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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 of Schedule VII to the Government of India
Act, 1935, “Taxes on the sale of goods”.
- 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 in 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 with
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. - It will be convenient at this stage to refer to the provisions of the Madras General Sales
Tax Act, (Mad. 9 of 1939), insofar 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 25 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 2(c) of the Act had defined “goods” as meaning “all kinds of movable
property other than actionable claims, stocks and 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 immoveable property or in the fitting out,
improvement or repair of movable property”. The definition of “sale” in Section 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 Section 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 Section 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 immoveable
property or the fitting out, improvement or repair of any movable property”. Pursuant to the
Explanation to Section 2(l)(i), a new rule, Rule 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.
- 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 the materials used in the
construction works as determined under Rule 4(3). The respondents contest this claim on the
ground that the power of the Madras Legislature to impose a tax on sales under Entry 48 in List II
in Schedule VII of the Government of India Act, does not extend to imposing a tax on the value
of materials used in works, as there is no transaction of sale in respect of those goods, and that the
provisions introduced by the Madras General Sales Tax (Amendment) Act, 1947 authorising the
imposition of such tax are ultra vires. As regards the sum of Rs 1,98,929-0-3, the contention of
the respondents was that they were not doing business in the sale of foodgrains, that they had
supplied them to the workmen when they were engaged in construction works in out of the way
places, adjusting the price therefor in the wages due to them and that the amounts so adjusted
were not liable to be included in the turnover. The Sales Tax Appellate Tribunal rejected both
these contentions, and held that the amounts in question were liable to be included in the taxable
turnover of the respondents. - The sole question for determination in this appeal is whether the provisions of the Madras
General Sales Tax Act are ultra vires, insofar as they seek to impose a tax on the supply of
materials in execution of works contract treating it as a sale of goods by the contractor, and the
answer to it must depend on the meaning to be given to the words “sale of goods” in Entry 48 in
List II of Schedule VII to the Government of India Act, 1935. Now, it is to be noted that while
Section 311(2) of the Act defines “goods” as including “all materials, commodities and articles”,
it contains no definition of the expression “sale of goods”. It was suggested that the word
“materials” in the definition of “goods” is sufficient to take in materials used in a works contract.
That is so; but the question still remains whether there is a sale of those materials within the
meaning of that word in Entry 48. On that, there has been sharp conflict of opinion among the
several High Courts. In Pandit Banarsi Das v. State of Madhya Pradesh [(1955) 6 STC 93], a
Bench of the Nagpur High Court held, differing from the view taken by the Madras High Court in
the judgment now under appeal, that the provisions of the Act imposing a tax on the value of the
materials used in a construction on the footing of a sale thereof were valid, but that they were bad
insofar as they enacted an artificial rule for determination of that value by deducting out of the
total receipts a fixed percentage on account of labour charges, inasmuch as the tax might,
according to that computation, conceivably fall on a portion of the labour charges and that would
be ultra vires Entry 48. The entire controversy hinges on the meaning of the words “sale of
goods” in Entry 48, and the point which we have now to decide is as to the correct interpretation
to be put on them.
- The contention of the appellant and of the States which have intervened is that the
provisions of a Constitution which confer legislative powers should receive a liberal construction,
and that, accordingly, the expression “sale of goods” in Entry 48 should be interpreted not in the
narrow and technical sense in which it is used in the Indian Sale of Goods Act, 1930, but in a
broad sense. - The contention of the appellant is well-founded that as the words “sale of goods” in Entry
48 occur in a Constitution Act and confer legislative powers on the State Legislature in respect of
a topic relating to taxation, they must be interpreted not in a restricted but broad sense. And that
opens up questions as to what that sense is, whether popular or legal, and what its connotation is
either in the one sense or the other. Learned counsel appearing for the States and for the assessees
have relied in support of their respective contentions on the meaning given to the word “sale” in
authoritative text-books, and they will now be referred to. According to Blackstone, “sale or
exchange is a transmutation of property from one man to another, in consideration of some price
or recompense in value”. This passage has, however, to be read distributively and so read, sale
would mean transfer of property for price. That is also the definition of “sale” in Benjamin on
Sale, 1950 Edn., p. 2. In Halsbury’s Laws of England, Second Edn., Vol. 29, p. 5, para 1,we
have the following:
“Sale is the transfer of the ownership of a thing from one person to another for a
money price. Where the consideration for the transfer consists of other goods, or some
other valuable consideration, not being money, the transaction is called exchange or
barter; but in certain circumstances, it may be treated as one of sale.
