Judgment :- 1. This appeal is by the assessee, challenging the order passed by the Revisional Authority under Section 64(1) of the Karnataka Value Added Tax, 2003 (hereinafter, referred to as the `KVAT Act’, for brevity) restoring the order under Section 39(1) with penalty and interest levied by of original authority, after disallowing the labour charges to an extent of 30% granted by the original authority. 2. The assessee is involved in execution of civil works contract for the prospective buyers of flats in the residential apartments constructed by him and is a registered dealer under the Act. The assessee made payments amounting to Rs.2,99,57,344/- to sub-contractors for execution of works contract, out of which, only one sub-contractor is registered under the KVAT Act, 2003 viz., M/s. IVR Prime Urban Developers Limited to whom the dealer/ assessee has paid a sum Rs. 2,20,00,000/- for main civil work. The remaining amount of Rs.79,57,344/- is paid to unregistered sub-contractors for carrying out works like construction of road, market, office, model flat, rock cutting, etc. Therefore, the audit authorities added the value of materials purchased by the said unregistered sub-contractors not supported by bills and used in the construction work is to be treated as unregistered dealer purchased liable to tax under Section 3(2) of the KVAT Act, 2003. The tax liable to be paid was proposed to be determined on best judgment assessment basis under Section 39(1) of the KVAT Act, 2003. The assessee filed his objections and submitted some of the works are labour works without materials and secondly, the payments made to the sub-contractors are included in the receipts declared to tax while effecting sales of flats in the apartments. According to the assessee, the said materials are not used in the course of business by the assessee. Therefore, tax under Section 3(2) cannot be levied on him. If the goods are purchased for the purpose of resale, tax under Section 3(2) cannot also be invoked. The Audit Officer after examining the aforesaid contentions held, that the materials used by the sub-contractors who have been awarded certain works by the assessee are in effect purchases from URDs with bifurcation made by him to the extent of 70% as value of goods purchased by the assessee and balance 30% towards labour charges out of the payments made by the assessee. As these goods are used in the execution of works contract in a manner that these goods are transferred as they are incorporated into the buildings, liability under Section (2) exists. He rejected the objection and held the 70% of the payments made to the sub-contractors as value of goods, and the liability falls on the assessee to pay under Section 3(2) of the Act. He concluded the assessments under Section 39(1) and also levied penalty under Section 72(2) as well as interest under Section 36. Aggrieved by the said order of the Audit Officer, the assessee preferred an appeal before the Joint Commissioner of Commercial Taxes. The Joint Commissioner proceeded on the footing that when the unregistered dealers have purchased the taxable goods from unregistered dealers and used the same in the work executed for and on behalf of the appellant for which the appellant cannot be foisted with purchase tax under Section 3(2) of the Act. The burden of payment of purchase tax under Section 3(2) of the KVAT Act, 2003 is on the purchases made by unregistered sub-contractors. It cannot be shifted on the assessee and therefore, he held that the levy of purchase tax on the assessee is unwarranted and uncalled for and therefore, he deleted the said tax liability with interest and penalty. The Additional Commissioner of Commercial Taxes initiated suo moto proceedings under Section 64(1) of the KVAT Act. After hearing the assessee, he was of the view that the case falls under Section 3(2) of the Act. Further, he held that the labour charges are spent by the unregistered contractors. The assessee cannot claim expenses in the course of execution of the works contract and hence, the assessee is not entitled to deduction of 30% of the said value of the works contract. Therefore, he set aside the order passed by the first Appellate Authority, restored the order passed by the Audit Officer and to the extent of granting deduction to the extent of 30%, this order was also set aside. Aggrieved by the said order, the assessee is before this Court. 3. Sri. Kamath, learned counsel appearing for the assessee submitted, firstly that the case is not covered under Section 3(2) of the Act. Aggrieved by the said order, the assessee is before this Court. 