LexM/S. K. RAHEJA DEVELOPMENT CORPORATION versus STATE OF KARNATAKA
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A MIS. K. RAHEJA DEVELOPMENT CORPORATION v. STATE OF KARNATAKA B MAY 5, 2005 [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
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