The law relating to contracts of exchange or barter is undeveloped, but the courts
seem inclined to follow the maxim of civil law, permutatio vicina est emptioni, and to
deal with such contracts as analogous to contracts of sale. It is clear, however, that
statutes relating to sale would have no application to transactions by way of barter.”
In Chalmer’s Sale of Goods Act, 12th Edn., it is stated at p. 3 that “the essence of sale is the
transfer of the property in a thing from one person to another for a price”, and at p. 6 it is pointed
out that “where the consideration for the transfer … consists of the delivery of goods, the contract
is not a contract of sale but is a contract of exchange or barter”. In Corpus Juris, Vol. 55, p. 36,
the law is thus stated:
“Sale” in legal nomenclature, is a term of precise legal import, both at law and in equity,
and has a well defined “legal signification, and has been said to mean, at all times, a
contract between parties to give and pass rights of property for money, which the buyer
pays or promises to pay to the seller for the thing bought or sold.”
It is added that the word “sale” as used by the authorities “is not a word of fixed and invariable
meaning, but may be given a narrow or broad meaning, according to the context”.
- It will be seen from the foregoing that there is practical unanimity of opinion as to the
import of the word “sale” in its legal sense, there being only some difference of opinion in
America as to whether price should be in money or in money’s worth, and the dictionary meaning
is also to the same effect. Now, it is argued by Mr Sikri, the learned Advocate-General of Punjab,
that the word “sale” is, in its popular sense, of wider import than in its legal sense, and that is the
meaning which should be given to that word in Entry 48, and he relies in support of this position
on the observations in Nevile Reid and Company Ltd. v. Commissioners of Inland Revenue
[(1922) 12 Tax Cas 545]. There, an agreement was entered into on April 12, 1918, for the sale of
the trading stock in a brewery business and the transaction was actually completed on June 24, - In between the two dates, the Finance Act, 1918, had imposed excess profits tax, and the
question was whether the agreement dated April 12, 1918, amounted to a sale in which case the
transaction would fall outside the operation of the Act. The Commissioners had held that as title
to the goods passed only on June 24, 1918, the agreement dated April 12, 1918, was only an
agreement to sell and not the sale which must be held to have taken place on June 24, 1918, and
was therefore liable to be taxed. Sankey, J., agreed with this decision, but rested it on the ground
that as the agreement left some matters still to be determined and was, in certain respects,
modified later, it could not be held to be a sale for the purpose of the Act. In the course of the
judgment, he observed that “sale” in the Finance Act should not be construed in the light of the
provisions of the Sale of Goods Act, but must be understood in a commercial or business sense. - Now, in its popular sense, a sale is said to take place when the bargain is settled between
the parties, though property in the goods may not pass at that stage, as where the contract relates
to future or unascertained goods, and it is that sense that the learned Judge would appear to have
had in his mind when he spoke of a commercial or business sense. But apart from the fact that
these observations were obiter, this Court has consistently held that though the word “sale” in its
popular sense is not restricted to passing of title, and has a wider connotation as meaning the
transaction of sale, and that in that sense an agreement to sell would, as one of the essential
ingredients of sale, furnish sufficient nexus for a State to impose a tax, such levy could,
nevertheless, be made only when the transaction is one of sale, and it would be a sale only when
it has resulted in the passing of property in the goods to the purchaser. It has also been held in
STO v. Messrs Budh Prakash Jai Prakash [(1955) 1 SCR 243], that the sale contemplated by
Entry 48 of the Government of India Act was a transaction in which title to the goods passes and
a mere executory agreement was not a sale within that entry. We must accordingly hold that the
expression “sale of goods” in Entry 48 cannot be construed in its popular sense, and that it must
be interpreted in its legal sense. What its connotation in that sense is, must now be ascertained.
