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Case Comment: State of Madras v. Gannon Dunkerley & Co.

(Madras) Ltd,
1959, SCR 379

3.1 Contract II

Submitted By: Nitish Joshi


Submitted To: Dr. Manish Yadav
UID - UG2017-066
2018 & Semester 3

National Law University, Nagpur.


Table of Contents
TABLE OF ABBREVIATIONS .......................................................................................................... 3
TABLE OF STATUTES....................................................................................................................... 3
INTRODUCTION................................................................................................................................. 4
FACTS OF THE CASE ........................................................................................................................ 5
ISSUE IN THE CASE .......................................................................................................................... 6
ARGUMENTS ADVANCED BY PETITIONER .............................................................................. 6
ARGUMENTS ADVANCED BY RESPONDENT ............................................................................ 7
CONCLUSION ................................................................................................................................... 10

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TABLE OF ABBREVIATIONS

SCR Supreme Court Reports


CO. Company
LTD. Limited
V. Versus

TABLE OF STATUTES

Sales of goods Act, 1930


Maharashtra Value added Tax Act, 2002

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INTRODUCTION
The taxation of works contracts has always been a matter of curiosity, controversies and
complications. Ever since the evolution of the concept of ‘deemed sales’ under the sales tax
laws, it has remain a mystery to understand that which are the transactions liable to tax under
the guise of ‘works contract’. The High Courts of various States as well as the Honourable
Supreme Court of India has to intervene time and again to decide whether a particular
transaction can be taxed or not under the sales tax laws of a particular State.
There are number of judgments pronounced by the most knowledgeable and honourable
judges of the highest courts of the States as well as the apex court. And there are number of
judgments which are contradicted by another judgment of the same court and there are many
cases still waiting justice. So to know the basics, one should know about the Works Contract.
Although there is no exact definition of Works contract but it means A works contract is an
agreement which is a mixture of service or labour and transfer of goods. Under a works
contract the contractor agrees to do certain job in execution whereof, certain goods are
transferred to the contractee. Thus, an agreement of building construction, manufacture,
processing, fabrication, erection, installation, repair or commissioning of any movable or
immovable property, is a works contract1 The value of the goods at the time of the transfer of
property in the goods (whether as goods or in some other form) involved in the execution of a
works contract may be determined by effecting the following deductions from the value of
the entire contract, in so for as the amounts relating to the deduction pertain to the said works
contract: -
(i) Labour and service charges for the execution of the works contract;
(ii) Amounts paid by way of price for sub-contract, if any, to sub-contractors;
(iii) Charges for planning, designing and architect’s fees;
(iv) Charges for obtaining on hire or otherwise, machinery and tools for the execution of the
works contract;
(v) Cost of consumables such as water, electricity, fuel used in the execution of works
contract, the property in which is not transferred in the course of execution of the works
contract;
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Maharashtra value added tax act section 2(24) sub section b (ii) -. the transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works contract including, an 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 movable or immovable property.

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(vi) Cost of establishment of the contractor to the extent to which it is relatable to supply of
the said labour and services;
(vii) Other similar expenses relatable to the said supply of labour and services
(viii) Profit earned by the contractor to the extent it is relatable to the supply of said labour
and services2
Should these works be covered under the ambit of sales of goods?
This is what we are going to learn from this project through a landmark judgement State of
Madras v. Gannon Dunkerley & Co. (Madras) Ltd3. A case which should be based on
taxation law becomes a constitutional case as the legislature of madras violates the
constitutional limits4. The project contains all the important content of the case including the
facts, issue, advanced arguments, judgement and analysis which will thoroughly help us to
understand the scenario of the particular case. Some of important sections of this are section
2(h) Madras General Sales Tax Act 1939 and section 4 of Sales of Goods act 1930 which will
help us to know does works contract comes under the ambit of sales of goods? Several latest
judgements are also cited in the project which will take into consideration the project topic to
come to fair conclusion. All the questions that come to mind of the readers will be cleared
through the project.