3. Sri. Kamath, learned counsel appearing for the assessee submitted, firstly that the case is not covered under Section 3(2) of the Act. Though the assessee got the works done through unregistered sub-contractors, when he sold the flats, he has paid tax, which is inclusive of the tax payable by him for the purchase of the said goods and therefore, the authorities were wrong in holding that the case falls under Section 3(2) and not 3(1) of the Act. Secondly, he contended, admittedly, the assessee has not used the goods in the course of his business. In other words, he has not consumed the said materials. On the contrary, it is sold and therefore, Section 3(2) is not attracted, as the application of Section 3(2) is restricted to only cases of consumption of the goods purchased form an unregistered dealer not for resale but for use. Thirdly, he contended, even if it is to be held that the assessee has to pay tax under Section 3(2), as he has already paid output tax and is entitled to deduction, it is only a book adjustment, which he has to make. The Audit officer may be directed to make necessary corrections. Lastly, it was contended, if it is held, that the assessee is liable to pay tax under Section 3(2), he is entitled to 30% deduction towards labour charges as per Rule 3 of the KVAT Act, which is rightly granted by the Audit Officer, which is set aside erroneously by the Additional Commissioner of Commercial Taxes. He also submitted a portion of the work included is a pure labour contract for rock cutting, land grading and landscaping, in which event, he is entitled to 100% deduction. Per contra, learned counsel appearing for the revenue submitted, when once a registered trader purchases material/goods from an unregistered trader as the unregistered trader is not paying the tax for sale, the trader has to pay tax for purchase of such goods and in the event of he reselling the property, then if he pays any output tax, he would be entitled to deduction on his liability of tax. This is not a case, which falls under Section 3(1) of the Act, but under Section 3(2) of the Act, as rightly held by the Authorities and therefore, he submits that, there is no case made out of interference by this Court. 4. In order to appreciate this contention, it is necessary to look at the wordings of the charging Section 3, which reads as under: Section 3. Levy of Tax:- (1) The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act. (2) The tax shall also be levied, and paid by every registered dealer or a dealer liable to be registered, on the sale of taxable goods to him, for use in the course of his business, by a person who is not registered under this Act. Sub-section (1) of Section 3 expressly provides that, every sale of goods in the State by a registered dealer or a dealer liable to be registered attracts levy of tax. The person who sells such goods has to pay the tax after levying the same and collecting from the purchasers. Sub-section (2) of Section 3 deals with a case where the person who sells the goods is not registered under the Act. When such a person sells the goods, the tax is leviable and payable if the purchaser of goods is a registered dealer. In other words, if taxable goods are sold by a person who is not registered dealer to a person, who is not a registered dealer, no tax is leviable or payable. But, once the registered dealer purchases the taxable goods in the course of his business, from an unregistered dealer then sales tax is to be paid by him. In common parlance it is called as purchase tax. The liability to pay purchase tax arises only if purchase is made for use in the course of his business. It does not mean that the said business which he is carrying on should be only sale and purchase of such goods. The words employed are “use in the course of his business” and not mere “use”. The liability to pay purchase tax arises only if purchase is made for use in the course of his business. It does not mean that the said business which he is carrying on should be only sale and purchase of such goods. The words employed are “use in the course of his business” and not mere “use”. The use of the goods may be in the same condition if he is a re seller of the said goods may be a raw product which will be absorbed in the final product in respect of which he is carrying on business. The user of the goods purchased depends on the nature of his business. Therefore, if that registered dealer who purchase these goods, sells the goods in the same form or uses in the course of his business by absorbing the same as an input to the final product and then sells the final product, he is liable to levy and pay the sales tax for such input. The said words that Section 3 (2) applies only to a case where a registered dealer who purchase goods from the unregistered dealer, use the said goods in the same condition in the course of his business, is not tenable. Section 10 of the Act deals with output tax, input tax and net tax. A reading of the aforesaid section makes it clear if the goods purchased by such registered dealer from an unregistered dealer is absorbed in the final product sold by such registered dealer, he is entitled to levy and collect sales tax from the ultimate purchaser. On re-sale he can collect the tax from the ultimate purchaser and is entitled to the benefit of set off or deduction to that extent of purchase tax. However, he has to pay tax after purchase within the time prescribed and then seek for deduction of such tax from the output tax in accordance with law. However, for such sales Section 3(1) is not attracted. Though the registered dealer is entitled to deduction which is characterized as input tax from the output tax to be eligible for such deduction, the registered dealer must pay input tax immediately after such purchase or within the period prescribed. It is only on such payment, he would be entitled for deduction of the same from the output tax. Though the registered dealer is entitled to deduction which is characterized as input tax from the output tax to be eligible for such deduction, the registered dealer must pay input tax immediately after