Holding

An agreement to construct buildings for consideration is a "works contract" within the meaning of the Karnataka Sales Tax Act, making the developer a dealer liable to pay turnover tax on the transfer of property in goods.

Summary

The appellant, Mis. K. Raheja Development Corporation, entered into development agreements with land owners and sale agreements with prospective purchasers to construct residential and commercial units for consideration. The State of Karnataka assessed turnover tax under the Karnataka Sales Tax Act, 1957, contending that the agreements amounted to a "works contract" involving transfer of property in goods. The appellant argued that it was the owner of the property and that no works contract existed, relying on provisions of the Karnataka Ownership Flats Act and the Transfer of Property Act. The Supreme Court examined the definition of "works contract" in the Sales Tax Act and held it to be an inclusive definition covering any agreement to construct for cash, deferred payment or other valuable consideration, irrespective of ownership. Consequently, the appellant was deemed a dealer liable to pay turnover tax on the transfer of property in goods arising from the works contract. The Court dismissed the appeal, upholding the lower court's order.

Issues considered

Whether an agreement to construct flats or commercial units for consideration constitutes a "works contract" under the Karnataka Sales Tax Act, 1957.
Whether the appellant, as a developer, is a "dealer" liable to pay turnover tax on the transfer of property in goods arising from such works contract.

Legislation cited

Karnataka Sales Tax Act, 1957s. 2(1)(k)(viii), s. 2(1)(u), s. 2(1)(v-i), s. 58, s. 5B
Transfer of Property Acts. 53A

Subjects

turnover taxworks contractKarnataka Sales Tax Actreal estate developmentdealer liabilitytransfer of property in goodsconstruction agreement

Judgment

A
MIS. K. RAHEJA DEVELOPMENT CORPORATION
v.
STATE OF KARNATAKA

MAY 5, 2005
B
[S.N. VARIA VA AND DR. AR. LAKSHMANAN, JJ.]

Karnataka Sales Tax Act, 1957-Sections 5B and 2(J)(v-i)-Works
C Contract Tax-Levy of-Agreement whereby developers undertaking to build
flats for prospective purchaser for valuable consideration-On completion,
unit to be handed over to the purchaser who would get undivided interest-
Developer 's plea that tax not payable as no transfer of any property in goods
by itself or. by virtue of any works contract-On appeal, held: Agreement to
construct a building either for cash or deferred payment or valuable
D consideration is 'works contract', the construction activity may be on behalf
of an owner of the property or by the owner-Developers have possessary
interest and a right to construct and as such are not owners of property but
claim a lien on the property-Hence, developer liable to pay turnover tax on
transfer of property in goods pursuant to 'works contract' provided the
E agreement is entered into before the construction is complete and not after
completion-Furthermore, by reason of termination clause, agreement does
not cease to be a 'work contract'.

Appellant-Development Corporation are engage_d in business of real
estate development. and allied contracts. They entered into a sale
F agreement with the intended purchasers for construction of building and
flats for valuable consideration to be paid in the ~anner stated in the
agreement. Pursuant to this, plans were to be sanctioned. The purchasers
were to get undivided interest in the land. The owner of the land were to
transfer the ownership directly to the society formed under the Karnataka
Ownership Flats (Regulation of Promotion of Consfruction, Sales,
G Management and Transfer) Act, 1974. With regard to the liability to pay
turnover tax, appellants filed returns showing nil tax liability. The
Authorities held that tax was payable as there was transfer of property
in goods pursuant to a work contract. Aggrieved appellants filed an appeal.
Tribunal held that the turnover could only be computed on value of goods
H 1210
K. RAHEJA DEVELOPMENT CORPN. v. STATE OF KARNATAKA 12 l l
in execution of the works contract. Thereafter, the appellants filed Revision A
Petition before the High Court which was dismissed. Hence the present
appeal.

