TMI Blog1964 (11) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the condition of the vehicle at the time of the second sale. It is therefore for the Sales Tax Authorities to find out the price of the vehicle on which tax has to be paid in either of the ways indicated by us above or such other way as may be just and reasonable and thereafter proceed to levy sales tax according to law. - Civil Appeal No. 245, & 246 of 1963, W.P. No. 500, & 671 of 1957, - - - Dated:- 10-11-1964 - GAJENDRAGADKAR P.B., WANCHOO K.N., HIDAYATULLAH M., RAGHUBAR DAYAL AND MUDHOLKAR J.R. JJ. C.B. Agarwala, Senior Advocate (O.P. Rana with him), for intervener No. 8. R.N. Sachthey, for intervener No. 7. A. Ranganadham Chetty, Senior Advocate (V. Ramaswamy and A.V. Rangam with him), for the respondent (in both the appeals) and intervener No. 6. V.P. Gopalan Nambiar, Advocate-General for the State of Kerala (Dr. V.A. Seyid Muhammad with him), for intervener No. 4. S.V. Gupta, Solicitor-General of India (B.R.G.K. Achar with him), of intervener No.1. B.V. Subramaniam, Advocate-General for the State of Andhra Pradesh (B.R.G.K Achar with him), for intervener No. 2. Naunit Lal, for intervener No. 3. M. Adhikari, Advocate-Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vehicle in good and serviceable repair, order and condition to the satisfaction of the owner, and he is also to insure and keep insured the vehicle against loss or damage by fire, accident and third party risks and punctually pay premia and all moneys payable in respect of such insurance: (see clause 3). The hirer has further to pay all taxes, licence fees, duties, fines, registration charges and other charges payable in respect of the vehicles and all rents and outgoings payable by the hirer in respect of the premises where the vehicle is kept or garaged when the same respectively becomes due: [see clause 3(e)]. He has also to satisfy the owner about all the above things having been duly done. He cannot sell, charge, pledge, assign or part with possession of the vehicle: [clause 3(g)]. The hirer has also to make good all damages to the vehicle, (fair wear and tear excepted) and pay the owner the full value of the vehicle in the event of total loss, whether the damage or loss be caused accidentally otherwise and to keep the vehicle at the sole risk of the hirer until the hirer purchase the vehicle or returns it to the owner: (clause 5). If the hirer makes default in the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement it shall remain the absolute property of the owner, and the hirer shall have no right or interest in the same other than as the hirer under the agreement. The agreement is not assignable: (clause 24). It is unnecessary to refer to the other clauses of the agreement as they are immaterial for our purposes. After such an agreement has been made, the hirer takes possession of the vehicle and if all its terms are carried out, the hirer becomes the owner of the vehicle when he exercises his option to purchase the vehicle after paying the sum of Re. 1 including the instalments then outstanding, if any. The appellant commenced business in February, 1955, and in the course of such business entered into several hire-purchase agreements relating to motor vehicles both new and second-hand. On April 28, 1956, the appellant submitted a return to the Assistant Commercial Tax Officer, Coimbatore, showing a turnover for the purposes of sales tax for Rs. 2,37,993 for the year 1955-56. The appellant had also collected (though it now claims that it was done erroneously) from the hirers of motor vehicles amounts equivalent to sales tax on their transactions and those amounts were kept in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nth Schedule to the Constitution and Entry 48 of List II of the Seventh Schedule to the Government of India Act, 1935, beyond what it meant in the Indian Sale of Goods Act, No. 3 of 1930. The State Legislature therefore could not arrogate to itself the power to levy a tax in respect of transactions which in form and in substance did not constitute sales as understood in the Indian Sale of Goods Act by merely adopting a wide definition. It was therefore incompetent for the State Legislature to enact Explanation 1. If the Explanation falls on account of the incompetence of the Legislature, no sales tax could be levied on hire-purchase transactions in view of Article 265 of the Constitution which lays down that "no tax shall be levied or collected, except by authority of law". These two writ petitions along with a number of others of the same kind dealing with hire-purchase agreements were heard by the High Court together. The first question to which the High Court addressed itself was whether there were two sales in this case or only one sale, for the contention on behalf of the appellant apparently was that there was only one sale by the dealer to the person who wanted to purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself would not amount to a sale. Such transactions could not in the view of the High Court be brought within the charging provisions of the section. The High Court therefore held that Explanation 1 to section 2(h) of the Act referred to those hire-purchase agreements only which fructify into sale and not to those which did not, and in this view of the matter upheld the validity of the Explanation. The High Court then considered when the tax should be levied even in those cases which fructify into sales. It held that where a hire-purchase agreement fructifies and results in a sale there could be no impediment in the way of the tax being levied even when the hire- purchase agreement is entered into. The High Court then considered the question as to what would be the quantum of consideration for the sale that is ultimately effected, and held that the total of all the instalments paid made up the sale price, though they were designated as instalments of hire. The High Court summed up its conclusion thus: "(1) That the transactions of hire-purchase entered into by the appellant constituted sales, rendering it liable to sales tax on its turnover, excepting in cases where owing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st month and is made to the appellant. So far as the dealer is concerned the whole price is paid by the appellant. The agreement also shows that the appellant is the owner of the vehicle and the intending purchaser is merely a hirer thereunder. The vehicle has to be registered in the name of the appellant, though the fact of registration by itself in one name or another may not be determinative of the ownership of the vehicle. Clause 14 and 15 of the agreement clearly show that there was no sale by the dealer to the intending purchaser of the vehicle at the time of the hire-purchase agreement. These clauses give power to the appellant to retake possession of the vehicle and determine the agreement. Now if the property in the vehicle had passed to the intending purchaser at the time of the hire-purchase agreement it would not have been open to the appellant to take possession of the vehicle or to insist on payment of arrears or to become entitled to everything that had been paid up to that day. Under the law all that the appellant would have been entitled to was to realise the loan he had given by filing a suit and then attaching and selling the vehicle. These two clauses are ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase agreement, as