Page 1 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1145 OF 2006

STATE OF KARNATAKA ETC. .....APPELLANT(S)

VERSUS

M/S PRO LAB & ORS. ETC. .....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

Constitutional validity of Entry 25 of Schedule VI to the

Karnataka Sales Tax Act, 1957 (hereinafter referred to as the

'Act') is the subject matter of the present appeal. It is the third

endeavour to resurrect this entry, when on the first two

occasions, the steps taken by the State were declared as

impermissible. Even this time, the High Court has dumped the

amendment as unconstitutional. However, the reasons advanced

by the High Court in all three rounds are different. While

traversing through the historical facts leading to the issue at

hand, we shall be referring to the same for clear understanding of

the controversy involved.

Civil Appeal No. 1145 of 2006 Page 1 of 42

Page 2 2)This entry was inserted in the said Act by an amendment which

came into effect from 01.07.1989, thereby providing levy of tax

for processing and supply of photographs, photo prints and photo

negatives. The validity of this entry was challenged by means of

a writ petition filed in the High Court of Karnataka. The High

Court in that case titled M/s Keshoram Surindranath Photo –

Bag (P) Ltd. and others v. Asstt. Commissioner of

Commercial Taxes (LR), City Division, Bangalore and

others

1

, declared the said Entry to be unconstitutional. State of

Karnataka had challenged that judgment by filing special leave

petition in this Court. This special leave petition was dismissed

vide order dated 20.04.2000, following its earlier judgment in the

case of Rainbow Colour Lab and Another v. State of Madhya

Pradesh and others

2

. The reason for holding Entry 25 as

unconstitutional was that the contract of processing and

supplying of photographs, photo frames and photo negatives was

predominantly a service contract with negligible component of

goods/material and, therefore, it was beyond the competence of

State Legislature given in Entry 25 of List II of Schedule VII of the

1

121 (2001) STC 175

2

(2000) 2 SCC 385

Civil Appeal No. 1145 of 2006 Page 2 of 42

Page 3 Constitution to impose sales tax on such a contract.

3)It so happened that within one year of the judgment in Rainbow

Colour Lab's case, three Judges Bench of this Court rendered

another judgment in the case of ACC Ltd. v. Commissioner of

Customs

3

, wherein it expressed its doubts about the correctness

of the law laid down in Rainbow. We may point out at this stage

itself that during the course of hearing of the present appeal,

there was a hot debate on the question as to whether judgment

in Rainbow Colour Lab's case was over-ruled in the case of ACC

Ltd. case or not. This aspect will be gone into by us at the

appropriate stage.

4)After the judgment in ACC Ltd. case, a circular instruction was

issued by the Commissioner of Commercial Taxes to the

assessing authorities to proceed with the assessments as per

Entry 25. This became the subject matter of challenge before the

High Court of Karnataka in the case of M/s Golden Colour Labs

and Studio and others v. The Commissioner of Commercial

Taxes

4

. The High Court allowed the writ petition vide judgment

dated 30.07.2003 holding that a provision once declared

3

(2001) 4 SCC 593

4

ILR 2003 Kar 4883

Civil Appeal No. 1145 of 2006 Page 3 of 42

Page 4 unconstitutional could not be brought to life by mere

administrative instructions. However, at the same time, the Court

observed that Entry 25, Schedule VI to the Act, declared ultra

vires the Constitution in Keshoram's case, cannot be revived

automatically, unless there is re-enactment made by the State

Legislature to that effect.

5)The appropriate procedure indicated in the aforesaid judgment

emboldened the State to come out with the required legislative

amendment. This paved way for the enactment of the Karnataka

State Laws Act, 2004 by the State Legislature that came into

force with effect from 29.01.2004. Section 2(3) of the said

amendment re-introduced Entry 25 in identical terms, as it

appeared earlier, and that too with retrospective effect that is

w.e.f. 01.07.1989, when this provision was inserted by the

amendment made in the year 1989 for the first time.

6)As was expected, this amendment was again challenged before

the Karnataka High Court by the respondent herein as well as

many others. Vide impugned judgment dated 19.08.2005, the

High Court has again declared the said amendment as

unconstitutional. It would be pertinent to mention that the High

Civil Appeal No. 1145 of 2006 Page 4 of 42

Page 5 Court has not taken into consideration the events that followed

after Rainbow Colour Lab's case, namely, over-ruling of the said

judgment in ACC Ltd. Since the basis of Keshoram's case

decided in the first calm by the High Court was same as given in

Rainbow Colour Lab, obviously Keshoram also no longer

remains a good law. However, the reason given by the High

Court, this time, is that the ratio laid down in Keshoram's case

continues to be binding on the State of Karnataka. As per the

High Court, “the re-enactment of the said provision is possible in

the event of a subsequent declaration made by the Hon'ble

Supreme Court re-considering or pronouncing a similar question

in terms of the findings in para 23 of the Golden Colour Lab's

case. This is, thus, the chequered history of the litigation amply

demonstrating as to how the State of Karnataka is making

desperate attempts to ensure that provision in the form of Entry

25 in the said Act survives, empowering the State Government to

levy sales tax for processing and supply of photographs, photo

prints and photo negatives.

7)At this stage, we take note of the exact phraseology used in

Entry 25 of the Act which reads as under:

Civil Appeal No. 1145 of 2006 Page 5 of 42

Page 6 Sl. No.Description of Works

Contract

Period Rate of Tax U/S

5-B

25 Processing and

supplying of

Photographs,

Photo Prints and

Photonegatives

1.7.1987 to

31.3.1996

1.4.1996 to

31.3.1998

from

1.4.1998

6%

8%

10%

8)We may also record at this point itself that legislative competence

of the State to insert the aforesaid Entry is primarily challenged

on the ground that the State Government is not empowered to

levy sales tax on the processing and supplying of photographs

which is predominantly in the nature of “service” and the element

of “goods” therein was minimal. The respondents argue that the

State Legislature does not have any power to impose tax on

“services” inasmuch as the sales tax can be levied only on “sale

of goods” as permitted under Article 366 (29-A) of the

Constitution of India. Challenge is also laid on the retrospective

effect given to the said Entry by arguing that such a move is

violative of Article 265 of the Constitution of India as subjecting

the assessees to such a tax from retrospective effect is

confiscatory in nature and, therefore, unconstitutional.

9)We have projected, in nutshell, the chequered history of the

litigation by referring to the judgments of this Court pronounced

Civil Appeal No. 1145 of 2006 Page 6 of 42

Page 7 from time to time which have a direct bearing on the outcome of

this appeal. Therefore, we are simply required to do a diagnostic

of the sorts in revisiting these judgments. As we proceed with

this exercise to notice and spell out the principle of law laid down

in these judgments, contextually, the same would analogously

facilitate in concluding the cases with very little discussion at our

end.

