Pandit Banarsi Das v. State of Madhya Pradesh & Others

A) ABSTRACT / HEADNOTE

This judgment in Pandit Banarsi Das v. State of Madhya Pradesh & Others [1958 AIR 909, 1959 SCR 427] addresses two critical constitutional issues: the legality of imposing sales tax on material supplies in building contracts, and the constitutional validity of delegated legislative power allowing the government to modify tax exemptions. The Supreme Court decisively ruled that the definition of “sale” under Entry 48, List II of the Government of India Act, 1935 cannot extend to indivisible works contracts where no independent sale of goods occurs. It thus held that a provincial legislature cannot impose sales tax on material portions of such contracts. The judgment further upheld the delegation of legislative power allowing the executive to modify tax exemptions under Section 6(2) of the Central Provinces and Berar Sales Tax Act, 1947. However, the Court clarified this did not apply to inseparable contracts. The case draws upon the landmark ruling in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., (1959) SCR 379, and substantially impacts how taxation is viewed in composite contracts.

Keywords: Sales Tax, Works Contract, Entry 48 List II, Delegated Legislation, Constitutional Validity, Indivisible Contract, Gannon Dunkerley.

B) CASE DETAILS

i) Judgement Cause Title: Pandit Banarsi Das v. State of Madhya Pradesh & Others

ii) Case Number: Civil Appeals Nos. 253 to 255 of 1955

iii) Judgement Date: April 3 and April 7, 1958

iv) Court: Supreme Court of India

v) Quorum: S.R. Das C.J., Venkatarama Aiyar, S.K. Das, A.K. Sarkar, Vivian Bose JJ.

vi) Author: Venkatarama Aiyar, J. (Majority), Bose, J. (Concurring)

vii) Citation: AIR 1958 SC 909; [1959] SCR 427

viii) Legal Provisions Involved:

  • Entry 48, List II, Schedule VII, Government of India Act, 1935

  • Sections 2, 4(a), 6(1), 6(2) of Central Provinces and Berar Sales Tax Act, 1947

  • Rule 4 of the Central Provinces and Berar Sales Tax Rules, 1947

ix) Judgments Overruled by the Case (if any): None

x) Case is Related to which Law Subjects:

  • Constitutional Law

  • Taxation Law

  • Administrative Law

  • Public Finance

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The background involves a challenge to the validity of tax assessments made on contractors for supplies made under works contracts. These assessments were under the Central Provinces and Berar Sales Tax Act, 1947, and challenged on two fronts: lack of legislative competence under Entry 48 of List II, and unconstitutional delegation of legislative power. The challenge was contextualised by reference to a composite works contract, particularly for military and PWD constructions, where the contractor, Pandit Banarsi Das, contended that no transfer of property in goods as a distinct “sale” occurred. This case was argued shortly after State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., which had declared that indivisible works contracts do not involve “sales” within the meaning of Entry 48. This judgment further reinforced the Gannon Dunkerley principle and clarified the nature of delegated powers under tax legislation[1].

D) FACTS OF THE CASE

The appellant was a registered contractor, primarily engaged in the construction of buildings and roads for the Military and Public Works Department of the State of Madhya Pradesh. The Sales Tax Department sought to levy tax on materials used in these works under the 1947 Sales Tax Act, asserting such supply amounted to a “sale” under Section 2(g), read with the charging provision Section 4(a). The State amended Item 33 of Schedule II through a notification dated 18th September 1950, which removed the exemption previously granted to sales to the Government. The appellant challenged the tax levy on two major grounds: (i) works contracts do not constitute sales under the constitutional Entry 48, and (ii) the amendment via executive notification violated constitutional limits on delegated legislation.