its very name implies, has two aspects. There is first an aspect of bailment of the goods subjected to the hire-purchase agreements, and there is next an element of sale which fructifies when the option to purchase, which is usually a term of hire-purchase agreements, is exercised by the intending purchaser. Thus the intending purchaser is known as the hirer so long as the option to purchase is not exercised, and the essence of a hire-purchase agreement properly so-called is that the property in the goods does not pass at the time of the agreement but remains in the intending seller, and only passes later when the option is exercised by the intending purchaser. The distinguishing feature of a typical hire-purchase agreement therefore is that the property does not pass when the agreement is made but only passes when the option is finally exercised after complying with all the terms of the agreement. Explanation I specifically brings out this characteristic of hire- purchase agreements. It provides that a transfer of goods on hire-purchase or other instalment system of payment (which presumably is of the same type as the hire-purchase agreement) shall be deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include an agreement to sell. The matter came up again before this Court in Gannon Dunkerley's case [1959] S.C.R. 379; 9 S.T.C. 353., and it was held that the expression "sale of goods" was at the time when the Government of India Act was enacted a term of well recognised legal import in the general law relating to sale of goods and in the legislative practice relating to that topic and must be interpreted in Entry 48 in List II in the Seventh Schedule as having the same meaning as in the Sale of Goods Act. Entry 54 of List II of the Seventh Schedule to the Constitution uses the same words (namely, taxes on sale of goods) as in Entry 48 of List II of the Seventh Sche- dule to the Government of India Act and therefore the words must bear the same meaning as explained in these two cases. Learned counsel for the respondent however urges that the view taken by this Court in Gannon Dunkerley's case [1959] S.C.R. 379; 9 S.T.C. 353, requires reconsideration. We have given our earnest consideration to this argument and are of opinion that considering that that view has stood for so many years and has been accepted in later cases, there is no case made out for reconsideration thereof. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Legislature. It is urged however that the property eventually does pass from the seller to the buyer when the option is exercised and other terms of the hire-purchase agreement are fulfilled and therefore the Explanation should be read as confined to those cases only where property does eventually pass from the seller to the buyer. We are of opinion that this argument cannot be accepted, for the intention of the Explanation clearly is to provide that the hire-purchase agreement shall be deemed to be a sale immediately on the date it is made, even though property has not passed from the seller to the buyer on that day. If this were not the real purpose and intention of Explanation I, its enactment would be entirely unnecessary for the main definition of "sale" under section 2(h) will apply to a hire-purchase agreement at the time when the property passes from the seller to the buyer on the option being exercised and on other terms of the agreement being fulfilled. We cannot therefore agree with the High Court that the Explanation should be confined only to those cases where the property does eventually pass for the obvious intention of the legislature in enacting the Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible when the option has been exercised and all the terms of the agreement fulfilled and the sale actually takes place. When sale takes place in a particular case will depend upon the terms of the hire- purchase agreement but till the sale takes place there can be no liability to sales tax under the Act. The High Court therefore was in error in holding that transactions of hire-purchase of the kind with which we are dealing having regard to their main intent and purpose might be treated as sales at the time the agreement is entered into; in all hire-purchase agreements of the type with which we are dealing sale only takes place when the option is exercised after all the terms of the agreement are fulfilled and it is at that time that the tax is exigible. This brings us to the last question, namely, what is the quantum of sale price which is to be the basis of taxation under the Act. The argument on behalf of the appellant in this connection is that the sale price in the particular cases with which we are concerned is only Re. 1 which the hirer has to pay when he exercises his option to purchase. On the other hand, the contention on behalf of the respondent is that the sale pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the price of the vehicle when the option is exercised would be this. Its value at that time is neither Re. 1 which is the nominal amount to be paid for the option nor the entire amount which is paid as hire including Re. 1. The value must be something less than the original price, which in the example men- tioned by us above was Rs. 5,000. In order to arrive at the value at the time of the second sale to the hirer, the Sales Tax Authorities should take into consideration the depreciation of the vehicle and such other matters as may be relevant in arriving at such price on which the sale can be said to have taken place when the option is exercised, but that price must always be less than the original price (which was Rs. 5,000 in the example given above by us). We may in this connection refer to Darngavil Coal Company v. Francis [1913] 7 Tax Cas. 1. That was a case under the (English) Income Tax Act, and the question that directly arose for consideration was with respect to deductions to be allowed from profits in the circumstances of that case. The facts were these: The appellant, a coal company, in order to obtain railway wagons for the conveyance of coal from its collieries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not agree. This case in our opinion brings out the true nature of the payment made as hire in hire-purchase agreement. Part of the amount is towards the hire and part towards the payment of price, and it would be for the Sales Tax Authorities to determine in an appropriate way the price of the vehicle on the date the hirer exercises his option and becomes the owner of the vehicle after fulfilling the terms of the agreement. There is no legislative guidance available as to how this should be done and perhaps it would be better if the Legislature gives guidance in such matters. But even in the absence of legislative guidance it would be for the Sales Tax Authorities to decide as best they can the value of the vehicle on the date the option is exercised and the property passes to the hirer. There may be two ways of doing it. The Sales Tax Authorities may split up the hire into two parts, namely, the amount paid as consideration for the use of the vehicle so long as it was the property of the owner, and the payment for the option on a future date to purchase the vehicle at a nominal price. If the first part is determined the rest would be towards the payment of price. The first pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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