10)In order to ensure that we avoid unnecessary burdening of

judgments with the earlier case laws, it is safe to charter the

journey by initiating discussion about the Constitution Bench

judgment in the case of Gannon Dunkerley and Co. and others

v. State of Rajasthan and others

5

. That case pertained to the

execution of the Works Contracts. Question involved was as to

whether there could be levy of sales tax on the sale of goods

involved in the execution of such Works Contracts. The

assessee, viz. Gannon Dunkerley, was carrying on business as

Engineering Contractors and executing the contracts pertaining

to construction of building projects, dams, roads and structural

contracts of all kinds. In respect of sanitary contracts, 20 per

cent was deducted for labour and balance was taken as a

turnover of the assessee for the purposes of levying sales tax by

5

(1993) 1 SCC 364

Civil Appeal No. 1145 of 2006 Page 7 of 42

Page 8 the assessing authority. Likewise, in respect of other contracts,

30 per cent was deducted for labour and on balance amount,

sales tax was levied treating it as turnover of the assessee under

the Madras General Sales Tax Act, 1939. The question which

arose for consideration was as to whether there was any sale of

goods. The Constitution Bench held that building contract was in

the nature of Works Contract and there was no element of sale of

goods in such a contract. In its opinion, in a building contract

where the agreement between the parties was that the contractor

should construct the building according to the specifications

contained in the agreement and in consideration received

payment as provided therein, there was neither a contract to sell

the materials used in the construction nor the property passed

therein as movables. It was held that in a building contract,

which was one entire and indivisible, there was no sale of goods

and it was not within the competence of the Provincial State

Legislature to impose tax on the supply of the materials used in

such a contract treating it as a sale. The Court, thus, proceeded

on the basis that a building contract was indivisible and

composite wherein there was no sale of goods and, therefore,

the State Legislature was not competent to impose sales tax on

the supply of material used in such a contract treating it as a

Civil Appeal No. 1145 of 2006 Page 8 of 42

Page 9 sale. Since, Entry 48 of the List II of Schedule VII in the

Government of India Act, 1935 was under consideration that

empowers State Government to levy tax “sale of goods”, the

Court held that the expression “sale of goods” in the said Entry is

to be given the same meaning as given under the Sale of Goods

Act, 1930. That would mean that it would be sale of goods only if

the two essential ingredients, namely: (i) an agreement to sell

movables for a price, and (ii) property passing therein persuant to

that agreement, are satisfied.

11)After the aforesaid Constitution Bench judgment, the Parliament

amended the Constitution of India by the Constitution (46

th

Amendment) Act, 1982 which received the assent of the

President of India on 02.02.1983. By this amendment, clause

(29-A) was inserted in Article 366 of the Constitution, which reads

as under:

“[(29A) “tax on the sale or purchase of goods”

includes -

(a) a tax on the transfer, otherwise than in

pursuance of a contract, of property in any

goods for cash, deferred payment or other

valuable consideration;

(b) a tax on the transfer of property in goods

(whether as goods or in some other form)

involved in the execution of a works contract;

(c) a tax on the delivery of goods on hire-

Civil Appeal No. 1145 of 2006 Page 9 of 42

Page 10 purchase or any system of payment by

instalments;

(d) a tax on the transfer of the right to use any

goods for any purpose (whether or not for a

specified period) for cash, deferred payment or

other valuable consideration;

(e) a tax on the supply of goods by any

unincorporated association or body of persons

to a member thereof for cash, deferred payment

or other valuable consideration;

(f) a tax on the supply, by way of or as part of

any service or in any other manner whatsoever,

of goods, being food or any other article for

human consumption or any drink (whether or

not intoxicating), where such supply or service,

is for cash, deferred payment or other valuable

consideration;

and such transfer, delivery or supply of any

goods shall be deemed to be a sale of those

goods by the person making the transfer,

delivery or supply and a purchase of those

goods by the person to whom such transfer,

delivery or supply is made;]”

12)The challenge laid to the aforesaid amendment was repelled by

this Court in the case of Builders Association of India and

others v. Union of India and others

6

. In this judgment, the

Constitution Bench specifically noted that the purport and object

of the aforesaid amendment was to enlarge the scope of the

expression “tax of sale for purchase of goods” wherever it occurs

in the Constitution so that it may include within its ambit any

transfer, delivery or supply of goods that may take place under

6

(1989) 2 SCC 645

Civil Appeal No. 1145 of 2006 Page 10 of 42

Page 11 any of the transactions referred to in sub-clauses (a) to (f). To

put it tersely, with the aforesaid amendment, the States are

empowered to make the Works Contract divisible and tax “sale of

goods” component. It clearly follows therefrom that the restricted

meaning which was assigned to the expression “sale of goods” in

Gannon Dunkerley's case is undone by the aforesaid

amendment. The interpretation which is to be assigned to clause

29-A of Article 366 is stated with remarkable clarity in M/s

Larsen Toubro and another v. State of Karnataka and

another

7

, by a three Judge Bench in the following words:

“60. It is important to ascertain The meaning of

Sub-clause (b) of Clause 29A of Article 366 of

the Constitution. As the very title of Article 366

shows, it is the definition clause. It starts by

saying that in the Constitution unless the

context otherwise requires the expressions

defined in that article shall have the meanings

respectively assigned to them in the article. The

definition of expression "tax on sale or purchase

of the goods" is contained in Clause (29A). If the

first part of Clause 29A is read with Sub-clause

(b) along with latter part of this clause, it reads

like this: tax on the sale or purchaser of the

goods" includes a tax on the transfer of property

in goods (whether as goods or in some other

form) involved in the execution of a works

contract and such transfer, delivery or supply of

any goods shall be deemed to be a sale of

those goods by the person making the transfer,

delivery or supply and a purchase of those

goods by the person to whom such transfer,

delivery or supply is made. The definition of

"goods" in Clause 12 is inclusive. It includes all

materials, commodities and articles. The

7

(2014) 1 SCC 708

Civil Appeal No. 1145 of 2006 Page 11 of 42

Page 12 expression, 'goods' has a broader meaning than

merchandise. Chattels or movables are goods

within the meaning of Clause 12. Sub-clause (b)

refers to transfer of property in goods (whether

as goods or in some other form) involved in the

execution of a works contract. The expression

"in some other form" in the bracket is of utmost

significance as by this expression the ordinary

understanding of the term 'goods' has been

enlarged by bringing within its fold goods in a

form other than goods. Goods in some other

form would thus mean goods which have

ceased to be chattels or movables or

merchandise and become attached or

embedded to earth. In other words, goods which

have by incorporation become part of

immovable property are deemed as goods. The

definition of 'tax on the sale or purchase of

goods' includes a tax on the transfer or property

in the goods as goods or which have lost its

form as goods and have acquired some other

form involved in the execution of a works

contract.

