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TMI Blog1964 (11) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... , for intervener No. 5. -------------------------------------------------- The judgment of the Court was delivered by WANCHOO, J.- These two appeals on certificates granted by the Madras High Court raise common questions and will be dealt with together. The appellant is a financing company consisting of a number of partners. Its main business is to advance money to persons who purchase motor vehicles but are themselves not in a position to find ready money to pay the price. The course of business followed by the appellant is to enter into hire-purchase agreements with those who want to purchase motor vehicles. It is necessary to refer to the terms of hire-purchase agreements which are on a set pattern in order to understand the points raised in these appeals. Any person desirous of acquiring a motor vehicle makes the selection of the make and type and fixes the price therefor which the motor dealer. Such person they approaches the appellant for financial assistance on a hire-purchase basis. Sometimes an initial payment is made to the motor dealer which is taken into account at the time of the hire- purchase agreement while at others the payment is made in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and the owner may without notice retake possession of the vehicle, and it shall be at the option of the owner to reinstate the contract on such conditions as it deems fit after the determination of the hiring as aforesaid: (clause 14). Upon the determination of the hiring as above, all arrears of rents up to the date of determination and all costs and expenses incurred by the owner in the exercise of the powers conferred by the agreement shall be paid by the hirer, and the hirer shall not be entitled to any repayment of any sum previously paid and all such rents and sums shall belong to the owner absolutely: (clause 15). The hirer may determine the hire at any time by delivering the vehicle to the owner and by paying him any part of the current rent due up to the date of such delivery and all other sums, if any, which up to such date, the hirer may have become liable to pay the owner under the agreement: (clause 18). Clause 20 of the agreement, which is important for our purposes, reads thus: "If the hirer shall duly observe and perform all the conditions and stipulations herein contained and on his part to be observed and per- formed and shall duly pay to the owner all rents h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this amount on the ground that hire- purchase agreements were not within the ambit of "sale" as defined in the Madras General Sales Tax Act, No. IX of 1939, (hereinafter referred to as the Act). But the Assistant Commercial Tax Officer made a provisional assessment on the basis of the return submitted by the appellant and fixed instalments for payment thereof. The appellant paid the instalments but preferred a revision to the Commercial Tax Officer objecting to the assessment mainly on the ground that hire- purchase agreements were not transactions of sale liable to be taxed under the Act. The revision was however dismissed on the ground that there was no necessity for interfering with the provisional assessment at that stage. Later, the Deputy Commercial Tax Officer passed the final order of assessment relating to the year 1955-56 holding that the hire-purchase transactions were subject to sales tax and overruled the objection that the transactions were only a system of financing and not sales. The appellant preferred an appeal to the Commercial Tax Officer against the order of assessment for the year 1955-56. That appeal is said to have been heard but no orders had been passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agent of such person. The High Court however held that there were two sales in these cases, first sale by the motor dealer to the appellant and the second by the appellant to the person who wanted to purchase the motor vehicle. Thus there were two distinct sales of the vehicle involved in the process by which the property in the vehicle passed from the dealer to the person who wanted to purchase it. It appears that sales tax was paid on the sale by the dealer and the contention of the appellant was that that was all the tax to which the transaction could be subjected. The High Court however held that as there were two sales involved in the transaction and the Act levied a multi-point tax on sales, tax could be levied again when the appellant sold the vehicle to the intending purchaser. The High Court then considered the nature of hire-purchase agreements, with particular reference to the agreement in the present case and held that a hire-purchase agreement of this kind had two elements, one of bailment and the other of sale, and rejected the contention of the appellant that such hire-purchase agreements were nothing more than hiring agreements involving bailment. Having held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of hire, the vehicle is seized by the appellant and therefore no title passes to the intending purchaser. (2) That these transactions of hire-purchase could having regard to their main intent and purpose be treated as sales at the moment the agreements were entered into, subject to adjustment by elimination of such portion of the turnover where no sale resulted. (3) That for the purpose of computing the turnover of the appellant, the total of the hire stipulated to be paid in instalments should be treated as price or consideration for the sale. " On this view the High Court dismissed the writ petitions. The appellant then applied for certificates which were granted ; and that is how the matter has come up before us. The matter first came up for hearing before us on August 31, 1964. It was then represented that there were provisions similar to Explanation 1 to section 2(h) of the Act in the Sales Tax Statutes of other States. We therefore decided to give notice to the Advocate- General of all States. It was also decided to give notice to the Attorney-General of India, particularly as the view taken by this Court in two earlier cases, namely Sales Tax Officer v. Messrs Budh Praka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aler to the person who wanted to purchase the vehicle at the time of the hire- purchase agreement, and that at that time the sale was by the dealer to the appellant. Then clauses 20 and 21 enforce this conclusion inasmuch as they give an option to the person who wanted to purchase the vehicle to do so by exercising his option under the conditions mentioned therein. If he had already become the owner when the agreement had been entered into, these two clauses could not have been included in the agreement. Then again clause 23 makes it clear that till the option is exercised the vehicle remains