Judgment

T. L. VENKATARAMA AIYAR J. : This appeal arises out of proceedings for assessment of sales tax payable by the respondents for the year 1949-1950, and it raises a question of considerable importance on the construction of Entry 48 in List II, Sch. VII to the Government of India Act, 1935, "Taxes on the sale of goods."

2. The respondents are a private limited Company registered under the provisions of the Indian Companies Act, doing business in the construction of buildings, roads and other works and in the sale of sanitary wares and other sundry goods. Before the sales tax authorities, the disputes ranged over a number of items, but we are concerned of this appeal with only two of them. One is with reference to a sum of Rs. 29,51,528-7-4 representing the value of the materials used by the respondents in the execution of their works contracts, calculated in accordance works the statutory provisions applicable thereto, and the other relates to a sum of Rs. 1,98,929-0-3 being the price of foodgrains supplied by the respondents to their workmen.

3. It will be convenient at this stage to refer to the provisions of the Madras General Sales Tax Act, (Mad. IX of 1939), in so far as they are relevant for the purpose of the present appeal. Section 2 (h) of the Act as it stood when it was enacted, defined "sale" as meaning "every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration". In 1947, the Legislature of Madras enacted the Madras General Sales Tax (Amendment) Act No. XXV of 1947 introducing several new provisions in the Act, and it is necessary to refer to them so far as they are relevant for the purpose of the present appeal. Section 3 (c) of the Act had defined "goods" as meaning "all kinds of movable property other than actionable claims, stocks all shares and securities and as including all materials, commodities and articles", and it was amended so as to include materials "used in the construction, fitting out, improvement or repair of immovable property or in the fitting out improvement or repair of movable property." The definition of "sale" in S. 2 (h) was enlarged so as to include "a transfer of property in goods involved in the execution of a works contract". In the definition of "turnover" in S. 2 (i), the following Explanation (1) (i) was added :

"Subject to such conditions and restrictions, if any, as may be prescribed in this behalf -

the amount for which goods are sold shall, in relation to a works contract, be deemed to be the amount payable to the dealer for carrying out such contract, less such portion as may be prescribed of such amount, representing the usual proportion of the cost of labour to the cost of materials used in carrying out such contract".

A new provision was inserted in S. 2 (i) defining "works contract" as meaning "any agreement for carrying out for cash or for deferred payment or other valuable consideration, the construction, fitting out, improvement, or repair of any building, road, bridge or other immovable property or the fitting out, improvement or repair of any movable property". Pursuant to the Explanation to S. 2 (I) )(i) , a new rule, R. 4 (3), was enacted that :

"The amount for which goods are sold by a dealer shall, in relation to a works contract, be deemed to be the amount payable to the dealer for carrying out such contract less a sum not exceeding such percentage of the amount payable as may be fixed by the Board of Revenue, from time to time for different areas, representing the usual proportion in such areas of the cost of labour to the cost of materials used in carrying out such contract, subject to the following maximum percentages............ ."

And then follows a scale varying with the nature of the contracts.

4. It is on the authority of these provisions that the appellant seeks to include in the turnover of the respondents the sum of Rs. 29,51,528-7-4 being the value of