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K.L. Johar and Company Vs. Deputy Commercial Tax Officer - Court Judgment

LegalCrystal Citation
SubjectSales Tax
CourtSupreme Court of India
Decided On
Judge
Reported in[1965]2SCR112
ActsMadras General Sales Tax Act, 1939 - Sections 2; Government of India Act 1935; Indian Sale of Goods Act, 1930 - Sections 4; Constitution of India - Articles 265 and 248(2); General Law
AppellantK.L. Johar and Company
RespondentDeputy Commercial Tax Officer
Cases ReferredDarngavil Coal Company v. Francis
Excerpt:
sales tax - assessment - section 2 of madras general sales tax act, 1939, government of india act, 1935, section 4 of indian sale of goods act, 1930, articles 265 and 248 (2) of constitution of india and general law - appeal to commercial tax officer against order of assessment by deputy commercial tax officer - order not passed by said authority - petition filed in high court - doubts prevailed over provisional assessment and final assessment - appellant contended levy in respect of hire purchase transaction illegal and unconstitutional - agreement having two elements contract of bailment and contract of sale - high court rejected contention of appellant - transaction of hire purchase constitutes sale - liable to be taxed - sale takes place when option of selling is exercised and all.....wanchoo, j.1. these two appeals on certificates granted by the madras high court raisecommon questions and will be dealt with together. the appellant is a financingcompany consisting of a number of partners. its main business is to advancemoney to persons who purchase motor vehicles but are themselves not in aposition to find ready money to pay the price. the course of business followedby the appellant is to enter into hire-purchase agreements with those who wantto purchase motor vehicles. it is necessary to refer to the terms ofhire-purchase agreements which are on a set pattern in order to understand thepoints raised in these appeals. 2. any person desirous of acquiring a motor vehicle makes the selection ofthe make and type and fixes the price therefore with the motor dealer......
Judgment:

Wanchoo, J.

1. These two appeals on certificates granted by the Madras High Court raisecommon questions and will be dealt with together. The appellant is a financingcompany consisting of a number of partners. Its main business is to advancemoney to persons who purchase motor vehicles but are themselves not in aposition to find ready money to pay the price. The course of business followedby the appellant is to enter into hire-purchase agreements with those who wantto purchase motor vehicles. It is necessary to refer to the terms ofhire-purchase agreements which are on a set pattern in order to understand thepoints raised in these appeals.

2. Any person desirous of acquiring a motor vehicle makes the selection ofthe make and type and fixes the price therefore with the motor dealer. Suchperson then approaches the appellant for financial assistance on ahire-purchase basis. Sometimes an initial payment is made to the motor dealerwhich is taken into account at the time of the hire-purchase agreement while atothers the payment is made in a number of instalments to the appellant. Ineither case the appellant pays the price or the balance thereof to the dealerand thereafter the hire-purchase agreement is entered into between theappellant and the person who wants to purchase the motor vehicle. The appellantis described in the agreement as the owner of the vehicle and the person whowants to purchase it as the hirer.