FACTS OF THE CASE


The assesses, Gannon Dunkerley & Company initially incorporated as a Private Ltd
Company in 1924 was converted to Public Ltd. Company in 1948, after taking over by Indian
Management. made its presence felt in all major sectors of construction, both Industrial and
Infrastructure, throughout the country.5
This all started because “works contracts” were encompassed within the ambit of the Madras
General Sales Tax Act and the Company was made to the levy of sales-tax within the
limitations provided in the said Act. Thus the amounts with respect to the materials
transferred; used in the execution of the contract, between the Government (Petitioner) and
the Company (Respondent) were included in the annual turnover of the company and thus
was taxed under the Act given above

2
Maharashtra value added tax act Rule 58 (1)
3
AIR 1958 SC 560
4
Government of India act, 1935
5
http://www.gannondunkerley.com

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The amending Act added a separate clause of sale in the Madras General Sales Tax Act under
sec 2(h): “Includes also a transfer of property in goods involved in the execution of a work
contract”. The validity of the assessment was challenged by the respondent who contended
that the power of the Madras Legislature to impose a tax on sales under Entry 48 in List II in
Sch. VII of the Government of India Act, 1935, did not extend to imposing a tax on the value
of materials used in construction works, as there was no transaction of sale in respect of those
goods, and that the provisions introduced in the Madras General Sales Tax Act, 1939, by the
Madras General Sales Tax (Amendment) Act, 1947, authorising the imposition of such tax
were ultra vires.

ISSUE IN THE CASE


Whether a building contract, as in the present case, constitutes within itself a contract of sale
of goods and contains any element of the nature of the sale of goods to justify the imposition
of the tax upon them?
To answer this question, the Court looked into what constitutes a “sale of goods”, and
whether a building contract includes a “sale of goods” to come under the tax net.

ARGUMENTS ADVANCED BY PETITIONER


Petitioner argued that in the Government of India Act, 1935, there are other provisions which
give a clear indication that the expression " sale of goods " in Entry 48 is not to be interpreted
in the sense which it bears in the Indian Sale of Goods Act, 1930. That is an argument open
to the appellant, because rules of interpretation are only aids for ascertaining the true
legislative intent and must yield to the context, where the contrary clearly appears. Now,
what are the indications contras? Section 311(2) of the Government of India Act defines
"agricultural income" as meaning “agricultural income as defined for the purposes of the
enactments relating to Indian income-tax ". It is said that if the words " sale of goods " in
Entry 48 were meant to have the same meaning as those words in the Indian Sale of Goods
Act, that would have been expressly mentioned as in the case of definition of agricultural
income, and that therefore that is not the meaning which should be put on them in that Entry.

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ARGUMENTS ADVANCED BY RESPONDENT
the argument is that the definition of " sale given in the Madras General Sales Tax Act is in
conflict with that given in the Indian Sale of Goods Act, 1930, that the sale of goods is a
matter falling within Entry 10 of the Concurrent List, and that, in consequence, as the Madras
General Sales Tax (Amendment) Act, 1947, under which the impugned pro-visions had been
enacted, had not been reserved for the assent of the Governor-General as provided in s. 107
(2), its provisions are bad to the extent that they are repugnant to the definition of " sale " in
the Indian Sale of Goods Act, 1930.

JUDGEMENT
The judgement put forward was reasonable and answered the questions of respondent and
petitioner respectively. To the argument of petitioner court was of the view that “the
draftsmen and the Parliament must have been well aware that the expression “sale of goods”
had acquired a legal import by that time, and it is legitimate therefore to presume that the
expression was used in the sense in which it was understood by English lawyers and also in
India. The draftsmen must have intended to define the power of the Legislature to tax only the
transaction of sale of foods, which was understood in law as meaning and as constituting
those composite series of acts beginning with an agreement of sale and ending with transfer
of property for a price, which constitute sale of goods.”
In order to constitute a sale as defined in the English Sale of Goods Act, followed in the
Indian Sale of Goods Act, two things are necessary:
(1) An agreement to sell, i.e., an agreement to transfer the property in goods to the buyer for
a price and
(2) An actual sale by which the property in the goods passes from the seller to the buyer.6
Sale of goods, therefore, means a contract whereby the property in the goods is actually
transferred by the seller to the buyer. It is not an executory contract7 but an executed

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Section 4 in The Sale of Goods Act, 1930
(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the
contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which
the property in the goods is to be transferred.
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An executory contract is a contract made by two parties in which the terms are set to be fulfilled at a later date.
The contract stipulates that both sides still have duties to perform before it becomes fully executed. The contract
is often in place between a debtor or borrower and another party.