For a correct determination thereof, it is necessary to digress somewhat into the evolution of the
law relating to sale of goods. - The concept of sale, as it now obtains in our jurisprudence, has its roots in the Roman
law. Under that law, sale, emptio venditio, is an agreement by which one person agrees to transfer
to another the exclusive possession (vacuam possessionem tradere) of something (merx) for
consideration. In the earlier stages of its development, the law was unsettled whether the
consideration for sale should be money or anything valuable. By a rescript of the Emperors
Diocletian and Maximian of the year 294 A.D., it was finally decided that it should be money,
and this law is embodied in the Institutes of Justinian, vide Title 23. Emptio venditio is, it may be
noted, what is known in Roman law as a consensual contract. That is to say, the contract is
complete when the parties agree to it, even without delivery as in contracts re or the observance
of any formalities as in contracts verbis and litteris. The common law of England relating to sales
developed very much on the lines of the Roman law in insisting on agreement between parties
and price as essential elements of a contract of sale of goods. In his work on Sale, Benjamin
observes:
“Hence it follows that, to constitute a valid sale, there must be a concurrence of the
following elements viz. (1) Parties competent to contract; (2) mutual assent; (3) a thing,
the absolute or general property in which is transferred from the seller to the buyer; and
(4) a price in money paid or promised.”
- Coming to the Indian law on the subject, Section 77 of the Contract Act defined “sale” as
“the exchange of property for a price involving the transfer of ownership of the thing sold from
the seller to the buyer”. It was suggested that under this section it was sufficient to constitute a
sale that there was a transfer of ownership in the thing for a price and that a bargain between the
parties was not an essential element. But the scheme of the Contract Act is that it enacts in
Sections 1 to 75 provisions applicable in general to all contracts, and then deals separately with
particular kinds of contract such as sale, guarantee, bailment, agency and partnership, and the
scheme necessarily posits that all these transactions are based on agreements. We then come to
the Indian Sale of Goods Act, 1930 (3 of 1930), which repealed Chapter 7 of the Contracts Act
relating to sale of goods, and Section 4 thereof is practically in the same terms as Section 1 of the
English Act. Thus, according to the law both of England and of India, in order to constitute a sale
it is necessary that there should be an agreement between the parties for the purpose of
transferring title to goods which of course presupposes capacity to contract, that it must be
supported by money consideration, and that as a result of the transaction property must actually
pass in the goods. Unless all these elements are present, there can be no sale. Thus, if merely title
to the goods passes but not as a result of any contract between the parties, express or implied,
there is no sale. So also if the consideration for the transfer was not money but other valuable
consideration, it may then be exchange or barter but not a sale. And if under the contract of sale,
title to the goods has not passed, then there is an agreement to sell and not a completed sale. - Now, it is the contention of the respondents that as the expression “sale of goods” was at
the time when the Government of India Act was enacted, a term of well-recognised legal import
in the general law relating to sale of goods and in the legislative practice relating to that topic
both in England and in India, it must be interpreted in Entry 48 as having the same meaning as in
the Sale of Goods Act, 1930, and a number of authorities were relied on in support of this
contention.
- On the basis of the authorities, the respondents contend that the true interpretation to be
put on the expression “sale of goods” in Entry 48 is what it means in the Indian Sale of Goods
Act, 1930, and what it has always meant in the general law relating to sale of goods. It is
contended by the appellant – and quite rightly – that in interpreting the words of a Constitution the
legislative practice relative thereto is not conclusive. But it is certainly valuable and might prove
determinative unless there are good reasons for disregarding it, and in STO v. Budh Prakash Jai
Prakash, it was relied on for ascertaining the meaning and true scope of the very words which are
now under consideration. There, in deciding that an agreement to sell is not a sale within Entry
48, this Court referred to the provisions of the English Sale of Goods Act, 1893, the Indian
Contract Act, 1872, and the Indian Sale of Goods Act, 1930, for construing the word “sale” in
that Entry and observed:
“Thus, there having existed at the time of the enactment of the Government of India Act,
1935, a well-defined and well-established distinction between a sale and an agreement to
sell, it would be proper to interpret the expression “sale of goods” in entry 48 in the sense
in which it was used in legislation both in England and India and to hold that it authorises
the imposition of a tax only when there is a completed sale involving transfer of title.”
