The Tribunal relied on the decision of the Nagpur High Court in Nemkumar Kesrimal v. Commissioner of Sales Tax, 1955-6 STC 222: (AIR 1955 Nag 99). In that case, it was observed:
'It is not disputed that the assessee effected sales after the 1st June, 1947, to the extent of Rs. 97,945-10-0 in fulfilment of the orders accepted by him prior to the commencement of the Act. The question for consideration, therefore, is whether these sales were made 'in the course of the execution of a contract'. In the definition of 'turnover' the sale price in respect of the sale or supply of goods in the carrying out of any contract is included. 'Sale price' with reference to carrying out of any contract is defined in Section 2(h)(ii) as the amount payable to a dealer as valuable consideration for the carrying out of a contract less such portion representing the proportion of the cost of labour and the cost of materials used in carrying out such contract. The definition of 'sale' in Section 2(g) also includes the transfer of property in goods made in course of the execution of a contract. In view of these provisions, it was necessary to define 'contract' It is defined in Section 2(b). The learned counsel for the assessee had to concede that the sales in question were not made in pursuance of any contract as defined by this sub-section. His contention is that the word 'contract' in the proviso to Section 4 is not restricted to 'contract' as defined but meansany agreement including an agreement to sell.We are not prepared to accept this interpretation. The word 'contract' must receive theinterpretation of that word as stated in Section2(b), unless there is anything repugnant to thesubject or context. At the commencement ofthe Act there must have been a large numberof labour-cum-material contracts outstandingand it would have been a great hardship tosuch conductors to have to pay sales tax whichthey were not likely to recover from theowners. That was not the case with the saleof merchandise. We are therefore of the opinion that the proviso to Section 4 is inapplicable to the instant case.'
(Page 226 of STC: (at p. 101 of AIR) ) The same view was taken by the Nagpur High Court in another case. Hirji Govindji v. Commissioner of Sales Tax, M.P., Nagpur, 1955-6 STC 370 (Nag). Shri Sapre, learned counsel for the assessee, however, urged that the two decisions of the Nagpur High Court were no longer binding in view of the decisions of the Supreme Court in Peare Lal Hari Singh v. State of Punjab 1958-9 STC 412: (AIR 1958 SC 644); State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., 1958-9 STC 353: (AIR 1958 SC 500) and Banarsi Das Bhanot v. State of Madhya Pradesh, 1958-9 STC 388: (AIR 1958 SC 909) It is urged that in those cases the Supreme Court struck down the definition of the word 'contract' which purported to give a limited meaning to it and therefore that definition should he disregarded while interpreting the proviso to Section 4(i) of the Act. This submission is without any foundation.
In 1958-9 STC 353: (AIR 1958 SC 560) (supra), the question that came up for consideration before the Supreme Court was as to whether in a building contract or a works contract where the consideration was fixed at a lump sum which included both the price of the material and the labour charges, sales tax could he imposed on the price of the goods artificially determined, especially when there was no contract to sell the goods as such. Their Lordships of the Supreme Court were of the view that the State Legislatures were entitled to impose tax on sale of goods; they could not artificially change the definition of 'sale of goods'; nor could they impose lax when there was in fact, no sale of goods, by artificially treating a particular transaction as a sale of goods. Their Lordships of the Supreme Court were not considering the question as to whether the State Legislatures could give an artificial definition of the word ''contract' The same is the case in the other two decisions of the Supreme Court.
In the case of Banarsi Das Bhanot, 1958-9 STC 388: (AIR 1958 SC 909) (supra), which specifically considered the provisions of the C.P. and Berar Sales Tax Act, 1947, their Lordships of the Supreme Court observed:
'. . . the expression 'sale of goods' in Entry 48 has the same meaning which it has in the Sale of Goods Act, 1930, that in a building contract there is no sale of materials as such, and that it is therefore ultra vires the powers of the Provincial Legislature to impose tax on the supply of materials.' (P. 393 of STC: (at p. 912 of AIR)).
Their Lordships further observed:
'. . . when a question arises as to whether a particular works contract could be charged to sales tax, it will be for the authorities under the Act to determine whether the agreement in question is on its true construction, a combination of an agreement to sell and an agreement to work, and if they come to the conclusion that such is its character, then it will be open to them to proceed against that part of it which is a contract for the sale of goods, and impose tax thereon.'