3. The material terms of the agreement may be summarised here. The agreementprovides that the owner (namely, the appellant) will let and the hirer (namely,the person who wants to purchase the vehicle) will take on hire the vehicle inquestion for such period as may be fixed in each case, (clause 1). The hirerhas to pay a certain amount per month to the owner and where an initial depositis made this amount is larger for the first month and other monthly paymentsare smaller. The hirer has to pay during the period of hire the monthly instalment,the vehicle is registered in the name of the owner and the hirer is forbiddento represent himself as the owner thereof or to do anything to suggest that heis the owner thereof; the hirer has to keep the vehicle in good and serviceablerepair, order and condition to the satisfaction of the owner, and he is also ininsure and keep insured the vehicle against loss or damage by fire, accidentand third party risks and punctually pay premia and all moneys payable inrespect of such insurance : (see clause 3). The hirer has further to pay alltaxes, licence fees, duties, fines, registration charges and other chargespayable in respect of the vehicle and all rents and outgoings payable by thehirer in respect of the premises where the vehicle is kept or garaged when thesame respectively become due : [see clause 3 (e)]. He has also to satisfy theowner 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 hirerhas 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 or otherwise and to keep thevehicle at the sole risk of the hirer until the hirer purchases the vehicle orreturns it to the owner : (clause 5). If the hirer makes default in the paymentof any rent for seven days, the hiring immediately determines and the owner maywithout notice retake possession of the vehicle, and it shall be at the optionof the owner to reinstate the contract on such conditions as it deems fit afterthe determination of the hiring as aforesaid : (clause 14). Upon thedetermination of the hiring as above, all arrears of rents upto the date ofdetermination and all costs and expenses incurred by the owner in the exerciseof the powers conferred by the agreement shall be paid by the hirer, and thehirer shall not be entitled to any repayment of any sum previously paid and allsuch rents and sums shall belong to the owner absolutely : (clause 15). Thehirer may determine the hire at any time by delivering the vehicle to the ownerand by paying him any part of the current rent due upto the date of suchdelivery and all other sums, if any, which upto such date, the hirer may havebecome liable to pay the owner under the agreement : (clause 18). Clause 20 ofthe agreement, which is important for our purposes reads thus :-

'If the hirer shall duly observe and perform allthe conditions and stipulations herein contained and on his part to be observedand performed and shall duly pay to the owner all rents hereby reserved duringthe term of hiring together with all other sums, if any payable by him to theowner under the provisions of this agreement, then and at the termination ofthe hiring, the hirer may purchase the vehicle from the owner for a sum of Re.1/-.'

4. Clause 21 provides that the hirer may at any time determine the hiringand become purchaser of the vehicle by paying to the owner such sum as togetherwith the sums previously paid will amount to the total sum payable by way ofrent thereunder together with all sums (if any) payable to the owner and inaddition a sum of Re. 1/-. Clause 22 provides that 'if the hirer fails toobserve and perform the conditions and stipulation herein contained and failsto exercise the option of purchasing the vehicle in accordance with theprovisions of the last preceding clause, and the vehicle is not returned to theowner on the termination of the hiring, the hirer shall pay the owner a certainsum every month until the vehicle is handed over to the owner by thehirer.' Clause 23 provides that until the vehicle shall have become theproperty of the hirer under the provisions of the agreement it shall remain theabsolute property of the owner, and the hirer shall have no right or interestin the same other than as the hirer under the agreement. The agreement is notassignable : (clause 24). It is unnecessary to refer to other clauses of theagreement as they are immaterial for our purposes. After such an agreement hasbeen made, the hirer takes possession of the vehicle and if all its terms arecarried out, the hirer becomes the owner of the vehicle when he exercises hisoption to purchase the vehicle after paying the sum of Re. 1/- including theinstalments then outstanding, if any.

5. The appellant commenced business in February 1955 and in the course ofsuch business entered into several hire-purchase agreements relating to motorvehicles both new and second-hand. On April 28, 1956, the appellant submitted areturn to the Assistant Commercial Tax Officer, Coimbatore, showing a turnoverfor the purposes of sales tax for Rs. 2,37,993/- for the year 1955-56. Theappellant had also collected (though it now claims that it was doneerroneously) from the hirers of motor vehicles amounts equivalent to sales taxon their transactions and those amounts were kept in suspense account. Thehirers however began to claim refund of this amount on the ground that hire-purchaseagreements were not within the ambit of 'sale' as defined in theMadras General Sales Tax Act, No. IX of 1939, (hereinafter referred to as theAct). But the Assistant Commercial Tax Officer made a provisional assessment onthe basis of the return submitted by the appellant and fixed instalments forpayment thereof. The appellant paid the instalments but preferred a revision tothe Commercial Tax Officer objecting to the assessment mainly on the groundthat hire-purchase agreements were not transactions of sale liable to be taxedunder the Act. The revision was however dismissed on the ground that there wasno necessity for interfering with the provisional assessment at that stage.Later, the Deputy Commercial Tax Officer passed the final order of assessmentrelating to the year 1955-56 holding that the hire-purchase transactions weresubject to sales tax and overruled the objection that the transactions wereonly a system of financing and not sales. The appellant preferred an appeal tothe Commercial Tax Officer against the order of assessment for the year1955-56. That appeal is said to have been heard but no orders had been passedthereon, when the writ petition was filed in the High Court on June 29, 1957.In the meantime provisional assessment had been made for the year 1956-57 andthe appellant was being pressed to pay that amount also. Consequently theappellant filed a writ petition on June 29, 1957 challenging the provisionalassessment with respect to the year 1956-57. Later he filed another writ petitionon August 18, 1957 challenging the final assessment for the year 1955-56.