This decision, though not decisive of the present controversy, goes far to support the contention
of the respondents that the words “sale of goods” in Entry 48 must be interpreted in the sense
which they bear in the Indian Sale of Goods Act, 1930. - The appellant and the intervening States resist this conclusion on the following grounds:
(1) The provisions of the Government of India Act, read as a whole, show that the
words “sale of goods” in Entry 48 are not to be interpreted in the sense which they have
in the Sale of Goods Act, 1930;
(2) The legislative practice relating to the topic of sales tax does not support the
narrow construction sought to be put on the language of Entry 48;
(3) The expression “sale of goods” has in law a wider meaning than what it bears in
the Sale of Goods Act, 1930, and that is the meaning which must be put on it in Entry 48;
and
(4) The language of Entry 48 should be construed liberally so as to take in new
concepts of sales tax.
(1) As regards the first contention, the argument is that in the Government of India Act, 1935,
there are other provisions which give a clear indication that the expression “sale of goods” in
Entry 48 is not to be interpreted in the sense which it bears in the Sale of Goods Act, 1930. That
is an argument open to the appellant, because rules of interpretation are only aids for ascertaining
the true legislative intent and must yield to the context, where the contrary clearly appears. Now,
what are the indications contra? Section 311(2) of the Government of India Act defines
“agricultural income” as meaning “agricultural income as defined for the purposes of the
enactments relating to Indian income tax”. It is said that if the words “sale of goods” in Entry 48
were meant to have the same meaning as those words in the Sale of Goods Act, that would have
been expressly mentioned as in the case of definition of agricultural income, and that therefore
that is not the meaning which should be put on them in that Entry.
In our opinion, that is not the inference to be drawn from the absence of words linking up the
meaning of the word “sale” with what it might bear in the Sale of Goods Act. We think that the
true legislative intent is that the expression “sale of goods” in Entry 48 should bear the precise
and definite meaning it has in law, and that that meaning should not be left to fluctuate with the
definition of “sale” in laws relating to sale of goods which might be in force for the time being. It
was then said that in some of the Entries, for example, Entries 31 and 49, List II, the word “sale”
was used in a wider sense than in the Sale of Goods Act, 1930. Entry 31 is “intoxicating liquors
and narcotic drugs, that is to say, the production, manufacture, possession, transport, purchase
and sale of intoxicating liquors, opium and other narcotic drugs….” The argument is that “sale”
in the Entry must be interpreted as including barter, as the policy of the law cannot be to prohibit
transfers of liquor only when there is money consideration therefor. But this argument proceeds
on a misapprehension of the principles on which the Entries are drafted. The scheme of the
drafting is that there is in the beginning of the Entry words of general import, and they are
followed by words having reference to particular aspects thereof. The operation of the general
words, however, is not cut down by reason of the fact that there are sub-heads dealing with
specific aspects. In Manikkasundara v. R.S. Nayudu [(1946) FCR 67, 84], occur the following
observations:
“The subsequent words and phrases are not intended to limit the ambit of the opening
general term or phrase but rather to illustrate the scope and objects of the legislation
envisaged as comprised in the opening term or phrase.”
A law therefore prohibiting any dealing in intoxicating liquor, whether by way of sale or barter or
gift, will be intra vires the powers conferred by the opening words without resort to the words
“sale and purchase”. Entry 49 in List II is “Cesses on the entry of goods into a local area for
consumption, use or sale therein”. It is argued that the word “sale” here cannot be limited to
transfers for money or for even consideration. The answer to this is that the words “for
consumption, use or sale therein” are a composite expression meaning octroi duties, and have a
precise legal connotation, and the use of the word “sale therein” can throw no light on the
meaning of that word in Entry 48. We are of opinion that the provisions in the Government of
India Act, 1935 relied on for the appellant are too inconclusive to support the inference that
“sale” in Entry 48 was intended to be used in a sense different from that in the Sale of Goods Act.