61. Viewed thus, a transfer of property in goods

under Clause 29A(b) of Article 366 is deemed to

be a sale of the goods involved in the execution

of a works contract by the person making the

transfer and the purchase of those goods by the

person to whom such transfer is made.

62. The States have now been conferred with

the power to tax indivisible contracts of works.

This has been done by enlarging the scope of

"tax on sale or purchase of goods" wherever it

occurs in the Constitution. Accordingly, the

expression "tax on the sale or purchase of

goods" in Entry 54 of List II of Seventh

Schedule when read with the definition Clause

29A, includes a tax on the transfer of property

in goods whether as goods or in the form other

than goods involved in the execution of works

contract. The taxable event is deemed sale.

63. Gannon Dunkerley-I (supra) and few other

decisions following Gannon Dunkerley-I (supra)

wherein the expression "sale" was given

Civil Appeal No. 1145 of 2006 Page 12 of 42

Page 13 restricted meaning by adopting the definition of

the word "sale" contained in the Sale of Goods

Act has been undone by the Forty-sixth

Constitutional Amendment so as to include

works contract. The meaning of Sub-clause (b)

of Clause 29A of Article 366 of the Constitution

also stands settled by the Constitution Bench of

this Court in Builders' Association (supra). As a

result of Clause 29A of Article 366, tax on the

sale or purchase of goods may include a tax on

the transfer in goods as goods or in a form

other than goods involved in the execution of

the works contract. It is open to the States to

divide the works contract into two separate

contracts by legal fiction: (i) contract for sale of

goods involved in the works contract and (ii) for

supply of labour and service. By the Forty-sixth

Amendment, States have been empowered to

bifurcate the contract and to levy sales tax on

the value of the material in the execution of the

works contract.”

13)Notwithstanding some clear and pertinent observations made in

by the Constitution Bench in Builders Association's case, while

upholding the Constitutional validity of 46

th

Amendment, there

was some ambiguity in the judicial thought on one particular

aspect which was also one of the basis of judgment in Gannon

Dunkerley's case. In Gannon Dunkerley's case, the Constitution

Bench had laid down “dominant intention test” to find out as to

whether a particular contract involved transfer of property in

goods. The Court was of the opinion that if the dominant

intention of a contract was not to transfer the property in goods,

but it was Works Contract, or for that matter, a contract in the

Civil Appeal No. 1145 of 2006 Page 13 of 42

Page 14 nature of rendering of services, even if a part of it related to the

transfer of goods, that would be immaterial and no sales tax on

the said part could be levied, going by the principle of dominant

intention behind such a contract, which was in the nature of

Works Contract in the contract relating to construction of

buildings.

14)As pointed out above, in Gannon Drunkerley's case, the Court

also held that such a contract was indivisible. No doubt, insofar

as indivisibility facet of the contract is concerned, the same was

done away by 46

th

Constitutional Amendment. However, in

subsequent cases, the Court grappled with the issue as to

whether the principle of dominant intention still prevailed. This

very aspect came up for discussion before two Judge Bench of

this Court in Rainbow Colour Lab's case. The Court held the

view that the division of contract after 46

th

Amendment can be

made only if the Works Contract involved a dominant intention to

transfer the property in goods and not in contracts where the

transfer in property takes place as an incident of contract of

service. This aspect is highlighted by the said Bench in the

following manner:

“10. Since this was a judgment rendered prior

to the coming into force of the 46th

Civil Appeal No. 1145 of 2006 Page 14 of 42

Page 15 Constitutional Amendment, we will have to

consider whether the said Amendment has

brought about any change so as to doubt the

legal position enunciated in the above case. It is

true that by the 46th Constitutional Amendment

by incorporating Clause 29A(b) in Article 366,

the definition of the words "sale" and "works

contract" have been enlarged. The State of

Madhya Pradesh has also brought about a

consequent change in the definition of the word

'sale' in Section of its Sales Tax Act but it is to be

noticed that in the said State Act the expression

'works contract' has not been specifically

defined.

11. Prior to the Amendment of Article 366, in

view of the judgment of this Court In State of

Madras v Gannon Dunkerley and Co., the State

could not levy sales-tax on sale of goods

involved in a work's contract because the

contract was indivisible. All that has happened In

law after the 46th Amendment and the judgment

of this Court in Builders case (supra) is that it is

now open to the States to divide the works

contract into two separate contracts by a legal

fiction (i) contract for sale of goods involved in

the said works contract and (it) for supply of

labour and service. This division of contract

under the amended law can be made only if the

works contract involved a dominant intention to

transfer the property in goods and not in

contracts where the transfer in property takes

place as an incident of contract of service. The

Amendment, referred to above, has not

empowered the State to indulge in microscopic

division of contracts involving the value of

materials used incidentally in such contracts.

What is pertinent to ascertain in this connection

is what was the dominant intention of the

contract. Every contract, be it a service contract

or otherwise, may involve the use of some

material or the other in execution of the said

contract. State is not empowered by the

amended law to impose sales-tax on such

incidental materials used in such contracts. This

is clear from the judgment of this Court in

Hindustan Aeronautics Ltd. v. State of Karnataka

Civil Appeal No. 1145 of 2006 Page 15 of 42

Page 16 [1984]2SCR248, where it was held thus:

...Mere passing of property in an article or

commodity during the course of performance of

the transaction in question does not render the

transaction to be transaction of sale. Even in a

contract purely of work or service, it is possible

that articles may have to be used by the person

executing the work, and property in such articles

or materials may pass to the other party. That

would not necessarily convert the contract into

one of sale of those materials. In every case,

the Court would have to find out what was the

primary object of the transaction and the

intention of the parties while entering into it....”

15)While considering the validity of Entry 25 in Schedule VI of the

Act and holding it to be unconstitutional, as beyond the powers of

the State Legislature, the High Court of Karnataka in Keshoram's

case examined in detail the business which was carried out by

the petitioner in the said case and the process that was involved

in processing and supplying of photographs, photoframes or

photonegatives. By that time, 46

th

Constitutional Amendment had

already been effected which was also taken note of by the High

Court. However, the High Court took the view that the main

object of the work undertaken by the petitioner in that case was

not the transfer of a chattle as a chattle and, in fact, it was a

contract of work and labour and there was no sale of goods

involved. It is clear from the following discussion in the said

Civil Appeal No. 1145 of 2006 Page 16 of 42

Page 17 judgment:

“30. In words and phrases the word

"photography" is defined as under :

"Photography" is the science which relates to

action of light on sensitive bodies in production

of pictures, fixation of images and the like.

31. Photography is a process of an art of

producing visible images on sensitive bodies by

action of light or other form of radiant energy.