6. The main contention of the appellant in the two writ petitions, was thatlevy of sales tax in respect of hire purchase transactions was illegal andunconstitutional as Explanation I to s. 2(h) of the Act defining'sale' was beyond the competence of the State legislature. TheExplanation is in these terms :-

'A transfer of goods on the hire-purchase or otherinstalment system of payment shall, notwithstanding the fact that the sellerretains the title in the goods as security for payment of the price, be deemedto be a sale.'

7. The appellant contended that this amounted to an extension of the meaningof the word 'sale' as used in Entry 54, List II of the SeventhSchedule to the Constitution and Entry 48 of List II of the Seventh Schedule tothe Government of India Act 1935 beyond what it meant in the Indian Sale ofGoods Act, No. 3 of 1930. The legislature therefore could not arrogate toitself the power to levy a tax in respect of transactions which in form and insubstance did not constitute sales as understood in the Indian Sale of GoodsAct by merely adopting a wide definition. It was therefore incompetent for theState legislature to enact Explanation I. If the Explanation falls on accountof the incompetence of the legislature, no sales tax could be levied onhire-purchase transactions in view of Art. 265 of the Constitution which laysdown that 'no tax shall be levied or collected, except by authority of law'.

8. These two writ petitions along with a number of others of the same kinddealing with hire-purchase agreements were heard by the High Court together.The first question to which the High Court addressed itself was whether therewere two sales in this case or only one sale, for the contention on behalf ofthe appellant, apparently was that there was only one sale by the dealer to theperson who wanted to purchase the motor vehicle and that the appellant wasmerely a financing agent of such person. The High Court however held that therewere two sales in this cases, first sale by the motor dealer to the appellantand the second by the appellant to the person who wanted to purchase the motorvehicle. Thus there were two distinct sales of the vehicle involved in theprocess by which the property in the vehicle passed from the dealer to theperson who wanted to purchase it. It appears that sales tax was paid on thesale by the dealer and the contention of the appellant was that was all the taxto which the transaction could be subjected. The High Court however held thatas there were two sales involved in the transaction and the Act levied amultipoint tax on sales, tax could be levied again when the appellant sold thevehicle to the intending purchaser.

9. The High Court then considered the nature of hire-purchase agreements,with particular reference to the agreement in the present case and held that ahire-purchase agreement of this kind had two elements, one of bailment and theother of sale, and rejected the contention of the appellant that suchhire-purchase agreements were nothing more than hiring agreements involvingbailment. Having held that the hire-purchase agreement of this type involvedtwo elements which were both real (i.e. element of bailment and element ofsale), the next question to which the High Court addressed itself was whethertax liability could be fastened on the appellant immediately it entered intothe agreement of hire-purchase or whether the tax could only beconstitutionally and legally levied after the intending purchaser had exercisedthe option which resulted in the transfer of property in the vehicle to suchperson. The High Court held that in most of the transactions of this nature theintending purchaser pays up the instalments and exercises the option and thusacquires title to the vehicle. But there might be cases where such a personmight be unable to become the owner, in the sense of obtaining the title to thevehicle by paying the instalments. In such a case the property would remainwith the appellant and bailment element would be the only element, the optionto purchase having not been exercised. In this latter class of cases, therewould be no sale, though there was an agreement granting an option to purchasewhich by itself would not amount to a sale. Such transactions could not in theview of the High Court be brought within the charging provisions of thesection. The High Court therefore held that Explanation I to section 2(h) ofthe Act referred to those hire-purchase agreements only which fructify intosale and not to those which did not, and in this view of the matter upheld thevalidity of the Explanation.