(2) It is next urged that for determining the true meaning of the expression “Taxes on the sale
of goods” in Entry 48 it would not be very material to refer to the legislative practice relating to
the law in respect of sale of goods. It is argued that “sale of goods” and “taxes on sale of goods”
are distinct matters, each having its own incidents, that the scope and object of legislation in
respect of the two topics are different, that while the purpose of a law relating to sale of goods is
to define the rights of parties to a contract, that of a law relating to tax on sale of goods is to bring
money into the coffers of the State, and that, accordingly, legislative practice with reference to
either topic cannot be of much assistance with reference to the other. Now, it is true that the
object and scope of the two laws are different, and if there was any difference in the legislative
practice with reference to these two topics, we should, in deciding the question that is now before
us, refer more appropriately to that relating to sales tax legislation rather than that relating to sale
of goods. But there was, at the time when the Government of India Act was enacted, no law
relating to sales tax either in England or in India. The first Sales Tax law to be enacted in India is
the Madras General Sales Tax Act, 1939, and that was in exercise of the power conferred by
Entry 48. In England, a purchase tax was introduced for the first time only by the Finance Act 2
of 1940. The position, therefore, is that Entry 48 introduces topic of legislation with respect to
which there was no legislative practice.
(3) It is next contended by Mr Sikri that though the word “sale” has a definite sense in the
Sale of Goods Act, 1930, it has a wider sense in law other than that relating to sale of goods, and
that, on the principle that words conferring legislative powers should be construed in their
broadest amplitude, it would be proper to attribute that sense to it in Entry 48. It is argued that in
its wider sense the expression “sale of goods” means all transactions resulting in the transfer of
title to goods from one person to another, that a bargain between the parties was not an essential
element thereof, and that even involuntary sales would fall within its connotation. He went on to
state that such sale took place when the value of the goods is paid to the owner.
The Land Acquisition Act, 1894 refers to the compulsory taking over of immovable property
as acquisition. In List II of the Government of India Act, this topic is described in Entry 9 as
“compulsory acquisition of land.” In the Constitution, Entry 42 in List III is “acquisition and
requisition of property”. The ratio on which the opinion of Lord Morton is based has no place in
the construction of Entry 48, and the law as laid down by the majority is in consonance with the
view taken by this Court that bargain is an essential element in a transaction of sale.
Another contention presented from the same point of view but more limited in its sweep is
that urged by the learned Solicitor-General, the Advocate-General of Madras and the other
counsel appearing for the States, that even in the view that an agreement between the parties was
necessary to constitute a sale, that agreement need not relate to the goods as such, and that it
would be sufficient if there is an agreement between the parties and in the carrying out of that
agreement there is transfer of title in movables belonging to one person to another for
consideration. It is argued that Entry 48 only requires that there should be a sale, and that means
transfer of title in the goods, and that to attract the operation of that Entry it is not necessary that
there should also be an agreement to sell those goods. To hold that there should be an agreement
to sell the goods as such is, it is contended, to add to the Entry, words which are not there.
We are unable to agree with this contention. If the words “sale of goods” have to be
interpreted in their legal sense, that sense can only be what it has in the law relating to sale of
goods. The ratio of the rule of interpretation that words of legal import occurring in a statute
should be construed in their legal sense is that those words have, in law, acquired a definite and
precise sense, and that, accordingly, the legislature must be taken to have intended that they
should be understood in that sense. In interpreting an expression used in a legal sense, therefore,
we have only to ascertain the precise connotation which it possesses in law. It has been already
stated that, both under the common law and the statute law relating to sale of goods in England
and in India, to constitute a transaction of sale there should be an agreement, express or implied,
relating to goods to be completed by passing of title in those goods. It is of the essence of this
concept that both the agreement and the sale should relate to the same subject-matter. Where the
goods delivered under the contract are not the goods contracted for, the purchaser has got a right
to reject them, or to accept them and claim damages for breach of warranty. Under the law,
therefore, there cannot be an agreement relating to one kind of property and a sale as regards
another. We are accordingly of opinion that on the true interpretation of the expression “sale of
goods” there must be an agreement between the parties for the sale of the very goods in which
eventually property passes. In a building contract, the agreement between the parties is that the
contractor should construct a building according to the specifications contained in the agreement,
and in consideration therefor receive payment as provided therein, and as will presently be shown
there is in such an agreement neither a contract to sell the materials used in the construction, nor
does property pass therein as movables. It is therefore impossible to maintain that there is implicit
in a building contract a sale of materials as understood in law.