E) LEGAL ISSUES RAISED

i) Whether the imposition of sales tax on supply of materials in indivisible works contracts was within the legislative competence of the Provincial Legislature under Entry 48, List II of the Government of India Act, 1935?

ii) Whether the State Government’s amendment of Item 33 of Schedule II by notification was an unconstitutional delegation of legislative authority?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for the Petitioner / Appellant submitted that Entry 48 of List II only allowed the State to tax “sales of goods”, which refers to a transfer of property under the Indian Sale of Goods Act, 1930. In indivisible works contracts, there is no such transfer of property in goods; rather, the ownership in materials used passes incidentally and not by agreement of sale. Therefore, taxing such contracts was beyond legislative competence[2].

They also argued that allowing the Government to amend Schedule II by notification under Section 6(2) amounted to an excessive delegation of legislative power, contrary to the Delhi Laws Act Case ([1951] SCR 747) and Rajnarain Singh v. Chairman, Patna Administration Committee ([1955] 1 SCR 290), since it altered legislative policy by withdrawing exemptions previously enacted by the legislature.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that the legislature could rightfully include composite contracts within the purview of sales tax by treating the supply of materials therein as a deemed sale. They contended that the definition under Section 2(g) included even transfers of property in goods made during execution of a contract. Further, Rule 4 provided a method for excluding labour component from the sale value, making the tax fair.

On the issue of delegation, they argued that Section 6(2) merely allowed administrative flexibility in granting or withdrawing exemptions and such delegation was limited to procedural matters, consistent with international legislative practices, including the US case Hampton Jr. & Co. v. United States (276 U.S. 394).

H) RELATED LEGAL PROVISIONS

i) Entry 48, List II, Schedule VII, Government of India Act, 1935
ii) Section 2(g) – Definition of “Sale”
iii) Section 4(a) – Charging Section
iv) Section 6(1) and 6(2) – Exemption and power to amend exemption
v) Rule 4, Central Provinces and Berar Sales Tax Rules, 1947

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Court held that in indivisible works contracts, the transfer of property in materials used does not amount to a sale under Entry 48. Citing the landmark judgment State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. ([1959] SCR 379), the Court reinforced that a “sale” requires an agreement to sell and transfer of title, which is absent in works contracts. Thus, taxing such contracts was ultra vires the powers of the Provincial Legislature.

ii) However, the Court clarified that if a works contract includes separate and distinct contracts for supply of materials and for execution of work, then the portion relating to supply of materials could be taxed[3].

b. OBITER DICTA 

i) The Court stated that delegating powers to modify tax exemptions by executive notification, as provided under Section 6(2), is valid. It constitutes conditional legislation, and not excessive delegation. The two subsections of Section 6 must be read together as forming an integrated policy framework, hence notification modifying exemptions is intra vires.

c. GUIDELINES 

  • A works contract must be evaluated to determine whether it includes separable agreements.

  • Only contracts that involve a sale in legal terms can be taxed under Entry 48.

  • Delegated power to modify tax exemptions under Section 6(2) is valid and not legislative overreach.

  • Sales tax authorities may assess if any element of a works contract qualifies as a sale.

J) CONCLUSION & COMMENTS

The Pandit Banarsi Das judgment solidifies constitutional boundaries for taxation powers of state legislatures, especially in relation to composite contracts. It reiterates that taxing a works contract in entirety under sales tax law violates the constitutional mandate of Entry 48, unless separability can be established. It upholds executive modification of exemptions under tax law as legitimate. The judgment thus aligns with constitutional doctrines on federal legislative competencies, and is foundational in taxation jurisprudence, especially in understanding post-Gannon Dunkerley interpretations.

K) REFERENCES

a. Important Cases Referred
[1] State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., [1959] SCR 379
[2] Rajnarain Singh v. Chairman, Patna Administration Committee, [1955] 1 SCR 290
[3] Hampton Jr. & Co. v. United States, 276 U.S. 394
[4] In re The Delhi Laws Act, 1912, [1951] SCR 747
[5] Syed Mohamed & Co. v. State of Madras, (1952) 3 STC 367

b. Important Statutes Referred

  • Central Provinces and Berar Sales Tax Act, 1947

  • Government of India Act, 1935

  • Indian Sale of Goods Act, 1930

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