10. The High Court then considered when the tax should be levied even inthose cases which fructify into sales. It held that where a hire- purchaseagreement fructifies and results in a sale there could be no impediment in theway of the tax being levied even when the hire- purchase agreement is enteredinto. The High Court then considered to the question as to what would be thequantum or consideration for the sale that is ultimately effected, and heldthat the total of all the instalments paid made up the sale price, though theywere designated as instalments of hire.

The High Court summed up its conclusion thus :

(1) That the transaction ofhire-purchase entered into by the appellant constitute sales, rendering itliable to sales tax on its turnover, excepting in cases where owing to thedefault on the part of the hirer in the payment of instalments of hire, thevehicle is seized by the appellant and therefore no title passes to theintending purchaser.

(2) That these transactions ofhire-purchase could having regard to their main intent and purpose be treatedas sales at the moment the agreements were entered into, subject to adjustmentby elimination of such portion of the turnover where no sale resulted;

(3) That for the purpose ofcomputing the turnover of the appellant, the total of the hire stipulated to bepaid in instalments should be treated as price or consideration for the sale.

11. On this view the High Court dismissed the writ petitions. The appellantthen applied for certificates which were granted; and that is how the matterhas come up before us.

12. The matter first came up for hearing before us on August 31, 1964. Itwas then represented that there were provisions similar to Explanation I tosection 2(h) of the Act, in the sales tax statutes of other States. Wetherefore decided to give notice to the Advocates General of all States. It wasalso decided to give notice to the Attorney- General of India, particularly asthe view taken by this Court in two earlier cases, namely, the Sales TaxOfficer v. Messrs. Budh Prakash Jai Prakash : [1955]1SCR243 and the Stateof Madras v. Gannon Dunkerley & Co. : [1959]1SCR379 was being assailedas incorrect. The appeals were then finally heard on September 29, 1964 andsubsequent dates after such notice had been served.

13. The first question that has been urged before us is that there wasreally one sale in the present case by the motor dealer to the intendingpurchaser of the vehicle and that the appellant was a mere financing agent ofsuch person and that the High Court was in error in holding that there were twosales one by the dealer to the appellant and the other by the appellant to theperson who intended to purchase the vehicle. We are of opinion that the viewtaken by the High Court in this behalf is correct. This will be clear from aconsideration of the various terms of the hire purchase agreement which we havealready summarised above. That agreement shows that the whole of the price ofthe vehicle is paid by the appellant to the dealer. Even where a part of theprice is paid by the intending purchaser, the payment is shown as hire for thefirst month and is made to the appellant. So far as the dealer is concerned thewhole price is paid by the appellant. The agreement also shows that theappellant is the owner of the vehicle and the intending purchaser is merely ahirer thereunder. The vehicle has to be registered in the name of theappellant, though the fact of registration by itself in one name or another maynot be determinative of the ownership of the vehicle. Clauses 14 and 15 of theagreement clearly show that there was no sale by the dealer to the intendingpurchaser of the vehicle at the time of the hire-purchaser agreement. Theseclauses give power to the appellant to retake possession of the vehicle anddetermine the agreement. Now if the property in the vehicle had passed to theintending purchaser at the time of the hire- purchase agreement it would nothave been open to the appellant to take possession of the vehicle or to insiston payment of arrears or to become entitled to everything that had been paidupto that day. Under the law all that the appellant would have been entitled towas to realise the loan he had given by filing a suit and then attaching andselling the vehicle. These two clauses are therefore clear indication of thefact that there was no sale by the dealer to the person who wanted to purchasethe vehicle at the time of the hire- purchase agreement, and that at that timethe sale was by the dealer to the appellant. Then clauses 20 and 21 enforcethis conclusion inasmuch as they give an option to the person who wanted topurchase the vehicle to do so by exercising his option under the conditionsmentioned therein. If he had already become the owner when the agreement hadbeen entered into, these two clauses could not have been included in theagreement. Then again clause 23 makes it clear that till the option isexercised the vehicle remains the absolute property of the appellant and theintending purchaser has no right in it except that of a hirer. We thereforeagree with the High Court that in cases of this kind there are two sales, oneby the dealer to financier (namely, the appellant in this case) and the otherby the financier (namely, the appellant) to the person who wanted to purchasethe vehicle. As the Act levied a multi-point sales tax at the relevant time itwas open to the State to tax both the sales and the fact that the sale by thedealer to the appellant had been taxed will not affect the liability of thesecond sale by the financier to the person who wanted to purchase the vehicle.What is the extent of that liability and when is that tax to be levied will beconsidered by us in connection with the second contention urged on behalf ofthe appellant.