Appellant contended that by virtue of the Agreement entered intq
by the appellants with the owner of the property, appellants became
owners of the property and that the entire consideration amount is paid B
to the owners and possession of the property is handed over to the
appellants; that the appellants did not undertake any works contract for
and on behalf of the intended purchasers; that developing the property
and selling flats or commercial complexes by the appellants does not
involve works contract; and that the agreement clause that if all payments C
are not made then amount paid can be forfeited and the agreement
rescinded indicates that the agreements are not agreements to carry out
a works contract.
Dismissing the appeal, the Court
HELD : 1.1. The definition of the term 'works contract' in the D
Karnataka Sales 'fax Act, 1957 is an inclusive definition. It does not include
merely a works contract as normally understood. It is a wide definition
which includes "any agreement" for carrying out building or construction
activity for cash, deferred payment or other valuable consideration. The
definition does not make a distinction based on who carries on the E
construction activity. It does not lay down that the construction must be
on behalf of an ow.1er of the property or that the construction cannot be
by the owner of the property. Thus, even if the appellants are owners to
the extent that they have entered into Agreements to carry out
construction activity on behalf of somebody else for cash, deferred
payment or other valuable consideration, they would be carrying out a F
works contract and would become liable to pay turnover tax on the
transfer of property in the goods involved in such works contract Further,
there is no distinction between construction of residential flats or
commercial units. A works contract can also be for construction of
commercial units. While considering whether an agreement amounts to a G
works contract or not, the provisions of the Karnataka Ownership Flats
(Regulation of Promotion of Construction, Sales, Management, and
Transfer) Act, 1974 will have no relevance. (1217-C-G)
1.2. In view of the agreement, the appellants undertook to build as
developers for the prospective purchaser. Such construction/development H
·;-

1212 SUPREME COURT REPORTS [2005] 3 S.C.R.

A was to be on pa~ment of a price in various instalments. Appellants have a
possessary interest and a right to construct which do not constitute the
person an owner of the property. As the appellants are not the owners
they claim a "lien" on the property. Further, under the agreement clause
they have right to terminate the Agreement and to dispose off the unit if
B a breach is committed by the purchaser. However, merely having such a
clause does not mean that the agreement ceases. to be a works contract
within the meaning of the term in the Act. All that this means is that if
there is a termination and that particular unit is not resold but retained
by the appellants, there would be no works contract to that extent. But so
long as there is no termination the construction is for and on behalf of
C purchaser, it remains a works contract. Furthermore, it is clarified that
if the agreement is entered into after the flat or unit is already constructed,
then there would be no works contract. But so long as the agreement is
entered into before the construction is complete it would be a works
contract. [1221-A-D] .. I'

D Mis. Mittal Investment Corporation v. The Additional Commissioner of
Commercial Taxes., Zone-I Bangalore S.T.A. Nos~ 35-38of1998 decided on
24th September, 1999, partly approved.

C.l. T. v. Podar Cement Ltd., [1992] 5 SCC 482 and Mysore Minerals
E Ltd v. C./. T., [1999] 7 sec 106, distinguished.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2766 of2000.

From the Judgment and Order dated 19.1 l.99 of the Kamataka High
Court in S.T.R.P. No. 120 of 1996.
. .._

F Dhruv Mehta, Mohit Chaudhary and Harshvardhan Jha, for Mis. K.L. r ')
Mehta & Co. for the Appellant.

Sanjay R. Hegde, Anil K. Mishra and A. Rohan Singh for the
Respondent.
~-

G The Judgment of the. Court was delivered by

S.N. V ARIA VA, J. This Appeal is against the Judgment of the
Kamataka High Court dated 19th November, 1999.

Briefly stated the facts are as follows :
H
K. RAHEJA DEVELOPMENT CORPN. v. STATE OF KARNATAKA [VARIAVA, J.] 1213

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

The question which arises for consideration is whether the Appellants
are dealers and are liable to pay turnover tax under the Kamataka Sales Tax
Act.
D
The Appellants filed returns showing Nil liability to pay tax on the
footing that there was no transfer of any property in goods either by itself or
by virtue of any works contract. The Adjudicating Authority did not accept
their contention and passed an Assessment Order claiming tax.