(4) It was finally contended that the words of a Constitution conferring legislative power
should be construed in such manner as to make it flexible and elastic so as to enable that power to
be exercised in respect of matters which might be unknown at the time it was enacted but might
come into existence with the march of time and progress in science, and that on this principle the
expression “sale of goods” in Entry 48 should include not only what was understood as sales at
the time of the Government of India Act, 1935 but also whatever might be regarded as sale in the
times to come.
- The principle of the decisions is that when, after the enactment of a legislation, new facts
and situations arise which could not have been in its contemplation, the statutory provisions could
properly be applied to them if the words thereof are in a broad sense capable of containing them.
The question then would be not what the framers understood by those words, but whether those
words are broad enough to include the new facts. Clearly, this principle has no application to the
present case. Sales tax was not a subject which came into vogue after the Government of India
Act, 1935. It was known to the framers of that statute and they made express provision for it
under Entry 48. Then it becomes merely a question of interpreting the words, and on the
principle, already stated, that words having known legal import should be construed in the sense
which they had at the time of the enactment, the expression “sale of goods” must be construed in
the sense which it has in the Sale of Goods Act.
The argument is that the definition of “sale” given in the Madras General Sales Tax Act is in
conflict with that given in the Sale of Goods Act, 1930, that the sale of goods is a matter falling
within Entry 10 of the Concurrent List, and that, in consequence, as the Madras General Sales
Tax (Amendment) Act, 1947 under which the impugned provisions had been enacted, had not
been reserved for the assent of the Governor-General as provided in Section 107 (2), its
provisions are bad to the extent that they are repugnant to the definition of “sale” in the Sale of
Goods Act, 1930. The short answer to this contention is that the Madras General Sales Tax Act is
a law relating not to sale of goods but to tax on sale of goods, and that it is not one of the matters
enumerated in the Concurrent List or over which the Dominion legislature is competent to enact a
law, but is a matter within the exclusive competence of the Province under Entry 48 in List II.
The only question that can arise with reference to such a law is whether it is within the purview of
that Entry. If it is, no question of repugnancy under Section 107 can arise.
- It now remains to deal with the contention pressed on us by the States that even if the
supply of materials under a building contract cannot be regarded as a sale under the Sale of
Goods Act, that contract is nevertheless a composite agreement under which the contractor
undertakes to supply materials, contribute labour and produce the construction, and that it is open
to the State in execution of its tax laws to split up that agreement into its constituent parts, single
out that which relates to the supply of materials and to impose a tax thereon treating it as a sale. It
is said that this is a power ancillary to the exercise of the substantive power to tax sales. The
respondents contend that even if the agreement between the parties could be split up in the
manner suggested for the appellant, the resultant will not be a sale in the sense of the Sale of
Goods Act, as there is in a works contract neither an agreement to sell materials as such, nor does
property in them pass as movables. - The contention that a building contract contains within it all the elements constituting a
sale of the materials was sought to be established by reference to the form of the action, when the
claim is in quantum meruit. It was argued that if a contractor is prevented by the other party to the
contract from completing the construction he has, as observed by Lord Blackburn in Appleby v.
Myres claim against that party, that the form of action in such a case is for work done and
materials supplied, as appears from Bullen and Leake’s Precedents of Pleadings, 10th Edn., at
pp. 285-86, and that that showed that the concept of sale of goods was latent in a building
contract. The answer to this contention is that a claim for quantum meruit is a claim for damages
for breach of contract, and that the value of the materials is a factor relevant only as furnishing a
basis for assessing the amount of compensation. That is to say, the claim is not for price of goods
sold and delivered but for damages. That is also the position under Section 65 of the Indian
Contract Act. - Another difficulty in the way of accepting the contention of the appellant as to splitting up
a building contract is that the property in materials used therein does not pass to the other party to
the contract as movable property. It would so pass if that was the agreement between the parties.