14. This brings us to a consideration of the validity of Explanation I,which we have already set out. It is necessary in this connection to understandthe nature of a typical hire purchase agreement as distinct from a sale inwhich the price is to be paid later by instalments. In the case of a sale inwhich the price is to be paid by instalments, the property passes as soon asthe sale is made, even though the price has not been fully paid and may later bepaid in instalments. This follows from the definition of sale in section 4 ofthe Indian Sale of Goods Act (as distinguished from an agreement to sell) whichrequires that the seller transfers the property in the goods to the buyer for aprice. The essence of a sale is that the property is transferred from theseller to the buyer for a price, whether paid at once or paid later ininstalments, on the other hand, a hire purchase agreement, as its very nameimplies, has two aspects. There is first an aspect of bailment of the goodssubjected to the hire purchase agreement, and there is next an element of salewhich fructifies when the option to purchase, which is usually a term of hirepurchase agreements is exercised by the intending purchaser. Thus the intendingpurchaser is known as the hirer so long as the option to purchase is notexercised, and the essence of a hire purchase agreement properly so called isthat the property in the goods does not pass at the time of the agreement butremains in the intending seller, and only passes later when the option isexercised by the intending purchaser. The distinguishing feature of a typicalhire purchase agreement therefore is that the property does not pass when theagreement is made but only passes when the option is finally exercised aftercomplying with all the terms of the agreement.

15. Explanation I specifically brings out characteristic of hire purchaseagreements. It provides that a transfer of goods on hire purchase or otherinstalment system of payment (which presumably is of the same type as the hirepurchase agreement) shall be deemed to be a sale, even though the property inthe goods does not pass to the intending purchaser and remains in the intendingseller. The Explanation recognises by using the words 'deemed to be asale' that there is no passing of the property at the time of the hirepurchase agreement, but provides by a fiction that the property shall be deemedto have passed notwithstanding the terms of the agreement. This deeming takesplace under the Explanation immediately on the hire purchase agreement beingmade.

16. The contention on behalf of the appellant is that the State legislaturewas not competent thus to expand the meaning of the words 'sale ofgoods' used in Entry 54 of List II of the Seventh Schedule to theConstitution, which corresponds to Entry 48 of the Provincial List of theGovernment of India Act, 1935, and make something a sale which is not a saleunder the law contained in the Indian Sale of Goods Act. It is clear that ifthe Explanation is good, the second sale in the present case must be held tohave taken place at the time the hire purchase agreement was made. On the otherhand, if the Explanation is beyond the competence of the State legislature andfalls, the sale cannot be said to have taken place when the hire purchaseagreement was made and can only take place when the option is exercised afterall the terms of the agreements have been satisfied.

17. This Court had occasion to deal with the interpretation of Entry 48 ofList II of the Seventh Schedule to the Government of India Act, 1935 in TheSales Tax Officer v. Messrs. Budh Prakash Jai Prakash : [1955]1SCR243 . Itheld that Entry 48 in question conferred power on the Provincial legislature toimpose a tax only when there had been a completed sale and not when there wasonly an agreement to sell. It was pointed out that there was a well defined andwell established distinction between a sale and an agreement to sell.Consequently, the definition in section 2(h) of the U.P. Sales Tax Act, No. XVof 1948, enlarging the meaning of the word 'sale' so as to includeforward contracts was to that extent declared ultra vires. That case dealt withforward contracts but it brings out the distinction between a sale and anagreement to sell and it was held that the State legislature had no power underthe relevant Entry in the Government of India Act to extend the definition ofsale so as to include an agreement to sell.