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

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

The Appellants filed a Revision Petition to the Karnataka High Court
which has been dismissed by the impugned Order. In the impugned Order it G
has been held that the matter has been examined in detail in the case of Ml
s. Mittal Investment Corporation v. The Additional Commissioner of
...:... Commercial Taxes, Zone-/, Bangalore in S.T.A. Nos. 35 to 38of1998 decided
\' on 24th September, 1999. On the principles laid down in that Judgment the
Petition stood disposed off.
H
1214 SUPREME COURT REPORTS [2005) 3 S.C.R.

A After the Appellants got leave in this Appeal a Review Application was -
made in Mittal Investment Corporation's case (supra). Some clarifications
have been issued by an Order dated I Ith February, 2000.

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

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

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

F
(viii)a person engaged in the business of transfer of property in goods
(whether as goods or in some other form) involved in the
-
,.
execution of a works contract.
xxx xxx xxx
xxx xxx xxx"
Thus ·a person engaged in the business of tra'lsfer of property in goods,
G whether as goods or in some other form, involved in execution of a works
contract would be a dealer.

Section 2( I)( u l) defines the words "taxable turnover" as under :

. "2( I )(u I) "taxable turnover" means the turnover on which a dealer
H shall be liable to pay tax as determined after making such deductions
K. RAHEJA DEVELOPMENT CORPN. v. STATE OF KARNATAKA [VARIAVA, J.] 1215

.! from his total turnover and in such manner as may be prescribed, but A
shall not include the turnover of purchase or sale in the course of
inter-State trade or commerce or in the course of export of the goods
out of the territory of India or in the course of irli.port of the goods
into the territory of India."

Section 2(1) (v-i) is relevant. It defines a "works contract" as follows: B
"2(l)(v-i) "works contract" includes any agreement for carrying
out for cash, deferred payment or other valuable consideration, the
building, construction, manufacture, processing, fabrication, erection,
installation, fitting out, improvement, modification, repair or
commissioning of any moveable or immovable property." c
~ It is thus to be seen that under the Karnataka Sales Tax Act the definition of
the words "works contract" is very wide. It is not restricted to a "works
contract" as commonly understood, i.e., a contract to do some work on behalf
of somebody else. It also includes "any agreement for carrying out either for
cash or for deferred payment or for any other valuable consideration, the D
building and construction of any moveable and immoveable property"
(emphasis supplied). The definition would therefore take within its ambit any
type of agreement wherein construction of a building takes place either for
cash or deferred payment, or valuable consideration. To be also noted that
the definition does not lay down that the construction must be on behalf of E
an owner of the property or that the construction cannot be by the owner of
the property. Thus even if an owner of property enters into an agreement to
construct for cash, deferred payment or valuable consideration a building or
flats on behalf of anybody else it would be a works contract within the
meaning of the term as used under the said Act.
" F
Section 58 provides for levy of tax on transfer of property in goods,
whether as goods or in some other form, in the execution of the works
contract. It reads as follows :

"58. Levy of tax on transfer of property in goods (whether as goods
or in some other form) involved in the execution of w9rks G
contracts .
.;_
Notwithstanding anything contained in sub-section (I) or sub-
~
section (3) or sub-section (3C) of Section 5, but subject to sub-section
(4), (5) or (6) of the said section, every dealer shall pay for each year,
H
1216 SUPREME COURT REPORTS (2005] 3 S.C.R.

A a tax under this Act on his taxable turnover of transfer of property in
goods (whether as goods or in some other fonn) involved in the
execution of works contract mentioned in column (2) of the Sixth
Schedule at the rates specified in the corresponding entries in column
(3) of the said Schedule."