Duration of action of light and also use of the

chemical is highly a technical expertise

therefore taking into consideration the various

decisions referred to above it could be

considered that it is a works contract where

property which is transferred in paper is only

incidental to such contract. In strict sense, it is

a service where the main object is not transfer

of property in goods. The good photograph as

observed by the apex Court is a thing of beauty

and revives nostalgic memories. It is a work of

art. In B.C. Kame's case [1977] 2 SCR 435 it

has already been held that there is no sale

involved and in spite of the fact that it is a

works contract it could not be subjected to tax

because the intention of the parties is not to

transfer the goods in the execution of said

works contract. It is only ancillary and incidental

to service contract. The photographs are not

marketable or saleable commodity and as such

no tax can be levied. Entry 25 of the Sixth

Schedule to the Karnataka Sales Tax Act, 1957,

therefore is beyond the scope of Article 466 of

the Constitution of India.

Writ appeals are accordingly allowed.”

16)It is manifest from the above that the rationale behind the

judgment was to look into the main object of the work undertaken

by the assessee and concluding that since it was essentially a

Civil Appeal No. 1145 of 2006 Page 17 of 42

Page 18 Works Contract and transfer of photopaper upon which the

positive prints were taken were simply incidental and ancilliary to

the main transactions, that was in the nature of service contract,

and, therefore, Entry 25 was beyond the scope of Article 366 of

the Constitution of India. Apparently, the High Court applied

dominant intention test while holding Entry 25 as unconstitutional.

By the time, Special Leave Petition against this judgment came

up for consideration before this Court on 20.04.2000, the

judgment in the case of Rainbow Colour Lab's case had just

been rendered observing that dominant intention test was still

valid notwithstanding insertion of clause 29-A in Article 366 of the

Constitution by 46

th

Amendment. Following this judgment, SLP

was dismissed.

17)Within one year of the said judgment, this very issue again

cropped up for discussion and decision before a three Judge

Bench in ACC Ltd. case. The issue arose under the Customs

Act, 1962 viz. whether the drawings, designs etc. relating to

machinery or industrial technology were goods which were

leviable to duty of customs on their transaction value at the time

of their report. However, since the issue related to meaning that

has to be given to the expression “goods”, the case law on this

Civil Appeal No. 1145 of 2006 Page 18 of 42

Page 19 aspect including Gannon Dunkerley & Kame's case were

specifically taken note of and discussed. The Court also noticed

the effect of 46

th

Amendment and in the process commented

upon the judgment in the Rainbow Colour Lab's case. The Court

specifically remarked that Gannon Dunkerley & Kame's

judgments were of pre 46

th

Amendment era which had no

relevance after the said Constitutional amendment. It can be

discerned from the following discussion contained therein:

“21. All the aforesaid decisions related to the

period prior to the Forty-sixth Amendment of the

Constitution when Article 366(29A) was inserted.

At that time in the case of a works contract it

was held that the same could not be split and

State Legislature had no legislative right to seek

to levy sales tax on a transaction which was not

a sale simpliciter of goods. Rainbow Colour Lab

& Anr. Vs. State of M.P. and Others, (2000) 2

SCC 385 was, however, a case relating to the

definition of the word "sale" in the M.P. General

Sales Tax Act, 1958 after its amendment

consequent to the insertion of Article 366(29A).

The question there was whether the job

rendered by a photographer in taking

photographs, developing and printing films

would amount to works contract for the purpose

of levy of sales tax. This Court held that the work

done by the photographer was only a service

contract and there was no element of sale

involved. After referring to earlier decisions of

this Court, it was observed at page 391 as

follows:

"15. Thus, it is clear that unless there is

sale and purchase of goods, either in fact

or deemed, and which sale is primarily

intended and not incidental to the

contract, the State cannot impose sales

tax on a works contract simpliciter in the

Civil Appeal No. 1145 of 2006 Page 19 of 42

Page 20 guise of the expanded definition found in

Article 366(29A)(b) read with Section 2(n)

of the State Act. On facts as we have

noticed that the work done by the

photographer which as held by this Court

in Kame case is only in the nature of a

service contract not involving any sale of

goods, we are of the opinion that the

stand taken by the respondent State

cannot be sustained."

22. Even though in our opinion the decisions

relating to levy of sales tax would have, for

reasons to which we shall presently mention, no

application to the case of levy of customs duty,

the decision in Rainbow Colour Lab case

(supra) requires consideration. As a result of the

Forty-sixth Amendment, sub-article 29A of Article

366 was inserted as a result whereof tax on the

sale or purchase of goods was to include a tax

on the transfer of property in goods (whether as

goods or in some other form) involved in the

execution of a works contract. Taking note of this

amendment this Court in Rainbow Colour Lab at

page 388-389 observed as follows:

"11. Prior to the amendment of Article

366, in view of the judgment of this Court

in State of Madras v. Gannon Dunkerley

& Co. (Madras) Ltd. the States could not

levy sales tax on sale of goods involved

in a works contract because the contract

was indivisible. All that has happened in

law after the 46th Amendment and the

judgment of this Court in 'Builders' case

is that it is now open to the States to

divide the works contract into two

separate contracts by a legal fiction: (i)

contract for sale of goods involved in the

said works contract, and (ii) for supply of

labour and service. This division of

contract under the amended law can be

made only if the works contract involved

a dominant intention to transfer the

property in goods and not in contracts

where the transfer in property takes

place as an incident of contract of

Civil Appeal No. 1145 of 2006 Page 20 of 42

Page 21 service. The amendment, referred to

above, has not empowered the State to

indulge in a microscopic division of

contracts involving the value of materials

used incidentally in such contracts. What

is pertinent to ascertain in this connection

is what was the dominant intention of the

contract. Every contract, be it a service

contract or otherwise, may involve the

use of some material or the other in

execution of the said contract. The State

is not empowered by the amended law to

impose sales tax on such incidental

materials used in such contracts.."

23. In arriving at the aforesaid conclusion the

Court referred to the decision of this Court in

Hindustan Aeronautics Ltd. vs. State of

Karnataka (1984) a SCC 706 and Everest

Copier (supra). But both these cases related to

pre-Forty-sixth Amendment era where in a

works contract the State had no jurisdiction to

bifurcate the contract and impose sales tax on

the transfer of property in goods involved in the

execution of a works contract. The Forty-sixth

Amendment was made precisely with a view to

empower the State to bifurcate the contract and

to levy sales tax on the value of the material

involved in the execution of the works contract,

notwithstanding that the value may represent a

small percentage of the amount paid for the

execution of the works contract. Even if the

dominant intention of the contract is the

rendering of a service, which will amount to a

works contract, after the Forty-sixth Amendment

the State would now be empowered to levy

sales tax on the material used in such contract.