18. The matter came up again before this Court in Gannon Dunkerley's : [1959]1SCR379 case 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 wellrecognised legal import in the relating to sale of goods and in the legislativepractice relating to that topic and must be interpreted in Entry 48 in List IIof 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 samewords (namely, taxes on sale of goods) as in Entry 48 of List II of the SeventhSchedule to the Government of India Act and therefore the words must bear thesame meaning as explained in these two cases.

19. Learned counsel for the respondent however urges that the view taken bythis Court in Gannon Dunkerley's : [1959]1SCR379 case requiresreconsideration. We have given our earnest consideration to this argument andare of opinion that considering that view has stood for so many years and hasbeen accepted in later cases, there is no case made out for reconsiderationthereof. In this connection our attention was drawn to Entry 92-A of List I ofthe Seventh Schedule to the Constitution, which refers to taxes on sale ofgoods where such sale takes place in the course of inter-State trade orcommerce and to the provisions of the Central Sales Tax Act, No. 74 of 1956,where 'sale' has been defined as including 'a transfer of goodson the hire purchase or other system of payment by instalments'. It isurged that this definition of 'sale' under the Central Sales Tax Actshows that the words 'sale of goods' used in Entry 92-A have a widermeaning. We are of opinion that there is no force in this argument, for theCentral Sales Tax Act was passed by Parliament and its validity has to beconsidered not only with reference to Entry 92-A of List I of the SeventhSchedule to the Constitution but also with reference to Art. 248(2) of theConstitution read with Entry 97 of List I of the Seventh Schedule to theConstitution. The fact that the definition of 'sale' in the CentralSales Tax Act includes words contained in Explanation I therefore is of no helpin construing the meaning of the words 'sale of goods', which havebeen authoritatively pronounced upon by this Court in Gannon Dunkerley's : [1959]1SCR379 case following Budh Prakash's : [1955]1SCR243 case.It is clear therefore that the State legislature when it proceeds to legislateeither under Entry 48 of List II of the Seventh Schedule to the Government ofIndia Act 1935 or under Entry 54 of List II of the Seventh Schedule to theConstitution, can only tax sale within the meaning of that word as defined inthe Sale if Goods Act. The essence of sale under the Sale of Goods Act is thatthe property should pass from the seller to the buyer when a contract of saleis made except in a case of conditional sale. Hire purchase agreements are notconditional sales. Therefore, any legislation by the State legislature makingany agreement of transaction in which the property does not pass from theseller to the buyer a sale would be beyond its legislative competence. WhatExplanation I does is to lay down that a hire purchase agreement shall bedeemed to be a sale in spite of the fact that the property does not pass at thetime of such agreement from the seller to the buyer. Therefore, Explanation Ias it stands is beyond the legislative competence of the State Legislature. Itis urged however that the property eventually does pass from the seller to thebuyer when the option is exercised and other terms the higher purchaseagreement are fulfilled and therefore the Explanation should be read asconfined to those cases only where property does eventually pass from theseller to the buyer. We are of opinion that this argument cannot be be accepted,for the intention of the Explanation clearly is to provide that the hirepurchase agreement shall be deemed to be a sale immediately on the date it ismade, even though property has not passed from the seller to the buyer on thatday. If this were not the real purpose and intention of Explanation I, itsenactment would be entirely unnecessary for the main definition of'sale' under section 2(h) will apply to a hire purchase agreement atthe time when the property passes from the seller to the buyer on the optionbeing exercised and on other terms of the agreement being fulfilled. We cannottherefore agree with the High Court that the Explanation should be confinedonly to those cases where the property does eventually pass for the obviousintention of the legislature in enacting the Explanation was to provide thatthe hire purchase agreement shall be deemed to be a sale on the very date onwhich it is made, even though no property passes from the seller to the buyeron that date. In this view of the matter it must be held taking into accountthe purpose, the intention and the interpretation of Explanation I that it isbeyond the competence of the State legislature. It must therefore be held to beinvalid and struck down accordingly.