B Mr. Mehta submitted that by virtue of the Agreement entered into by
the Appellants with the owner of the property the Appellants became owners
of the property even though a formal conveyance in their favour had not been
executed. He took this Court through various provisions of the Agreement
entered into by the Appellants with the owner of the pr-iperty. He submitted
C
-
that under such Agreements almost the entire consideration amount is paid to
the owners and possession of the property is handed over to the Appellants.
He submitted that by virtue of the principles laid down in Section 53A of the
,..
Transfer of_ Property Act the Appellants were the owners of the property. In
support of this submission, he relied upon the Judgments of this Co•Jrt in the
cases of C.l.T. v. Podar Cement ltd., reported _in [1992] 5 SCC 482 and
D Mysore Minerals ltd v. C.I.T., reported in [1999] 7 SCC 106. In these cases,
in the context of the Income Tax Act, it has been held that even though there
is no formal conveyance the concerned party could be considered to be the
beneficial owner. Mr. Mehta submitted that an owner cannot be said to carrying
on a works contract on behalf of others.

E Mr. Mehta next submitted that in any event the Appellants did not
undertake any works contract for and on behalf of the intended purchasers.
He su.bmitted that the Appellants were themselves developing the property
and selling flats or commercial complexes in that property. He submitted that
in such type of activities no works contract was involved. Mr. Mehta submitted
F that in the Agreements wuh the intended purchasers there was a clause which
provides that if all payments are not made then amounts paid can be forfeited
and the agreement rescinded. He submitted that a person carrying out a
works contract would have no right to forfeit or rescind the contract itself.
He submitted that such a clause indicates that the Agreements are not
agreements to carry out a works contract.
G
On the other hand, Mr. Hegde submitted that the definition of a 'works
contract' in the said Act is an inclusive definition which is very wide. He _...
submitted that any agreement wherein party has agreed to construct or build
for cash, deferred payment or other valuable consideration would be covered
H by the definition of the term 'works contract' as used in the said Act. In
K. RAHEJA DEVELOPMENT CORPN. v. STATE OF KARNATAKA [VARIAVA, J.] 1217

... support of his submission he relied upon the Agreements entered into by the A
Appellants with the various purchasers and submitted that these Agreements
indicate that the Appellants are undertaking the construction of the building
and the flats for and on behalf of the purchasers and that the same is for
valuable consideration to be paid in a differed manner. He submitted that
except to the extent that the Appellants retain certain commercial premises or
flats for themselves, the work carried out pursuant to such Agreements would B
amount to a 'works contract'. He submitted that the Appellants are liable to
pay turnover tax on the transfer of property in goods. involved in such works
contract.

,,.--
We have heard the parties, perused the various documents and considered
the cases cited at the bar. As has been rightly submitted by Mr. Hegde the
c
definition of the term 'works contract' in the said Act is an inclusive definition.
~
It does not include merely a works contract as normally understood. It is a
wide definition which includes "any agreement" for carrying out building or
construction activity for cash, deferred payment or other valuable consideration.
The definition does not make a distinction based on who carries on the D
construction activity. Thus even an owner of the property may also be said
to be carrying on a works contract if he enters into an agreement to. construct
for cash, deferred payment or other valuable consideration. We, therefore, do
not need to go into the question whether the Appellants are owners as even
if the Appellants are owners to the extent that they have entered into
Agreements to carry out construction activity on behalf of somebody else for
E
cash, deferred payment or other valuable consideration, they would be carrying
out a works contract and would become liable to pay turnover tax on the
transfer of property in the goods involved in such works contract. Further
under the said Act there is no distinction between construction of residential
'I flats or commercial units. Thus, a works contract, within the meaning of the F
term in the said Act, can also be for construction of commercial units. For
the purposes of considering whether an agreement amounts to a works contract
or not, the provisions of the Karnataka Ownership Flats (Regulation of
Promotion of Construction, Sales, Management and Transfer) Act, 1974 will
have no relevance.
G
However as Mr. Mehta has argued on this aspect we record that reliance
:::.... of the Judgments in Podar Cement ltd. and Mysore Minerals Ltd: cases
~ (supra) are of no assistance to the Appellants. Those are cases under the
Income Tax Act. Those cases lay down that the term 'owner' must be given
an interpretation in the context of the provisions of the Act. If that rational
H
1218 SUPREME COURT REPORTS [2005] 3 S.C.R.