The conclusion arrived at in Rainbow Colour

Lab case, in our opinion, runs counter to the

express provision contained in Article 366 (29A)

as also of the Constitution Bench decision of

this Court in Builders' Association of India and

Others vs. Union of India and Others (1989) 2

SCC 645.” [emphasis supplied]

18)It is amply clear from the above and hardly needs clarification

Civil Appeal No. 1145 of 2006 Page 21 of 42

Page 22 that the Court was of the firm view that two Judges Bench

judgment in Rainbow Colour Lab's case did not lay down the

correct law as it referred to pre 46

th

Amendment judgments in

arriving at its conclusions which had lost their validity. The Court

also specifically commented that after 46

th

Amendment, State is

empowered to levy sales tax on the material used even in those

contracts where “the dominant intention of the contract is the

rendering of a service, which will amount to a Works Contract”.

19)In view of the above, the argument of the respondent assessees

that ACC Ltd. case did not over-rule Rainbow Colour Lab's case

is, therefore, clearly misconceived. In fact, we are not saying so

for the first time as a three member Bench of this Court in M/s

Larsen and Toubro has already stated that ACC Ltd. had

expressly over-ruled Rainbow Colour Lab while holding that

dominant intention test was no longer good test after 46

th

Constitutional Amendment. We may point out that learned

counsel for the respondent assessees took courage to advance

such an argument emboldened by certain observations made by

two member Bench in the case of C.K. Jidheesh v. Union of

India

8

, wherein the Court has remarked that the observations in

ACC Ltd. were merely obiter. In Jidheesh, however, the Court

8

(2005) 13 SCC 37

Civil Appeal No. 1145 of 2006 Page 22 of 42

Page 23 did not notice that this very argument had been rejected earlier in

Bharat Sanchar Nigam Ltd. v. Union of India

9

. Following

discussion in Bharat Sanchar is amply demonstrative of the

same:

“46. This conclusion was doubted in Associated

Cement Companies Ltd. v. Commissioner of

Customs, (2001) 4 SCC 593 saying:

“The conclusion arrived at in Rainbow

Colour Lab case (2000) 2 SCC 385, in

our opinion, runs counter to the express

provision contained in Article 366(29A)

as also of the Constitution Bench

decision of this Court in Builders Assn. of

India v. Union of India – (1989) 2 SCC

645.

47. We agree. After the 46

th

Amendment, the

sale element of those contracts which are

covered by the six sub-clauses of Clause (29A)

of Article 366 are separable and may be

subjected to sales tax by the States under Entry

54 of List II and there is no question of the

dominant nature test applying. Therefore, in

2005, C.K. Jidheesh v. Union of India - (2005) 8

SCALE 784 held that the aforesaid observations

in Associated Cement (supra) were merely

obiter and that Rainbow Colour Lab (supra) was

still good law, it was not correct. It is necessary

to note that Associated Cement did not say that

in all cases of composite transactions the 46

th

Amendment would apply”

20)In M/s Larsen and Toubro, the Court, after extensive and

elaborate discussion, once again specifically negated the

argument predicated on dominant intention test having regard to

the statement of law delineated in ACC Ltd. and Bharat Sanchar

9

(2006) 3 SCC 1

Civil Appeal No. 1145 of 2006 Page 23 of 42

Page 24 Nigam Ltd. cases. The reading of following passages from the

said judgment is indicative of providing complete answer to the

arguments of the respondent assessees herein:

“64. Whether contract involved a dominant

intention to transfer the property in goods, in our

view, is not at all material. It is not necessary to

ascertain what is the dominant intention of the

contract. Even if the dominant intention of the

contract is not to transfer the property in goods

and rather it is the rendering of service or the

ultimate transaction is transfer of immovable

property, then also it is open to the States to

levy sales tax on the materials used in such

contract if it otherwise has elements of works

contract. The view taken by a two-Judge Bench

of this Court in Rainbow Colour Lab (supra) that

the division of the contract after Forty-sixth

Amendment can be made only if the works

contract involved a dominant intention to

transfer the property in goods and not in

contracts where the transfer of property takes

place as an incident of contract of service is no

longer good law, Rainbow Colour Lab (supra)

has been expressly overruled by a three-Judge

Bench in Associated Cement.

65. Although, in Bharat Sanchar, the Court was

concerned with Sub-clause (d) of Clause 29A of

Article 366 but while dealing with the question

as to whether the nature of transaction by which

mobile phone connections are enjoyed is a sale

or service or both, the three-Judge Bench did

consider the scope of definition in Clause 29A

of Article366. With reference to Sub-clause (b)

it said: "Sub-clause (b) covers cases relating to

works contract. This was the particular fact

situation which the Court was faced with in

Gannon Dunkerley-I and which the Court had

held was not a sale. The effect in law of a

transfer of property in goods involved in the

execution of the works contract was by this

amendment deemed to be a sale. To that extent

Civil Appeal No. 1145 of 2006 Page 24 of 42

Page 25 the decision in Gannon Dunkerley-I was directly

overcome". It then went on to say that all the

Sub-clauses of Article 366 (29A) serve to bring

transactions where essential ingredients of a

'sale' as defined in the Sale of Goods Act, 1930

are absent, within the ambit of purchase or sale

for the purposes of levy of sales tax.

66. It then clarified that Gannon Dunkerley-I

survived the Forty-sixth Constitutional

Amendment in two respects. First, with regard

to the definition of "sale" for the purposes of the

Constitution in general and for the purposes of

Entry 54 of List II in particular except to the

extent that the clauses in Article 366(29A)

operate and second, the dominant nature test

would be confined to a composite transaction

not covered by Article 366(29A). In other words,

in Bharat Sanchar, this Court reiterated what

was stated by this Court in Associated Cement

that dominant nature test has no application to

a composite transaction covered by the clauses

of Article 366(29A). Leaving no ambiguity, it

said that after the Forty-sixth Amendment, the

sale element of those contracts which are

covered by six Sub-clauses of Clause 29A of

Article 366 are separable and may be subjected

to sales tax by the States under Entry 54 of List

II and there is no question of the dominant

nature test applying.

67. In view of the statement of law in

Associated Cement

and Bharat Sanchar, the

argument advanced on behalf of the Appellants

that dominant nature test must be applied to

find out the true nature of transaction as to

whether there is a contract for sale of goods or

the contract of service in a composite

transaction covered by the clauses of Article

366(29A) has no merit and the same is

rejected.