such purchase or within the period prescribed. It is only on such payment, he would be entitled for deduction of the same from the output tax. The law do not provide for book adjustment of these two taxes. The condition precedent for claiming deduction from the out put tax is the payment of input tax on such purchase. From the aforesaid facts, it is not in dispute that the assessee has paid a sum of 79,57,344/- to an unregistered sub-contractor for carrying out works like construction of road, markets, office, model flats, rock cutting, landscaping, etc. As the sub-contractors to whom the said payments made were unregistered, the sub-contractors did not collect the tax under the Act from the assessee. In other words, they did not levy any tax. Therefore, the assessee has not paid any tax, and Section 3(2) is attracted. Section 3 (2) of the Act deals with a case, which is not covered under Section 3(1). Therefore, we do not see any substance in the contention of the appellant in this regard. Having regard to the nature of the transaction, Rule 3 of KVAT Rules provides for determination of turn over for the purpose of this Act. Rule 3(1) deals with the total turn over of a dealer for the purpose of the Act. Rule 3(1A) states the total turn over of a dealer for the purpose of the Act shall be aggregate to the total amount paid or paid by the dealer as the consideration for the purchase of any of the goods in respect of which, tax is leviable under Section 3(2). However, Section 3(2) provides for deductions. It provides that the taxable turn over shall be determined by allowing the following deductions from the total turn over. Sub Clause (l) and (m) provide for deduction of the actual labour charges expended and in the absence of such labour charges, not ascertainable from the books of accounts maintained by the dealer, the amount deductable would be as per the table mentioned in the said sub-clause (m). In respect of civil works like construction of buildings, bridges, roads, etc., 30% is the labour and like charges, which is permitted to be deducted. In respect of civil works like construction of buildings, bridges, roads, etc., 30% is the labour and like charges, which is permitted to be deducted. Though the assessee has not spent any amount towards the labour charges, actually he has given the sub-contract and it is the sub-contractor who has spent the said amount. When the sub-contractor is an unregistered dealer and the entire work entrusted is calculated and taken into account in the accounts of the assessee, he is certainly entitled to the deduction of labour charges. As they are unable to show what is the actual amount expended, he is entitled to benefit of 30% of discount as prescribed under law. That apart, as submitted by the learned counsel for the appellant, if he has paid for landscaping, stone cutting, etc., in which event, there is no sale of goods, if he is able to demonstrate what is the amount paid towards stone cutting and landscaping, where there is no sale of goods, that mount has to be excluded from the total amount of Rs.79,57,344/-, which he has paid to the sub-contractor. It is an exercise to be done by the Audit Officer on the evidence, produced by the assessee and therefore the Additional Commissioner of Commercial Taxes was in error in holding that the assessee is not entitled to 30% deduction as he has not paid any labour charges. That finding is hereby set aside. When the assessee after utilizing the goods purchased from an unregistered dealer has put up a flat and he has sold it for consideration and if he has paid output tax on the total consideration received by him, certainly he would be entitled to deduction of input tax, provided, he has paid the input tax, first, then only he is entitled to deduction. It was submitted that output tax was paid before payment of input tax and therefore, it is only a book adjustment. We find it difficult to accept this submission. The question of giving deduction, out of output tax is only after input tax is paid. In the instant case, admittedly, input tax is not paid till today, so, only on payment of input tax, assessee is entitled to deduction and if he has already paid output tax certainly he would be entitled to deduction after paying the tax under Section 3(2) of the Act. In the instant case, admittedly, input tax is not paid till today, so, only on payment of input tax, assessee is entitled to deduction and if he has already paid output tax certainly he would be entitled to deduction after paying the tax under Section 3(2) of the Act. In that view of the matter, we pass the following order: ORDER I) The Appeal is partly allowed. II) The order of the Additional Commissioner of Commercial Taxes in revision to the extent of disallowing 30% deduction is hereby set aside. III) It is held that, the tax is payable under Section 3(2) of the Act. IV) In so far as the contention that, no tax is payable for work such as stone cutting and landscaping, where there is no sale of goods, which is also included in the aforesaid amount of Rs.79,57,344/- is concerned, it is a matter to be enquired into by the Audit Officer and therefore the Audit Officer is directed to give an opportunity to the assessee, after hearing him, and then to pass appropriate orders, adjudicating the expenditure of liability of the assessee under Section 3(2) of the Act. No. Costs.