A was to be applied then in the context of the Kamataka Sales Tax Act, the
Appellants would not be owners as admittedly they do not have any registered
sale-deeds in their hand. The Agreement relied upon by Mr. Mehta between
the Appellants and the owners of the land is nothing but a development
Agreement. Pursuant to such an Agreement, plan would be get sanctioned in
the name of the owner of the property. It would be the owner of the property
B who would then execute a conveyance directly to the society of purchasers.
All that the Appellants have is a possessary interest and a right to construct.
Such rights do not constitute the person an owner of the property.

To consider whether the Appellants are executing works contract one
C needs to look at a typical Agreement entered into with the purchaser. The
relevant clauses are clause (q), (r) of the recitals and clauses I, 5(c) and 7,
which read as follows :

"(q) i) Construction of the said multi-storeyed building;

(ii) Sale of the units in the aforesaid multistoreyed building to different
D persons in whose favour ultimately a Deed of Conveyance would be
obtained by the Holders, directly from the Vendors, of an undivided
fractional interest in the said land (i.e. the area of 5910.17 sq. metres .
described in the First Schedule hereunder written) and such owner of
units would own, on ownership basis, the respective units on condition
E that ari Agreement would be entered into between the Holders on the
one hand and the persons (desiring to acquire on ownership basis an
unit in such multi-storeyed building) on the other hand and it would
be an essential, integral and basic concept, term and condition of the
proposed transaction (which would be by way of a package deal not
capable of being segregated or separated or terminated one without
F the corresponding effect on the other) that K. Raheja Development (
Corporation as the Land-holder would agree to sell to such persons
an undivided fractional interest in the said land described in the First
Schedule hereunder written on condition that they i.e. Mis K. Raheja
Development Corporation as Developers on behalf of and as
G Developers of such person would construct for, as a unit ultimately
to belong to such person a unit or units that would be so mutually
selected and settled by and between K. Raheja Development
Corporation and the person concerned;

[emphasis supplied]
H
K. RAHEJA DEVELOPMENT CORPN. v. STATE OF KARNATAKA [VARIAVA, J.J 1219

(r) The Prospective Purchaser is interested in acquiring ownership A
rights in respect of unit/s Nos. I I 0 I on the eleventh floor/s of the
said multi-storeyed building named 'Raheja Towers' and also car
parking space/s No. Is nil in the basement/ground floor of the said
building (hereinafter referred to as 'the said Unit')"
··········································································································································· B
I. As and by way of a package deal :
(a) K. Raheja Development Corporation, (as Holders) agree to sell
to the Prospective Purchaser an undivided 0.42% share, right,
title and interest in the said land described in the First Schedule
hereunder written (with no right to the Prospective Purchaser to C
claim any separate sub-division and/or right to exclusive

.. possession of any portion of the said land) for a lump sum
agreed and quantified consideration of Rs. 3,25,000 (Rupees
three lacs twenty five thousand only) to be paid by the
Prospective Purchaser to the Holders at the time and in the
manner stated in Clause 2 hereof; D
(b) K. Raheja Development Corporation, (as Developers) agree to
build the said building named 'Raheja Towers', having the
specifications and amenities therein set out in the Second
Schedule hereunder written and as Developers for the prospective
Purchaser, the Developers shall build for and as unit/s to belong E
to the Prospective Purchaser, the said premises (details whereof
are set out in the Third Schedule hereunder written) for a lump
sum agreed and quantified consideration of Rs. 5,07,000 (Rupees
five lacs seven thousand only) to be paid by the Prospective
Purchaser to the Developers at the time and in the manner set F
out in Clause 3 hereof. The said premises shall have the amenities
set out in the Fourth Schedule hereunder written.