Civil Appeal No. 1145 of 2006 Page 25 of 42

Page 26 68. In Gannon Dunkerley-II, this Court, inter

alia, established the five following propositions:

(i) as a result of Forty-sixth Amendment the

contract which was single and indivisible has

been altered by a legal fiction into a contract

which is divisible into one for sale of goods and

the other for supply of labour and service and

as a result of such contract which was single

and indivisible has been brought on par with a

contract containing two separate agreements;

(ii) if the legal fiction introduced by Article

366(29A)(b) is carried to its logical end, it

follows that even in a single and indivisible

works contract there is a deemed sale of the

goods which are involved in the execution of a

works contract. Such a deemed sale has all the

incidents of the sale of goods involved in the

execution of a works contract where the

contract is divisible into one for sale of goods

and the other for supply of labour and services;

(iii) in view of Sub-clause (b) of Clause 29A of

Article 366, the State legislatures are

competent to impose tax on the transfer of

property in goods involved in the execution of

works contract. Under Article 286(3)(b),

Parliament has been empowered to make a law

specifying restrictions and conditions in regard

to the system of levy, rates or incidents of such

tax. This does not mean that the legislative

power of the State cannot be exercised till the

enactment of the law under Article 286(3)(b) by

the Parliament. It only means that in the event

of law having been made by Parliament under

Article 286(3)(b), the exercise of the legislative

power of the State under Entry 54 in List II to

impose tax of the nature referred to in Sub-

clauses (b), (c) and (d) of Clause (29A) of

Article 366 would be subject to restrictions and

conditions in regard to the system of levy, rates

and other incidents of tax contained in the said

law; (iv) while enacting law imposing a tax on

sale or purchase of goods under Entry 54 of the

Civil Appeal No. 1145 of 2006 Page 26 of 42

Page 27 State List read with Article 366(29A)(b), it is

permissible for the State legislature to make a

law imposing tax on such a deemed sale which

constitutes a sale in the course of the inter-

state trade or commerce under Section 3 of the

Central Sales Tax Act or outside under Section

4 of the Central Sales Tax Act or sale in the

course of import or export under Section 5 of

the Central Sales Tax Act; and (v) measure for

the levy of tax contemplated by Article

366(29A)(b) is the value of the goods involved

in the execution of a works contract. Though

the tax is imposed on the transfer of property in

goods involved in the execution of a works

contract, the measure for levy of such

imposition is the value of the goods involved in

the execution of a works contract. Since, the

taxable event is the transfer of property in

goods involved in the execution of a works

contract and the said transfer of property in

such goods takes place when the goods are

incorporated in the works, the value of the

goods which can constitute the measure for the

levy of the tax has to be the value of the goods

at the time of incorporation of the goods in

works and not the cost of acquisition of the

goods by the contractor.

69. In Gannon Dunkerley-II, Sub-section (3) of

Section 5 of the Rajasthan Sales Tax Act and

Rule 29(2)(1) of the Rajasthan Sales Tax Rules

were declared as unconstitutional and void. It

was so declared because the Court found that

Section 5(3) transgressed the limits of the

legislative power conferred on the State

legislature under Entry 54 of the State List.

However, insofar as legal position after Forty-

sixth Amendment is concerned, Gannon

Dunkerley-II holds unambiguously that the

States have now legislative power to impose

tax on transfer of property in goods as goods or

in some other form in the execution of works

Civil Appeal No. 1145 of 2006 Page 27 of 42

Page 28 contract.

70. The Forty-sixth Amendment leaves no

manner of doubt that the States have power to

bifurcate the contract and levy sales tax on the

value of the material involved in the execution

of the works contract. The States are now

empowered to levy sales tax on the material

used in such contract. In other words, Clause

29A of Article 366 empowers the States to levy

tax on the deemed sale.”

21)To sum up, it follows from the reading of the aforesaid judgment

that after insertion of clause 29-A in Article 366, the Works

Contract which was indivisible one by legal fiction, altered into a

contract, is permitted to be bifurcated into two: one for “sale of

goods” and other for “services”, thereby making goods

component of the contract exigible to sales tax. Further, while

going into this exercise of divisibility, dominant intention behind

such a contract, namely, whether it was for sale of goods or for

services, is rendered otiose or immaterial. It follows, as a

sequitur, that by virtue of clause 29-A of Article 366, the State

Legislature is now empowered to segregate the goods part of the

Works Contract and impose sales tax thereupon. It may be

noted that Entry 54, List II of the Constitution of India empowers

the State Legislature to enact a law taxing sale of goods. Sales

tax, being a subject-matter into the State List, the State

Civil Appeal No. 1145 of 2006 Page 28 of 42

Page 29 Legislature has the competency to legislate over the subject.

22)Keeping in mind the aforesaid principle of law, the obvious

conclusion would be that Entry 25 of Schedule VI to the Act

which makes that part of processing and supplying of

photographs, photo prints and photo negatives, which have

“goods” component exigible to sales tax is constitutionally valid.

Mr. Patil and Mr. Salman Khurshid, learned senior counsel who

argued for these assessees/respondents, made vehement plea

to the effect that the processing of photographs etc. was

essentially a service, wherein the cost of paper, chemical or other

material used in processing and developing photographs, photo

prints etc. was negligible. This argument, however, is founded on

dominant intention theory which has been repeatedly rejected by

this Court as no more valid in view of 46

th

Amendment to the

Constitution.

23)It was also argued that photograph service can be exigible to

sales tax only when the same is classifiable as Works Contract.

For being classified as Works Contract the transaction under

consideration has to be a composite transaction involving both

goods and services. If a transaction involves only service i.e.

Civil Appeal No. 1145 of 2006 Page 29 of 42

Page 30 work and labour then the same cannot be treated as Works

Contract. It was contended that processing of photography was

a contract for service simplicitor with no elements of goods at all

and, therefore, Entry 25 could not be saved by taking shelter

under clause 29-A of Article 366 of the Constitution. For this

proposition, umbrage under the judgment in B.C. Kame's case

was sought to be taken wherein this Court held that the work

involving taking a photograph, developing the negative or doing

other photographic work could not be treated as contract for sale

of goods. Our attention was drawn to that portion of the

judgment where the Court held that such a contract is for use of

skill and labour by the photographer to bring about desired

results inasmuch as a good photograph reveals not only the

asthetic sense and artistic faculty of the photographer, it also

reflects his skill and labour. Such an argument also has to be

rejected for more than one reasons. In the first instance, it needs

to be pointed out that the judgment in Kame's case was rendered

before the 46

th

Constitutional Amendment. Keeping this in mind,

the second aspect which needs to be noted is that the dispute

therein was whether there is a contract of sale of goods or a

contract for service. This matter was examined in the light of law

prevaling at that time, as declared in Dunkerley's case as per

Civil Appeal No. 1145 of 2006 Page 30 of 42

Page 31 which dominant intention of the contract was to be seen and

further that such a contract was treated as not divisible. It is for

this reason in BSNL and M/s Larsen and Toubro cases, this

Court specifically pointed out that Kame's case would not provide

an answer to the issue at hand. On the contrary, legal position

stands settled by the Constitution Bench of this Court in Kone

Elevator India Pvt. Ltd. v. State of Tamil Nadu and Ors.