the absolute property of the appellant and the intending purchaser has no right in it except that of a hirer. We therefore agree with the High Court that in cases of this kind there are two sales, one by the dealer to the financier (namely, the appellant in this case) and the other by the financier (namely, the appellant) to the person who wanted to purchase the vehicle. As the Act levied a multi-point sales tax at the relevant time it was open to the State to tax both the sales and the fact that the sale by the dealer to the appellant had been taxed will not affect the liability of the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intending purchaser and remains in the intending seller. The Explanation recognises by using the words "deemed to be a sale" that there is no passing of the property at the time of the hire-purchase agreement, but provides by a fiction that the property shall be deemed to have passed notwithstanding the terms of the agreement. This deeming takes place under the Explanation immediately on the hire-purchase agreement being made. The contention on behalf of the appellant is that the State Legislature was not competent thus to expand the meaning of the words "sale of goods" used in Entry 54 of List II of the Seventh Schedule to the Constitution, which corresponds to Entry 48 of the Provincial List of the Government of India Act, 1935, and make something a sale which is not a sale under the law contained in the Indian Sale of Goods Act. It is clear that if the Explanation is good, the second sale in the present case must be held to have taken place at the time the hire-purchase agreement was made. On the other hand, if the Explanation is beyond the competence of the State Legislature and falls, the sale cannot be said to have taken place when the hire-purchase agreement was made and ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Schedule to the Constitution, which refers to taxes on sale of goods where such sale takes place in the course of inter-State trade or commerce and to the provisions of the Central Sales Tax Act, No. 74 of 1956, where "sale" has been defined as including a "transfer of goods on the hire-purchase or other system of payment by instalments." It is urged that this definition of "sale" under the Central Sales Tax Act shows that the words "sale of goods" used in Entry 92-A have a wider meaning. We are of opinion that there is no force in this argument, for the Central Sales Tax Act was passed by Parliament and its validity has to be considered not only with reference to Entry 92-A of List I of the Seventh Schedule to the Constitution but also with reference to Article 248(2) of the Constitution read with Entry 97 of List I of the Seventh Schedule to the Constitution. The fact that the definition of "sale" in the Central Sales Tax Act includes words contained in Explanation I therefore is of no help in construing the meaning of the words "sale of goods", which have been authoritatively pronounced upon by this Court in Gannon Dunkerley's case [1959] S.C.R. 379; 9 S.T.C. 353, following Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the very date on which it is made, even though no property passes from the seller to the buyer on that date. In this view of the matter it must be held taking into account the purpose, the intention and the interpretation of Explanation 1 that it is beyond the competence of the State Legislature. It must therefore be held to be invalid and struck down accordingly. The next question that arises is whether a hire-purchase agreement ever ripens into a sale and if so when. We have already pointed out that a hire-purchase agreement has two elements: (i) element of bailment, and (ii) element of sale, in the sense that it contemplates an eventual sale. The element of sale fructifies when the option is exercised by the intending purchaser after fulfilling the terms of the agreement. When all the terms of the agreement are satisfied and the option is exercised a sale takes place of the goods which till then had been hired. When this sale takes place it will be liable to sales tax under the Act for the taxable event under the Act is the taking place of the sale, the Act providing for a multi-point sales tax at the relevant time. Where however option is not exercised or cannot be exerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his entire amount. We are of opinion that neither of these two contentions is correct. It stands to reason that Re. 1 cannot be the price of a vehicle in these cases for even if the vehicle is treated as second-hand when the option is exercised, the sum of Re. 1 would be an absurd price for a second-hand vehicle of the kind with which we are concerned. The argument in this connection is that the entire amount paid as hire is really for hire and the price is only the sum of Re. 1 which is paid for the option which finally results in sale. This contention overlooks the essence of hire-purchase agreement which is that the hire includes not only what would be pay- able really as hire but also a part of it is towards the price. The contention that the price is only Re. 1 which is paid for the option there- fore cannot be accepted. On the other hand, the contention on behalf of the respondent that the price is the entire amount paid as hire including Re. 1 paid for the option also does not seem to be correct. This ignores the fact that at any rate part of what is paid as hire is really towards the hire of the vehicle for the period when the hirer is only a hirer. This will also be clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a certain annual sum was paid for a period of years for a certain number of wagons. By the terms of the agreements the coal company during the periods of the payments used the wagons at its own risk and was bound to keep them in repair, and at the end of the period it had the option of purchasing the wagons at the nominal price of one shilling for each wagon. It will be seen that the agreement was in the nature of a hire-purchase agreement of wagons. The question then arose whether any deductions from profits could be allowed to the coal company in the circumstances. It was held that the annual payments under the agreements were divisible into two, namely, (i) consideration paid for the use of the wagons, and (ii) payments for an option at a future date to purchase the wagons at a nominal price. It was also held that in so far as the payments represented the consideration for the use of the wagons during the period of agreement they were admissible as deduction in the computation of the coal company's profits for the purpose of assessment to income-tax. It was observed that it was perfectly clear that during the course of the period of years the wagon still was the property of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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