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Why is land one-third of the property?

MAY 11, 2022

By Vijay Kumar

WHEN you buy a house, what is the amount of tax that you must pay? This is a taxing question for both sellers and buyers of houses, as it amounts to nearly twenty percent of the price - that is the white price. It is commonly known that in most of the transactions in sale of houses, there is an invariable element of black money, which cannot be taxed.

If buying a house is a complicated affair, paying taxes is chaotic. And once you get into law everything is complicated, like what is a house, what is sale, etc., There are several ways of buying that house. You can buy land and build a house; you can buy land and ask a contractor to build a house. You can buy a flat where there is an invisible undivided share in land. And taxing these complicated transactions was always a difficult proposition.

In a recent case, the question before the Gujarat High Court was whether the notification providing for 1/3rd deduction with respect to land or undivided share of land in cases of construction contracts involving element of land is ultra-vires the provisions of the GST Acts and/or violative Article 14 of the Constitution of India? - 2022-TIOL-663-HC-AHM-GST

The issue has a long history, which started litigationally somewhere in the year 1950.


Entry 54 of List II of the Constitution of India empowered the States to impose tax on sale or purchase of goods. The legislative competence of the States to impose tax on goods used in indivisible works contracts came up before the Supreme Court in State of Madras v Gannon Dunkerley and Co. 2002-TIOL-493-SC-CT-LB (1st Gannon Dunkerley case). The Supreme Court observed:

1. in case of building construction contract, the property in goods passes to the buyer by the theory of accretion as and when the goods are embedded into the earth.

2. The property in goods does not pass as chattel pursuant to the agreement of sale and therefore it is not sale as per the Sale of Goods Act, 1930.

Thus, it was held that the State legislatures did not have the competence to impose sales tax on the goods element of a construction contract.

The government brought in the 46th Constitutional Amendment in 1982 to undo the judgement of the Supreme Court. Article 366(29A) of the Constitution was inserted whereby the transfer of property in goods (whether as goods or in some other form) involved in the course of execution of works contract was deemed to be sales.

The STATEMENT OF OBJECTS AND REASONS of the Amendment Bill stated:

1. Sales tax laws enacted in pursuance of the Government of India Act, 1935 as also the laws relating to sales tax passed after the coming into force of the Constitution proceeded on the footing that the expression "sale of goods", having regard to the rule as to broad interpretation of entries in the legislative lists, would be given a wider connotation. However, in Gannon Dunkerley's case, the Supreme Court held that the expression "sale of goods" as used in the entries in the Seventh Schedule to the Constitution has same meaning as in the Sale of Goods Act, 1930. This decision related to works contracts.

2. By a series of subsequent decisions, the Supreme Court has on the basis of the decision in Gannon Dunkerley's case, held various other transactions which resemble, in substance, transactions by way of sales, to be not liable to sales tax.

3. This position has resulted in scope for avoidance of tax in various ways.

4. While sale by a registered club or other association of persons (the club or association of persons having corporate status) to its members is taxable, sales by an unincorporated club or association of persons to its members is not taxable as such club or association, in law, has no separate existence from that of the members.

5. In the Associated Hotels of India case, the Supreme Court held that there is no sale involved in the supply of food or drink by a hotelier to a person lodged in the hotel.

6. States have been proceeding on the basis that the Associated Hotels of India case was applicable only to supply of food or drink by a hotelier to a person lodged in the hotel and that tax was leviable on the sale of foodstuffs by a restaurant. But the Supreme Court has held that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human need or ministering to the bodily want of human beings. It would not make any difference whether the visitor to the restaurant is charged for the meal as a whole or according to each dish separately.

7. It is, therefore, proposed to suitably amend the Constitution to include in article 366 a definition of "tax on the sale or purchase of goods" by inserting a new clause (29A).

This new clause 29A(b) read as:

(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.

Then, a question arose as to on what amount tax could be imposed as a works contract would even contain some element of labour. This issue was decided by the Supreme Court in the case of  Gannon Dunkerley and Co. v State of Rajasthan - 2002-TIOL-103-SC-CT-CB (2nd Gannon Dunkerley's case). It was held that tax could be imposed only on the value of goods incorporated in the works contract and that the labour expenses and profit thereon was to be excluded. It was held that the value of goods was to be ascertained from the books of account of the assessee. Only where it was not possible to ascertain the actual value, the State could prescribe a formula on the basis of fixed percentage of value of contract. It was however clarified that such prescribed value should not appreciably differ from the actual value.