But if there was no such agreement and the contract was only to construct a building, then the
materials used therein would become the property of the other party to the contract only on the
theory of accretion. When the work to be executed is, as in the present case, a house, the
construction imbedded on the land becomes an accretion to it on the principle quicquid plantatur
solo, solo cedit, and it vests in the other party not as a result of the contract but as the owner of
the land. It is argued that the maxim, what is annexed to the soil goes with the soil, has not been
accepted as a correct statement of the law of this country.
The decisions are concerned with rights of persons who, not being trespassers, bona fide put
up constructions on lands belonging to others, and as to such persons the authorities lay down that
the maxim recognised in English law, quicquid plantatur solo, solo cedit has no application, and
that they have the right to remove the superstructures, and that the owner of the land should pay
compensation if he elects to retain them. That exception does not apply to buildings which are
constructed in execution of a works contract, and the law with reference to them is that the title to
the same passes to the owner of the land as an accretion thereto. Accordingly, there can be no
question of title to the materials passing as movables in favour of the other party to the contract. It
may be, as was suggested by Mr Sastri for the respondents, that when the thing to be produced
under the contract is movable property, then any material incorporated into it might pass as a
movable, and in such a case the conclusion that no taxable sale will result from the disintegration
of the contract can be rested only on the ground that there was no agreement to sell the materials
as such. But we are concerned here with a building contract, and in the case of such a contract,
the theory that it can be broken up into its component parts and as regards one of them it can be
said that there is a sale must fail both on the grounds that there is no agreement to sell materials as
such, and that property in them does not pass as movables.
- To sum up, the expression “sale of goods” in Entry 48 is a nomen juris, its essential
ingredients being an agreement to sell movables for a price and property passing therein pursuant
to that agreement. In a building contract which is, as in the present case, one, entire and
indivisible – and that is its norm, there is no sale of goods, and it is not within the competence of
the Provincial Legislature under Entry 48 to impose a tax on the supply of the materials used in
such a contract treating it as a sale. - This conclusion entails that none of the legislatures constituted under the Government of
India Act, 1935 was competent in the exercise of the power conferred by Section 100 to make
laws with respect to the matters enumerated in the lists, to impose a tax on construction contracts
and that before such a law could be enacted it would have been necessary to have had recourse to
the residual powers of the Governor-General under Section 104 of the Act. And it must be
conceded that a construction which leads to such a result must, if that is possible, be avoided. It is
also a fact that acting on the view that Entry 48 authorises it, the States have enacted laws
imposing a tax on the supply of materials in works contracts, and have been realising it, and their
validity has been affirmed by several High Courts. All these laws were in the statute book when
the Constitution came into force, and it is to be regretted that there is nothing in it which offers a
solution to the present question. We have, no doubt, Article 248 and Entry 97 in List I conferring
residual power of legislation on Parliament, but clearly it could not have been intended that the
Centre should have the power to tax with respect to works constructed in the States. In view of
the fact that the State Legislatures had given to the expression “sale of goods” in Entry 48 a wider
meaning than what it has in the Sale of Goods Act, that States with sovereign powers have in
recent times been enacting laws imposing tax on the use of materials in the construction of
buildings, and that such a power should more properly be lodged with the States rather than the
Centre, the Constitution might have given an inclusive definition of “sale” in Entry 54 so as to
cover the extended sense. But our duty is to interpret the law as we find it, and having anxiously
considered the question, we are of opinion that there is no sale as such of materials used in a
building contract, and that the Provincial Legislatures had no competence to impose a tax thereon
under Entry 48.
- To avoid misconception, it must be stated that the above conclusion has reference to
works contracts, which are entire and indivisible, as the contracts of the respondents have been
held by the learned Judges of the Court below to be. The several forms which such kinds of
contracts can assume are set out in Hudson on Building Contracts, at p. 165. It is possible that
the parties might enter into distinct and separate contracts, one for the transfer of materials for
money consideration, and the other for payment of remuneration for services and for work done.
In such a case, there are really two agreements, though there is a single instrument embodying
them, and the power of the State to separate the agreement to sell, from the agreement to do work
and render service and to impose a tax thereon cannot be questioned, and will stand untouched by
the present judgment. In the result, the appeal fails
