State of Madras vs Gannon Dunkerley & Co.
1959 SCR 379
Case Summary
[Contract of Sale]
Facts
The respondent company, Gannon Dunkerley & Co., engaged in building construction contracts, was assessed to sales tax under the Madras General Sales Tax Act, 1939 (amended in 1947).
The sales tax authorities included the value of materials (like cement, steel, etc.) used in construction within the taxable turnover.
The respondent challenged the tax, arguing:
The power to impose tax on sales under Entry 48 of List II (Government of India Act, 1935) did not apply as there was no "sale" of materials in building contracts.
The construction contract was indivisible and could not be split into a “sale of materials” and “payment for work done.”
The High Court ruled in favor of the respondent, declaring the amendment ultra vires.
Issues
Whether a building contract that involves the use of materials constitutes a sale of those materials under Entry 48 of List II of the Government of India Act, 1935.
Can the value of materials used in a building contract be included in taxable turnover under the Madras General Sales Tax Act?
Key Legal Provisions
Sales of Goods Act, 1930
Section 2(7) - Goods are defined as movable property, including stock and shares, crops, and things attached to the land that can be severed.
Section 4 - Sale and Agreement to Sale
Section 5 - Contract of Sale has two elements: An agreement to sell goods and transfer of the property for a price.
Judgement
The Supreme Court upheld the High Court judgement and laid:
The term “sale of goods” in Entry 48 must be interpreted as per its legal meaning in the Sale of Goods Act, 1930.
For a sale to exist:
There must be an agreement to sell identifiable goods.
Property (ownership) in those goods must pass to the buyer as goods.
A building contract is indivisible and cannot be split into:
Sale of materials
Payment for labour or services.
The contractor constructs the building and transfers it in its entirety. There is no separate agreement for the sale of materials.
Hence, there is no "sale of goods" under the building contract.
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