10

.

Following observations in that case are apt for this purpose:

“On the basis of the aforesaid elucidation, it has

been deduced that a transfer of property in goods

under Clause (29A)(b) of Article 366 is deemed

to be a sale of goods involved in the execution of

a Works Contract by the person making the

transfer and the purchase of those goods by the

person to whom such transfer is made. One

thing is significant to note that in Larsen and

Toubro (supra), it has been stated that after the

constitutional amendment, the narrow meaning

given to the term “works contract” in Gannon

Dunkerley-I (supra) no longer survives at

present. It has been observed in the said case

that even if in a contract, besides the obligations

of supply of goods and materials and

performance of labour and services, some

additional obligations are imposed, such contract

does not cease to be works contract, for the

additional obligations in the contract would not

alter the nature of the contract so long as the

contract provides for a contract for works and

satisfies the primary description of works

contract. It has been further held that once the

characteristics or elements of works contract are

satisfied in a contract, then irrespective of

additional obligations, such contract would be

covered by the term “works contract” because

nothing in Article 366(29A)(b) limits the term

10

(2014) 7 SCC 1

Civil Appeal No. 1145 of 2006 Page 31 of 42

Page 32 “works contract” to contract for labour and

service only.”

24)Another attack on the insertion of Entry 25 pertained to

retrospectivity given to this provision. It was sought to be argued

that amendment to the Act was made by Karnataka State Laws

Act, 2004 which came into force w.e.f. 29.01.2004 and insertion

of Entry 25 with retrospective effect i.e. w.e.f. 01.07.1989 was not

permissible. To put it otherwise, the argument was that even if

Entry 25 is held to be valid, it should be made prospective i.e.

w.e.f. 29.01.2004. According to the learned senior counsel, Entry

25 with retrospective effect is onerous on the respondents and if

the respondents are directed to pay these amounts, they will face

severe financial crisis. Such an onerous provision, in their

submission, would violate the fundamental rights of the

respondents guaranteed under Article 19(1)(g) which guarantees

freedom to carry on trade, business or profession.

25)We are afraid, even this argument does not cut any ice. The first

thing in this regard which is to be kept in mind is that Entry 25

was inserted for the first time by amendment of the Act w.e.f.

01.07.1989. This amendment was post 46

th

Constitutional

Amendment. However, the High Court of Karnataka declared the

Civil Appeal No. 1145 of 2006 Page 32 of 42

Page 33 said Entry to be unconstitutional and the SLP was also

dismissed. Undoubtedly, it was because of the judgment in

Rainbow Colour Lab, which judgment was declared as not a

good law in ACC Ltd. (which position is repeated in BSNL as well

as M/s Larsen and Toubro cases). Thus, the very basis on which

Entry 25 of Schedule VI was declared as unconstitutional, has

been found to be erroneous. In such circumstances, the

legislature will be justified in enacting the law from the date when

such a law was passed originally and that date is 01.07.1989 in

the instant case. We have to keep in mind the fact that on the

basis of this amendment, there have been assessments made by

the assessing authorities. This was admitted by the learned

counsel for the respondents at bar at the time of the arguments.

26)Position stated above has to be read in the context that the

legislature is, otherwise, competent to pass amendments of this

nature from retrospective effect. The principle that such a power

exists with the legislature has been reiterated time and again by

this Court. [See: (1) National Agricultural Co-operative

Marketing Federation of India Ltd. and Anr. v. Union of

India

11

, (2) Shri Prithvi Cotton Mills Ltd. and Anr. v. Broach

11

(2003) 5 SCC 23

Civil Appeal No. 1145 of 2006 Page 33 of 42

Page 34 Borough Municipality and Ors.

12

, (3) Indian Aluminium Co.

etc. etc. v. State of Kerala and others, (4) Hiralal Rattanlal

etc. etc. v. State of U.P. and Anr. etc. etc.

13

and (5) Union of

India (UOI) and Anr. v. Raghubir Singh (Dead) by Lrs. Etc.

14

].

It is not necessary to discuss all these judments and our purpose

would be served by extensively quoting from the case in National

Agricultural Co-operative Marketing Federation of India Ltd.:

“13. That the Legislature can enact laws

retrospectively is not in dispute. Nor is it

disputed that the amendment is intended to be

retrospective and that the amendment would at

least prospectively exclude all cooperative

societies except the primarily society from the

benefit of Section 80P(2)(a)(iii) of the Income

Tax Act. According to the appellants, the

amendment cannot be considered to have

retrospective operation in the absence of a

validating provision nor could Parliament

reverse the judgment of this Court by such

statutory overruling. If the amendment is

construed as having retrospective operation,

then, it is submitted, the amendment is

unconstitutional because it seeks to impose a

tax on apex societies for the last 31 years, it

was contended that by denying the deduction to

the apex societies, the farmers and the primary

societies would be vitally affected as it would be

reflected in the returns obtained by them. This

would be contrary to the legislative intent which

was to benefit all societies which market

agricultural produce.

xx xx xx

15. The Legislative power either to introduce

enactments for the first time or to amend the

12

(1969) 2 SCC 283

13

(1973) 1 SCC 216

14

(1989) 2 SCC 754

Civil Appeal No. 1145 of 2006 Page 34 of 42

Page 35 enacted law with retrospective effect, is not only

subject to the question of competence but is

also subject to several judicially recognized

limitations with some of which we are at present

concerned. The first is the requirement that the

words used must expressly provide or clearly

imply retrospective operation S.S. Gadgil v. Lal

& Co., [1964]53ITR231(SC) . J.C. Jani, Income

Tax Officer, Circle-IV. Ward-G Ahmedabad v.

Induprasad Devshanker Bhatt, [1969] 72 ITR

595 (SC). The second is that the retrospectively

must be reasonable and not excessive or

harsh, otherwise it runs the risk of being struck

down as unconstitutional Rai Ramkrishna and

Ors. v. The State of Bihar, [1963] 50 ITR 171

(SC), 915; Jawaharmal v. State of Rajasthan

and Ors., [1966]1SCR890, 905, Supreme Court

Employees Welfare Association v. Union of

India and Anr., (1993) ILLJ 1094 SC. The third

is apposite where the legislation is introduced to

overcome a judicial decision. Here the power

cannot be used to subvert the decision without

removing the statutory basis of the decision

Shri Prithvi Cotton Mills Ltd. v. Broach Borough

Municipality and Ors. [1971]79ITR136(SC),

Lalitaben v. Gordhanbhai and Anr., AIR 1987

SC 1315; Janapada Sabha Chhindwara v. The

Central Provinces Syndicate Ltd., [1970] 3

SCR 745 : Indian Aluminium Co. and Ors. v.

