Important point
Even an owner of the property may also be said to be carrying on a works contract if he enters into an agreement to construct and a works contract, within the meaning of the term in the Karnataka Sales Tax Act, can also be for construction of commercial units.

Headnote:Karnataka Sales Tax Act—Section 2(1)(k)(viii), 2(1)(v-i), 2(1)(u1)—Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales, Management and Transfer) Act, 1974—Liability to pay turnover tax on works contract—Definition of ‘works contract’—Appellants carry on business of real estate development and allied contracts—They enter into development Agreements with owners of lands and get the plans sanctioned—They construct residential apartments and/or commercial complexes and then into Agreements of Sale with intended purchasers—Purchasers to get an undivided interest in the land also—Whether appellants are dealers liable to pay turnover tax under the Karnataka Act—(Yes).
Held : The definition of the term ‘works contract’ in the said Act is an inclusive definition. It does not include merely a works contract as normally understood. It is a wide definition which includes “any agreement” for carrying out building or construction activity for cash, deferred payment or other valuable consideration. The definition does not make a distinction based on who carries on the construction activity. Thus even an owner of the property may also be said to be carrying on a works contract if he enters into an agreement to construct for cash, deferred payment or other valuable consideration. We, therefore, do not need to go into the question whether the Appellants are owners as even if the Appellants are owners to the extent that they have entered into Agreements to carry out construction activity on behalf of somebody else for cash, deferred payment or other valuable consideration, they would be carrying out a works contract and would become liable to pay turnover tax on the transfer of property in the goods involved in such works contract. Further under the said Act there is no distinction between construction of residential flats or commercial units. Thus, a works contract, within the meaning of the term in the said Act, can also be for construction of commercial units. For the purposes of considering whether an agreement amounts to a works contract or not, the provisions of the Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales, Management and Transfer) Act, 1974 will have no relevance. (Para 16)
Thus the Appellants are undertaking to build as developers for the prospective purchaser. Such construction/development is to be on payment of a price in various instalments set out in the Agreement. As the Appellants are not the owners they claim a “lien” on the property. Of course, under clause 7 they have right to terminate the Agreement and to dispose off the unit if a breach is committed by the purchaser. However, merely having such a clause does not mean that the agreement cease to be a works contract within the meaning of the term in the said Act. All that this means is that if there is a termination and that particular unit is not resold but retained by the Appellants, there would be no works contract to that extent. But so long as there is no termination the construction is for and on behalf of purchaser. Therefore, it remains a works contract within the meaning of the term as defined under the said Act. It must be clarified that if the agreement is entered into after the flat or unit is already constructed, then there would be no works contract. But so long as the agreement is entered into before the construction is complete it would be a works contract. (Para 19)

Judgment

S.N. Variava, J.—This Appeal is against the Judgment of the Karnataka High Court dated 19th November, 1999.

2. Briefly stated the facts are as follows :

The Appellants carry on the business of real estate development and allied contracts. They are having their Office at Bangalore. They enter into development Agreements with owners of lands. Thereafter they get plans sanctioned. After approval of the plans they construct residential apartments and/or commercial complexes. In most cases before they construct the residential apartments and/or commercial complexes they enter into Agreements of Sale with intended purchasers. The Agreements would provide that on completion of the construction the residential apartments or the commercial complex would be handed over to the purchasers who would get an undivided interest in the land also. The owners of the land would then transfer the ownership directly to the society which is being formed under the Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales, Management and Transfer) Act, 1974.

3. The question which arises for consideration is whether the Appellants are dealers and are liable to pay turnover tax under the Karnataka Sales Tax Act.

4. The Appellants filed returns showing Nil liability to pay tax on the footing that there was no transfer of any property in goods either by itself or by virtue of any works contract. The Adjudicating Authority did not accept their contention and passed an Assessment Order claiming tax.

5. Against the Assessment Order, the Appellants went in Appeal to the Additional Joint Commissioner of Commercial Taxes (Appeal). The Additional Joint Commissioner held that tax was payable as there was transfer of property in goods pursuant to a works contract.

6. Being aggrieved with the Order the Appellants filed an Appeal to the Karnataka Appellant Tribunal. The Appeal was partly allowed. It was held that the turnover could only be computed on the value of goods in the execution of the works contract.

7. The Appellants filed a Revision Petition to the Karnataka High Court which has been dismissed by the impugned Order. In the impugned Order it has been held that the matter has been examined in detail in the case of M/s. Mittal Investment Corporation vs. The Additional Commissioner of Commercial Taxes, Zone-I, Bangalore in S.T.A.Nos. 35 to 38 of 1998 decided on 24th September, 1999. On the principles laid down in that Judgment the Petition stood disposed off.

8. After the Appellants got leave in this Appeal a Review Application was made in Mittal Investment Corporation’s case (supra). Some clarifications have been issued by an Order dated 11th February, 2000.

9. Mr. Mehta submitted that as the Judgment in Mittal Investment Corporation’s case has been reviewed this matter should also be sent back to the High Court. However, on a question from the Court, whether the Appellants were accepting the principles laid down in Mittal Investment Corporation’s case the answer was that the Appellants wanted to agitate all the grounds including the ground that there was no works contract. Such a contention would stand concluded by the High Court Judgment in Mittal Investment Corporation’s case even after the Order passed in the Review Application. No purpose would therefore be served in remitting the matter back to the High Court. Mr. Mehta was therefore asked to proceed in this Court itself.

10. Mr. Mehta drew the attention of this Court to relevant provisions of the Karnataka Sales Tax Act [hereinafter called the said Act]. Section 2(1)(k)(viii) defines a “dealer” as follows:

“2(1)(k) “dealer” means any person who carries on the business of buying, selling or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration, and includes—

xxx xxx xxx

(viii) a person engaged in the business of transfer of property in goods (whether as goods

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2005 Supreme(SC) 794

Important pointEven an owner of the property may also be said to be carrying on a works contract if he enters into an agreement to construct and a works contract, within the meaning of the term in the Karnataka Sales Tax Act, can also be for construction of commercial units.

Cases Referred (1)

Important point
Even an owner of the property may also be said to be carrying on a works contract if he enters into an agreement to construct and a works contract, within the meaning of the term in the Karnataka Sales Tax Act, can also be for construction of commercial units.