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contract8, and the transfer of the property in the goods is for a price, i.e., for money
consideration. In this regard, the Court relied on various authorities like Benjamin on Sale
and Halsbury’s Laws of England.
For sale of goods, the Court held that there cannot be an agreement to one kind of property or
work and a sale regards another. For the true interpretation of the term “sale of goods” there
must be an agreement for the sale of the very goods in which eventually property passes.
Thus even the appellant’s contention that an express agreement is not necessary with respect
to the goods is also nullified. In a contract to construct buildings according to specifications,
there is no contract to sell materials used in construction. Thus such a contract for sale of
materials cannot be inferred from a building contract.
Thus the Court observed that the expression “sale of goods” has a well-defined meaning
under law even before the Government of India Act, 1935 had come into force and thus the
meaning in the Constitutional Act also has to be the same as understood by lawyers and
Courts, viz., as defined under the Sale of Goods Act. Under the Sale of Goods Act, “goods”
means every kind of moveable property other than actionable claims and money; and
Includes stock and shares, growing crops, grass and things attached to or forming part of the
land, which are agreed to be severed before sale or under the contract of sale. According to
the definition in the English Act “goods” include all chattels personal, other than things in
action and money.
Argument of Respondent also got the answer as the Court held that the power of the
legislature could not extend to anything other than a transaction of sale as understood in law.
It does not mean that the Legislature has no power to enact provisions which are intended and
are necessary for the enjoyment and exercise of power, but the Legislature can tax only on
what constitutes a “sale of goods”. Under the guise of enacting a law in respect of a field
open to the Legislature, it is not entitled to transgress the limits and widen the field by
enacting an inclusive definition of sale of goods, to include what in law is not a transaction of
sale. If really the Legislature has no power to levy a tax upon transactions, which do not
constitute in law sales of goods, it purports to do something, which is forbidden.
Thus it has become clear that the Legislature has a power to determine taxable events, but has
no power to widen the field and change the definition of “sale of goods” as understood in
law.

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The contract is often made between two or more people, but it can also be between a person and an entity, or
two or more entities. Contracts often specify that one party will provide a service or goods to the other, and are
not fully effective until all parties involved have signed. Some contracts even require the signatures be
witnessed.

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One more question that is answered by court is that “whether building contracts comes under
the ambit of sales of good” the way the court answered this question was easily understood
by everyone
In this regard the Court observed that when the material is fixed to the corpus by the builder,
the property passes when the property in the larger corpus itself passes to the other party.
This rule, of course, is subject to any special stipulations in the contract to build. If the parties
intended that property in materials should pass at an earlier stage that of course governs the
rights between the parties. If the material is supplied by the other party to the contract, or if
on his account the builder purchases the materials, the contract in either event will be a mere
contract for labour and work and not for sale of the material.
The Court then relied on an English decision Reid v. Mcbeth & Grey9 wherein before the
ship was completed, the builders became bankrupt. At that time, there were iron and steel
plates of a large quantity lying in the railway station which were ordered by the ship-builders.
Now, both the builders and the ship owners claimed these materials. The House of Lords held
that there was no sale with respect to materials in this case and the contract of sale was with
regards to the purchase of the ship. The materials in question should not be regarded as
appropriated to the contract or sold under the Sale of Goods Act.
The Court thus held that building contracts are always considered in law as entire and
indivisible contracts in the sense, that the complete fulfilment of the promise by one party is a
condition precedent to the right of the other to call for the fulfilment of any part of the
promise by the other.
In the present case, cement and other materials were provided by the Government. It is only
the non-controlled materials (meaning labour and workforce etc.) that the company had to
find for the purpose of the work. The company does not purport to sell the materials under the
contract, and it is not a contract for the sale of the materials. On the face of the contract,
therefore, it is difficult to come to the conclusion, that the contract involves any element of
sale of goods to justify the imposition of a tax upon the assesses.
It therefore, follows that the building contracts, which the assessees entered into during the
assessment year, on which the turnover was calculated, do not involve any element of sale of
the materials and are not in any sense contracts for the sale of goods as understood in law.
Having regard to the terms of particular contracts, there may be an intention to pass the
ownership in the materials for a price agreed upon between the parties, in which case such