5. The undermentioned terms and provisions are express conditions
to be observed, performed and fulfilled by the Prospective Purchaser, G
on the basis of which this Agreement has been entered into by the
Holders/Developers and the due and proper fulfillment whereof are
to be conditions precedent to any title being created and I or being
capable of being documented by the Prospective Purchaser in the
aforesaid fractional interest in the land described in the Firnt Schedule H
1220 SUPREME COURT REPORTS [2005) 3 S.C.R.

A hereunder written and/or in the said premises:

(a) ................................................................. ,............................. .

(b) ························································· ·······································
(c) The overall control and management of the project and the
B development and completion of the said building shall be
with the Developers and furthermore the Developers are and
shall continue to be in possession of the said land and building -
and shall be entitled to a lien thereon and that the Prospective
Purchaser shall not be entitled to claim or demand from the
c Holders possession of any portion of the said land or to
claim or demand from the Developers possession of the said
premises unless and until the Prospective Purchaser has paid
in full through the Holder~ the full consideration money
payable to the Holders under Clause 2 above and the full
consideration money payable to the Developers under Clause
D 3 above.

7. If the Prospective Purchaser commits default in payment of any of
the instalments of consideration aforesaid on their respective due
E dates (time being the essence of the contract) and/or in observing and
performing any of the terms and conditions of this Agreement, the
Holders/Developers shall be at liberty, after giving 15 days notice
specifying the breach and if the same remains not rectified within
that time, to terminate this Agreement, in which event, a sum
equivalent to 10% of the amounts that may till then have been paid
F by the Prospective Purchaser to the Holders and the Developers
respectively shall stand forfeited. The Holders and the Developers
shall, however, on such termination, refund to the Prospective
Purchaser the balance amounts of the instalments of part payment, if
any, which may have till then been paid by the Prospective Purchaser
G to the Holders and the Developers respectively but without any further
amount by way of interest or otherwise. On the Holder/Developers
terminating this Agreement under this Clause, they shall be at liberty
to dispose off the said Unit/s and the said fractional interest in the
land to any other person as they deem fit, at such price as they may
determine and the Prospective Purchaser shall not be entitled to
H question such sale, disposal or to claim any amount from them."
K. RAHE.IA DEVELOPMENT CORPN. 1·. STATE OF KARNATAKA [VARIAVA, J.] 1221

Thus the Appellants are undertaking to build as developers for the A
prospective purchaser. Such construction/development is to be on payment of
a price in various instalments set out in the Agreement. As the Appellants are
not the owners they claim a "lien" on the property. Of course, under clause
7 they have right to terminate the Agreement and to dispose off the unit if
a breach is committed by the purchaser. However, merely having such a
clause does not mean that the agreement ceases to be a works contract within B
the meaning of the term in the said Act. All that this means is that if there
is a termination and that particular unit is not resold but retained by the
Appellants, there would be no works contract to that extent. But so long as
there is no termination the construction is for and on behalf of purchaser.
Therefore, it remains a works contract within the meaning of the term. as C
defined under the said Act. It must be clarified that if the agreement is
entered into after the flat or unit is already constructed, then there would be
no works contract. But so long as the agreement is entered into before the
construction is complete it would be a works contract.

In this view of the matter, the Judgment of the High Court to the extent D
that it confirms with the above-mentioned view stands confirmed. We do not
approve the observations in Mittal Investment Corporation's case (supra)
which are contrary to the view expressed above. As on the main aspects we
agree with the High Court Judgment, we see no reason to interfere.

The Appeal stands dismissed. There will be no order as to costs. E
N.J. Appeals dismissed.