State of Kerala and Ors., [1996]2SCR23 .

xx xx xx

16. There is no fixed formula for the expression

of legislative intent to give retrospectivity to an

enactment. "Sometimes this is done by

providing for jurisdiction where jurisdiction had

no t been properly invested before. Sometimes

this is done by re-enacting retrospectively a

valid and legal taxing provision and then by

fiction making the tax already collected to stand

Civil Appeal No. 1145 of 2006 Page 35 of 42

Page 36 under the re-enacted law. Sometimes the

Legislature gives its own meaning and

interpretation of the law under which tax was

collected and by legislative fiat makes the new

meaning binding upon courts. The Legislature

may follow any one method or all of them, Shri

Prithvi Cotton Mills v. Broach Borough

Municipality, [1971] 79ITR 136 (SC) .

17. By validating clause coupled with a

substantive statutory change is therefore only

one of the methods to leave actions

unsustainable under the unamended statute,

undisturbed. Consequently, he absence of a

validating clause would not by itself affect the

retrospective operation of the statutory

provision, if such retrospectivity is otherwise

apparent.

xx xx xx

19. In making this change, the Legislature does

not "statutorily overrule" this Courts decision in

Kerala Cooperative Marketing Federation Ltd.

Supra. as has been contended by the appellant.

Overruling assumes that a contrary decision is

given on the same facts or law. Where the law,

as in this case, has been changed and is no

longer the same, there is no question of the

Legislature overruling this Court.

20. As has been held in Ujagar Prints v. Union

of India, [1989]179 ITR 317a (SC).

"A competent legislature can always

validate a law which has been declared

by courts to be invalid, provided the

infirmities and vitiating in factors noticed

in the declaratory judgment are removed

or cured. Such a validating law can also

be made retrospective. If in the light of

Civil Appeal No. 1145 of 2006 Page 36 of 42

Page 37 such validating and curative exercise

made by the legislature - granting

legislative competence - the earlier

judgment becomes irrelevant and

unenforceable that cannot be called an

impermissible legislative overruling of

the judicial decision. All that the

legislature does is to usher in a valid law

with retrospective effect in the right of

which the earlier judgment becomes

irrelevant".

xx xx xx

22. Once the circumstances are altered by

Legislation, it may neutralise the effect of the

earlier decision of the Court which becomes

ineffective after the change of the law.

23. Similarly in Krishnamurthi & Co. v. State of

Madras and Anr., [1973] 2 SCR 54 the Madras

General Sales Tax 1959 Act (as it stood)

provided under Entry 47 for tax on "lubricating

oils, all kinds of mineral oils (not otherwise

provided for in this Act) quenching oil and

greases w.e.f. 1.4.1964". The question was

whether this entry covered furnace oil. The

Madras High Court construed the phrase and

came to the conclusion that it did not. The

Legislature then enacted an Amendment Act in

1967. Entry 47 was amended - so as to

expressly provide that furnace oil would be

subjected to tax. The Act was made effective

from 1964. The Act was challenged as being

unreasonable since it retrospectively made the

dealers liable for sales tax which they had not

passed on to others. The challenge was

negatived and it was said that

"The object of such an enactment is to

remove and rectify the defect in

Civil Appeal No. 1145 of 2006 Page 37 of 42

Page 38 phraseology or lacuna or other nature

and also to validate the proceedings,

including realisation of tax, which have

taken place in pursuance of the earlier

enactment which has been found by the

court to be vitiated by an infirmity. Such

an amending and validating Act in the

very nature of things has a retrospective

operation. Its aim is to effectuate and

carry out the object for which the earlier

principal Act had been enacted. Such

an amending and validating Act to make

"small repairs" is a permissible mode of

legislation and is frequently resorted to

in fiscal enactments".

xx xx xx

28. The test of the length of time covered by

the retrospective operation cannot by itself,

necessarily be a decisive test. Rai

Ramkrishna and Ors. v. The State of Bihar,

[1963] 50 ITR 171 (SC) Account must be

taken of the surrounding facts and

circumstances relating to the taxation and the

legislative background of the provision.

Jawahamal v. State of Rajasthan: [1966] 1

SCR 890 To recapitulate the legislative

background of the particular statutory

provision in question before us - the first

authoritative interpretation of Section 80P(2)

(a)(iii) was made in 1994 in Assam

Cooperatives Supra when it held that the word

"of" must be construed as "produced by".

Therefore, the law as it stood from 1968 was,

by the decision, required to be read in

precisely this manner and presumably

assessments of Apex Societies were

commended and concluded on this basis. The

situation continued till 1998 till this Court

reversed Assam Cooperatives in Kerala

Civil Appeal No. 1145 of 2006 Page 38 of 42

Page 39 Cooperative Marketing Federation Ltd. Supra.

Before the assessment year was over, by the

1998 Amendment the word "of" was

substituted with "given by". In real terms

therefore there was hardly any retrospectivity,

but a continuation of the status quo ante. The

degree and extent of the unforeseen and

unforeseeable financial burden was, in the

circumstances, minimal and cannot be said to

be unreasonable or unconstitutional.

27)We would also like to refer to the case of Hiralal Ratanlal v.

State of U.P.

15

, wherein it was observed “the source of the

legislative power to levy sales or purchase tax on goods is Entry

54 of the List II of the Constitution. It is well settled that subject

to Constitutional restrictions a power to legislate includes a power

to legislate prospectively as well as retrospectively. In this regard

legislative power to impose tax also includes within itself the

power to tax retrospectively.”

28)We would like to point out at this stage that the High Court in the

impugned judgment has not dealt with the mater in its correct

perspective. The reason given by the High Court in invalidating

Entry 25 is that this provision was already held unconstitutional

by the said High Court in Keshoram's case against which the

SLP was also dismissed and in view of that decision, it was not

15

(1973) 1 SCC 216

Civil Appeal No. 1145 of 2006 Page 39 of 42

Page 40 permissible for the legislature to re-enact the said Entry by

applying a different legal principle. According to us, this was

clearly an erroneous approach to deal with the issue and the

judgment of the High Court is clearly unsustainable. The High

Court did not even deal with various facets of the issue in their

correct perspective, in the light of subsequent judgments of this

Court with specific rulings that Rainbow Colour Lab is no longer a

good law.

29)The impugned judgment of the High Court is accordingly set

aside, the present appeal is allowed and as a result thereof, the

writ petitions filed by the respondents in the High Court are

dismissed holding that Entry 25 of Schedule VI of the Act is

constitutionally valid. There shall, however, be no order as to

costs.

.............................................CJI

(H.L. DATTU)

.............................................J.

(A.K. SIKRI)

.............................................J.

(ARUN MISHRA)

NEW DELHI;

JANUARY 30, 2015.

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