20. The next question that arises is whether a hire purchase agreement everripens into a sale and if so when. We have already pointed out that a hirepurchase agreement has two elements : (i) element of bailment, and (ii) elementof sale, in the sense that it contemplates an eventual sale. The element ofsale fructifies when the option is exercised by the intending purchase afterfulfilling the terms of the agreement. When all the terms of the agreement aresatisfied and the option is exercised a sale takes place of the goods whichtill then had been hired. When this sale takes place it will be liable to salestax under the Act for the taxable event under the Act is the taking place ofthe sale, the Act providing for a multi-point sales tax at the relevant time.Where however option is not exercised or cannot be exercised because of theinability of the intending purchaser to fulfil the terms of the agreement,there is no sale at all. As the taxable event is the sale of goods, the tax canonly be levied when the option is exercised after fulfilling all the terms ofthe hire purchase agreement. We cannot agree with the view of the High Courtthat because in most of such cases the option is exercised, tax is eviableimmediately on the making of the hire purchase agreement and that in a fewcases where there is failure to carry out the terms of the agreement or toexercise the option, there can be adjustment by elimination of such portion ofthe turnover. As we have pointed out the taxable event under the Act is thesale of goods and until that taxable event takes place there can be noliability to pay tax. Therefore, even though eventually most cases of hirepurchase may result in sales by the exercise of the option and the fulfilmentof the terms of the agreement, tax is not exigible at the time when the hirepurchase agreement is made, for at that time the taxable event has not takenplace; it can only be exigible when the option has been exercised and all theterms of the agreement fulfilled and the sale actually takes place. When saletakes place in a particular case will depend upon the terms of the hirepurchase agreement but till the sale takes place there can be no liability tosales tax under the Act. The High Court therefore was in error in holding thattransactions of hire purchase of the kind with which we are dealing havingregard to their main intent and purpose might be treated as sales at the timethe agreement is entered into; in all hire purchase agreements of the type withwhich we are dealing sale only takes place when the option is exercised afterall the terms of the agreement are fulfilled and it is at that time that thetax is exigible.

21. This brings us to the last question, namely, what is the quantum of saleprice which is to be the basis of taxation under the Act. The argument onbehalf of the appellant in this connection is that the sale price in theparticular cases with which we are concerned is only Re. 17/- which the hirerhas to pay when he exercises his option to purchase. On the other hand the contentionon behalf of the respondent is that the sale price is the entire amount paid bythe hirer to the financier and the tax is exigible on this entire amount. Weare of opinion that neither of these two contentions is correct. It stands toreason that Re. 1/- cannot be the price of a vehicle in these cases for even ifthe vehicle is treated as second-hand when the option is exercised the sum ofRe. 1/ - would be an absurd price for a second-hand vehicle of the kind withwhich we are concerned. The argument in this connection is that the entireamount 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 contentionoverlooks the essence of hire purchase agreements which is that the hireincludes not only what would be payable really as hire but also a part of it istowards the price. The contention that the price is only Re. 1/- which is paidfor the option therefore cannot be accepted.

22. On the other hand the contention on behalf of the respondent that theprice is the entire amount paid as hire including Re. 1/- paid for the optionalso does not seem to be correct. This ignores the fact that at any rate partof what is paid as hire is really towards the hire of the vehicle for theperiod when the hirer is only a hirer. This will also be clear from the factthat if the entire hire is treated as price, the result would be that the priceof what is a second-hand vehicle when the sale eventually takes place would bemore than the price of the new vehicle. This will be clear from an example of ahire purchase agreement, which was given to us on behalf of the appellant. Inthe particular example, the price of the vehicle was Rs. 5,000/-. The hirepurchase agreement however provided for payment of Rs. 6,487/6/- by the hire tothe owner in seventeen instalments. The hire would become the owner on theexercise of the option after he had paid all the instalments. But if all theinstalments are to be treated as price the result would be that a vehicle whichwas priced at Rs. 5,000/- when the agreement was made and must have depreciatedduring the seventeen months when it was on hire would be valued at Rs.6,487/6/- at the time when the option is exercised and the sale in favour ofthe hirer takes place. This is clearly impossible to accept and therefore thecontention of the respondent must also be rejected.