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[1904 AC 223 (L)]

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contracts might contain an element of sale of goods, but that is not the case here. The Court
held that if the Legislature intends to bring under the tax net contracts such as these, then the
amendment is ultra vires of the legislature to that extent as they had no power to tax
transactions which are not “sale of goods”. Thus the levy of tax in this case is not justified in
law.

CONCLUSION
Levy of tax on Works Contract though has become old by passage of time but still has its
significance due to the various unsettled issues relating thereto.. Apex Court had a occasion
to consider whether in the building contract which was in the nature of composite and
indivisible works contract, there was a sale of goods. Apex Court held that there was no sale
of goods. Likewise, the goods provided on lease for use was not liable to tax because it was
not sale within the definition of Section 4 of the Sale of Goods Act. After the decision in the
case of State of Madras Vs. Gannon Dunkerley & Company, the matter with regard to
taxability of goods involved in the execution of works contract, was examined by the Law
Commission, in its 61st report. As a result of the recommendations by the Law’ Commission
to levy the tax on the goods used in the execution of the works contract and on the leasing
transactions, clause (29-A) has been added in Article 366 of the Constitution of India by the
46th Constitutional Amendment, enlarging the definition of sale.

ANNEXURE

1. Name of the Case (Full Citation) State of Madras v. Gannon Dunkerley & Co.
(Madras) Ltd, 1959, SCR 379

2. Composition of the Bench: Constitution Bench

Name of Judges: Sudhi Ranjan (Cj), Aiyyar, T.L. Venkatarama Das, S.K., Sarkar,
A.K., Vivian Das

3. Area of Law- Civil Law

4. Brief Facts of the Case: The assesses, Gannon Dunkerley and Co. (Madras) Ltd., are
a private limited company incorporated under the Indian Companies Act and they
carry on business as Engineers and Contractors. Their business consists mainly of
execution of contracts for construction of buildings, bridges, dams, roads and
structural contracts of all kinds.The controversy started because “works contracts”

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were included within the ambit of the Madras General Sales Tax Act and the
Company was made subject to the levy of sales-tax within the limitations provided in
the said Act. Thus the amounts with respect to the materials transferred, used in the
execution of the contract, between the Government (the contracting party) and the
Company (the builder) were included in the annual turnover of the company and thus
was taxed under the Act aforementioned. The amending Act added an inclusive
definition of sale in the Madras General Sales Tax Act under sec 2(h): “Includes also
a transfer of property in goods involved in the execution of a work contract.”

5. Question of Law- Whether building contracts include “sale of goods”?


What is “sale of goods”?

6. Reliance on Relevant

1. Statutes: Sales of goods Act, 1930

2.Decided Cases- Reid v. Mcbeth & Grey [1904 AC 223 (L)]

7. Legal issues of Determination: Whether Legislature has power to widen the field and
change the definition of “sale of goods” as understood in law.

8. Methodology of judging the issues involved- The judge very dexterously emphasized
on each issue. Valid reasoning was given for every ruling and they also visited the
ancient milieu of legal profession to form their opinion. Each and every question of
law was answered and reference of English judgement made it very easy for readers
to understand the case.

9. Opinion of the court is: Unanimous

10. Student’s own remarks- The best thing of the judgment was that the court not only
answered the questions but also explained there reasoning in a intricated manner
which made it easy for the readers to learn the concept easily. As the number of
illiterate litigation is huge in number, the court is concerned for their protection from
exploitation. The judgment brought a major change as it was for the first time when
the issue was dealt in so detail.

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BIBLIOGRAPHY
JOURNALS REFFERED
Supreme Court Cases
Supreme Court Report
WEBSITES REFFERED
www.gannondunkerley.com
https://mahagst.gov.in/
https://www.merriam-webster.com/thesaurus/retainer

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