(Page 393 of STC: (at p. 912 of AIR) )
From this decision it is clear that when a building contract is one and indivisible, in that ease alone the sales lax cannot be imposed on the artificially determined value of the material that has been used in constructing the building This clearly shows that their Lordships expressed the view that even in a building contract defined under the Act, there could be imposition of sales tax if the contract was not an indivisible contract but was a combination of an agreement to sell and an agreement to work. The definition of 'contract' as such was not struck down in Banarsi Das Bhanot's case, 1968-9 STC 388: (AIR 1958 SC 909) (supra); but only Rule, 4 made under the Act was struck down. That Rule provides for determining the price of the material utilized in a building contract and enabling that part of the price to be included in the taxable turnover The definition of 'contract' was however, left untouched.
5. Shri Sapre drew our attention to the decision of the Punjab High Court in Wah Stone and Lime Quarry Co. v. Punjab State, 1963 14 STC 167 (Punj). The definition of 'contract' in the Punjab Sales Tax Act is the same as in the C.P. Act. Section 4 of the Punjab Act is also similar for the C.P. Act inclusive of the proviso. There it was urged that the word 'contract' used in the proviso should be given not the restricted meaning given in the definition but should be used in general terms as understood under the Indian Contract Act. This is what their Lordships of the Punjab High Court observed:
'It is urged by Mr. Sarin, counsel for the applicants, that the special notion of a contract introduced by Section 2(c) of the Punjab General Sales Tax Act is unwarrantable and has been rejected by their Lordships of the Supreme Court in the two authorities mentioned above. Even the Legislature has accepted this position by repealing Clause (c) of Section 2 altogether (definition of contract) In his submission the sales lax must in the result be levied in accordance with the substantive provisions of Section 4 and the 'contract' referred to in the proviso can have reference only to the contract as defined in the Indian Contract Act. We are not called upon to (five an answer on the merits of this argument. We have merely to say which of the two concepts of contract mentioned in the question should be accepted. The notion of contract as defined in Section 2(c) of the Act cannot now be sustained in view of the decisions of their Lordships in Gannon Dunkerley's case, 1958-9 STC 353: (AIR 1958 SC 560), and the subsequent repeal of the provision by the State Legislature.
We would, accordingly, give an answerto the reference that the word 'contract' asused in the proviso to Sub-section (1) of Section 4 of the Punjab General Sales Tax Act,194-8, means a contract as defined in the IndianContract Act and is not limited by the definition under Clause (c) of Section 2 of the Punjab General Sales Tax Act.' (p. 170)
With due respect, we must observe that theirLordships of the Punjab High Court havenot given any reasons in support of the conclusions reached by them. We have alreadyindicated that the decisions of the SupremeCourt, referred to above, have not the effectof in any way, affecting the definition of theword 'contract' in the Sales Tax Act; norhas the definition been struck down. Whathas been pointed out in the Supreme Courteases is that where the contract as defined inthe Acts is an indivisible contract, in that casesales tax cannot be imposed on the notionalvalue of the material that is utilised in thebuilding or She works contract.
6. Even after the decision of the Supreme Court, the proviso under Section 4 can be brought into operation if the building or works contract as defined in the Act is not an indivisible contract: in that ease, the sale price of the material agreed to be supplied can be exempted by operation of the proviso under Section 4 of the Act. The purpose why the proviso was enacted has been stated by the Nagpur High Court, and we agree with that view.
7. For the aforesaid reasons, our answer to the first question is that the word 'contract' occurring in the proviso to Section 4(1) of the C.P. and Berar Sales Tax Act, 1947 is to be interpreted according to Section 2(b) of the Act.
8. Learned counsel for the assessee did not press the second question. From the facts on record it is obvious that the sales worth Rs. 13,05,449-3-0 were covered by Explanation II to Section 2(g) of the Act and that the sales were liable to tax. The sales in question being of the pre-Constitution period could be taxed on the basis of the 'nexus theory'; that is why the learned counsel has fairly not pressed the second question. Our answer to second question, therefore, is in the affirmative.
9. The assessee shall pay costs of this Reference to the Commissioner of Sales Tax. Hearing fee Rs. 150.