23. The real position in our opinion as to price of the vehicle when theoption 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 amountwhich is paid as hire including Re. 1 /-. The value must be something less thanthe original price, which in the example mentioned 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 ofthe vehicle and such other matters as may be relevant in arriving at such priceon 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 give above by us).

24. We may in this connection refer to Darngavil Coal Company v. Francis[1913] 7 T C Pt.I. That was a case under the (English) IncomeTax Act, and the question that directly arose for consideration was withrespect to deductions to be allowed from profits in the circumstances of thatcase. The facts were these : The appellant, a coal company, in order to obtainrailway wagons for the conveyance of coal from its collieries to its customersfrom time to time entered into agreements with a wagon company under which acertain annual sum was paid for a period of years for a certain number ofwagons. By the terms of the agreements the coal company during the periods ofthe payments used the wagons at its own risk and was bound to keep them inrepair, and at the end of the period it had the option of purchasing the wagonsat the nominal price of one shilling for each wagon. It will be seen that theagreement was in the nature of hire purchase agreement of wagons. The questionthen arose whether any deductions from profits could be allowed to the coalcompany in the circumstances. It was held that the annual payments under theagreements were divisible into two, namely, (i) consideration paid for the useof the wagons, and (ii) payments for an option at a future date to purchase thewagons at a nominal price. It was also held that insofar as the paymentsrepresented the consideration for the use of the wagons during the period ofagreement they were admissible as deduction in the computation of the coalcompany's profits for the purpose of assessment to income-tax. It was observedthat it was perfectly clear that during the course of the period of years thewagon still was the property of the wagon company and not of the coal company;but the coal company wished to use it and accordingly an extra payment was madein respects of that. No discrimination was made between the two kinds ofpayment; it was a lumpsum that was paid. In such cases two things were going onconcurrently - there was a sale and purchase agreement under certain terms nota sale at that moment, but an option on certain terms on a future date to havea sale and on the other hand there was also concurrent with that a hiringagreement. The Court then went on to observe that it had no materials forsplitting up that payment showing what was truly hire and what was truly paymenttowards eventual purchase. Finally the case was remitted to the Commissionerswith instructions that they were bound to allow as deduction such portion ofthe yearly payment made in respect of the wagons agreements as represented theconsideration paid for being allowed to us wagons which under the contract werenot yet the property of the coal company and that the Commissioners must decidethat question for themselves if parties did not agree.

25. This case in our opinion brings out the true nature of the payment madeas hire in hire purchase agreement. Part of the amount is towards the hire andpart towards the payment of price, and it would be for the sales taxauthorities to determine in an appropriate way the price of the vehicle on thedate the hirer exercises his option and becomes the owner of the vehicle afterfulfilling the terms of the agreement. There is no legislative guidanceavailable as to how this would be done and perhaps it would be better if thelegislature gives guidance in such matters. But even in the absence oflegislative guidance it would be for the sales tax authorities to decide asbest as they can the value of the vehicle on the date the option is exercisedand the property passes to the hirer. There may be two ways of doing it. Thesales tax authorities may split up the hire into two parts, namely, the amountpaid as consideration for the use of the vehicle so long as it was the propertyof the owner, and the payment for the option on a future date to purchase thevehicle at a nominal price. If the first part is determined the rest would betowards the payment of price. The first part may be determined after findingout the proper amount to be paid as hire in the market for a vehicle of thetype concerned, or in such other way as may be available to the sales taxauthorities. The second method may be to take the original price fixed in thehire purchase agreement and to calculate the depreciation and all other factorsthat may be relevant in arriving at the price when the second sale takes placeto the hirer including the condition of the vehicle at the time of the secondsale. It is therefore for the sales tax authorities to find out the price ofthe vehicle on which tax has to be paid in either of the ways indicated by us aboveor such other way as may be just and reasonable.

26. We therefore allow the appeals in part and set aside the order of theHigh Court and the assessments made, and direct that the sales tax authoritieswill determine the price in accordance with what we have said above andthereafter proceed to levy sales tax according to law. The appellant will getits costs from the respondent-one set of hearing fee.

27. Appeals partly allowed.


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