Court Holds Builder's Construction Activity Covered Under "Works Contract" and VAT Exigible, But Quashes Demand for 2005-06 in Absence of Rules for Taxable Turnover Calculation
In a significant judgment delivered on September 24, 2026, a Division Bench of the Delhi High Court comprising Justices Avneesh Jhingan and Shail Jain adjudicated a writ petition filed by M/s Vardhman Properties Ltd. challenging a VAT demand for the assessment year 2005-06 raised by the Value Added Tax Officer under the Delhi Value Added Tax Act, 2004 (DVAT Act).
The petitioner, a builder engaged in the construction and sale of commercial complexes, sought quashing of the demand notice dated January 16, 2009, and the default assessment notice dated January 28, 2009. The core legal questions before the court were twofold: (i) whether the petitioner's activities fall within the statutory definition of "works contract" under Section 2(1)(zo) of the DVAT Act and hence attract VAT; and (ii) whether the VAT demand for 2005-06 could be sustained in the absence of machinery provisions under the DVAT Rules prescribing the manner of determining taxable turnover for such works contracts.
The court referred to authoritative Supreme Court precedents, notably Larsen and Toubro Limited v. State of Karnataka (2014) 1 SCC 708, which clarified that construction activities undertaken by a builder after entering into a contract with a purchaser constitute a "works contract" and are subject to VAT. The Court reiterated that the builder acts on behalf of the purchaser from the stage of agreement, and thus, VAT is exigible on the value of goods incorporated during construction.
However, the Court also examined whether the VAT demand was enforceable for the 2005-06 assessment year, a period when the DVAT Rules lacked specific machinery provisions for calculating taxable turnover of works contracts by builders. The relevant Rule 3 of the DVAT Rules was substituted only on September 7, 2006, introducing the mechanism to determine taxable turnover. Prior to this, no statutory formula or rules existed to compute taxable turnover, rendering any VAT demand for that period legally unsustainable.
The Court placed reliance on the Division Bench decision of the Punjab and Haryana High Court in Dhingra Jardine Infrastructure Pvt. Ltd. v. State of Haryana (2017), upheld by the Supreme Court on limited review, which held that while the levy of tax on builders is not in dispute, the absence of machinery provisions made the demand unenforceable for periods before such rules were framed.
The Delhi High Court thus held that the VAT demand for the 2005-06 assessment year on M/s Vardhman Properties Ltd. was liable to be quashed due to the absence of machinery provisions governing the computation of taxable turnover. The Court set aside the impugned demand and default assessment notices, allowing the writ petition.
This judgment underscores the importance of procedural and rule-based frameworks in tax administration, emphasizing that while substantive liability to VAT on works contracts is clear, the absence of statutory machinery to compute taxable turnover invalidates enforcement of such demands. Builders and developers conducting works contracts must be mindful of such procedural safeguards in VAT assessments.
Bottom Line:
Delhi Value Added Tax Act, 2004 - Builder/developer entering into agreements with purchasers during construction is covered by "works contract" and is exigible to VAT; however, for assessment year 2005-06, in absence of machinery provisions under DVAT Rules for determination of taxable turnover in respect of such works contracts prior to substitution of Rule 3 w.e.f. 07.09.2006, levy/demand was unsustainable and liable to be quashed.
Statutory provision(s):
Delhi Value Added Tax Act, 2004 Section 2(1)(zo), Delhi Value Added Tax Rules, 2005 Rule 3
M/s Vardhman Properties Ltd. v. Value Addes Tax Officer, (Delhi)(DB) : Law Finder Doc Id # 2990714