Thereafter a question arose as to whether even a tripartite agreement between the landowner, developer and prospective buyer would constitute a works contract even though property in such agreement would subsequently pass by way of a registered sale deed. The Supreme Court held in the case of  K. Raheja Development Corporation vs State of Karnataka - 2005-TIOL-77-SC-CT  that even a tripartite agreement involving construction of flats for prospective buyer would constitute sale in the course of the execution of works contract.

The correctness of the decision of the Supreme Court in the case of K. Raheja Development Corporation was doubted and referred to a larger bench. The larger bench in the case of  Larsen and Toubro Ltd. v State of Karnataka - 2013-TIOL-46-SC-CT-LB  affirmed the view taken in the case of K. Raheja Development Corporation. It was, however, clarified that the activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser and that the value addition made to the goods transferred after the agreement is entered into can only be made chargeable to tax by the Government. It was further observed that if at the time of construction and until the construction was completed, there was no contract for construction of building with the flat purchaser, the goods used in the construction could not be deemed to have been sold by the builder since at that time there was no purchaser. It was held that the fact that the building was intended for sale ultimately after construction did not make any difference.


Service Tax was introduced for the first time by the Finance Act, 1994. Clause (zzzza) was introduced in Section 65(105) of the Finance Act, 1994 by the Finance Act, 2007 which included services in relation to the execution of works contract excluding the contracts in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

A question arose as to whether composite contract for the supply of goods and services could be taxed prior to 1st April 2007 under the head of construction service even though works contract service became taxable only from 1st April 2007. The CESTAT by a majority held that they were taxable even prior to 1st April 2007. This was a judgement in which three technical members overruled the decision of two judicial members including the President who was an erudite High Court judge. - 2015-TIOL-527-CESTAT-DEL-LB

I then wrote, Finally the erudite conclusions arrived at by the President after extensive research into the amazing realms of judicial interpretation of various shades of legislation - was overruled by three technical members interpreting legislative principles.

This judgement came on 19.03.2015. Fortunately, it did not last long. On 20.08.2015, the Supreme Court in the case of  Commissioner, Central Excise and Customs v Larsen and Toubro Ltd. 2015-TIOL-187-SC-ST  held that the works contract service became taxable only after the Finance Act, 2007 and, therefore, no service tax could be imposed on composite contracts under the head of construction service which could be utilized for imposing tax only on pure services.

Clause (zzzh) of Section 65(105) of the Finance Act, 1994 relating to construction service was amended by the Finance Act, 2010 and an Explanation was added whereby construction of a complex intended for sale was deemed to be service by builder to the buyer unless entire consideration was received after grant of completion certificate by the competent authority.

This explanation and imposition of service tax on service by a builder was challenged before the Delhi High Court on the ground that there was no mechanism for computing service tax in case of a transaction involving transfer of land. This contention was accepted by the Delhi High Court in the case of  Suresh Kumar Bansal v Union of India - 2016-TIOL-1077-HC-DEL-ST  wherein it was held that the valuation rules did not provide any mechanism for deriving value of services in case the transaction involved sale of land. It was, therefore, held that no service tax could be demanded in the absence of any computation mechanism.

To overcome the judgement of the Delhi High Court in the case of Suresh Kumar Bansal, the Service Tax (Determination of Value) Rules, 2006 were retrospectively amended. Clause (i) of Rule 2A of the rules expressly provided for deduction of amount charged for land or undivided share of land. Clause (ii) of Rule 2A provided for lumpsum deduction only in a case where value is not determined under clause (i) which provides for deduction on actual basis.


GST has been enacted with a view to merge and consolidate earlier laws relating to indirect taxes. And to make taxes simple .

And the Gujarat High Court concluded that:

The impugned Paragraph 2 of the Notification, which provides for a mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of land is ultra-vires the provisions as well as the scheme of the GST Acts. Application of such mandatory uniform rate of deduction is discriminatory, arbitrary, and violative of Article 14 of the Constitution of India.

It is a huge problem for the government to solve this problem. The easier options are:

1. Appeal to Supreme Court

2. Amend the law retrospectively

Option No. 2 can be before or after Option No. 1.

Until Next week