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State of Kerala Vs. Modern Plastic Industries - Court Judgment

LegalCrystal Citation
SubjectSales Tax
CourtKerala High Court
Decided On
Case NumberA.S. No. 66 of 1977 (O.S. No. 84 of 1973 of the file of the Sub-Court, Alleppey)
Judge
Reported in[1984]57STC64(Ker)
AppellantState of Kerala
RespondentModern Plastic Industries
Appellant AdvocateThe Government Pleader
Respondent Advocate P.A. Mohammed (T),; S.A. Razzak and; P.H. Sapharulla
Cases ReferredSundaram Finance Ltd. v. State of Kerala
Excerpt:
- - 4. on the facts of the case we notice that the government did not deal with any machinery, that it did not intend to deal with machinery, that its intention in advancing the loan for purchase was only to facilitate the purchase of machinery and that was one of the terms of a scheme of the government which would serve to promote persons like the petitioner. the government's interest is only to see that the amount advanced is not lost but is secured in the best way possible......has said that though apparently the arrangement between the plaintiff and the defendant was one of hire-purchase, in fact and in substance it was only a financing arrangement and therefore when the government, pursuant to the hire-purchase agreement, purported to transfer the machinery ultimately to the plaintiff it was not selling the machinery and therefore any sales tax which the plaintiff was compelled to pay to the government would not be a proper levy. for that reason the plaintiff has obtained a decree for recovery of a sum of rs. 9,670 and interest thereon which he had to pay as sales tax at the instance of the officers of the defendant. 2. the plaintiff started a business of manufacture and sale of plastic products. the plaintiff's firm applied to the joint director of.....
Judgment:

Subramonian Poti, Ag. C.J.

1. The one and only question that need engage our attention in this appeal is whether in entering into what purported to be a hire-purchase agreement with the defendant, the State of Kerala, the plaintiff was really entering into a financing arrangement in regard to the purchase of a machinery for his business. The Court below has said that though apparently the arrangement between the plaintiff and the defendant was one of hire-purchase, in fact and in substance it was only a financing arrangement and therefore when the Government, pursuant to the hire-purchase agreement, purported to transfer the machinery ultimately to the plaintiff it was not selling the machinery and therefore any sales tax which the plaintiff was compelled to pay to the Government would not be a proper levy. For that reason the plaintiff has obtained a decree for recovery of a sum of Rs. 9,670 and interest thereon which he had to pay as sales tax at the instance of the officers of the defendant.

2. The plaintiff started a business of manufacture and sale of plastic products. The plaintiff's firm applied to the Joint Director of Industries and Commerce for a loan of Rs. 1,00,000 for purchase of an injection moulding machine at an estimated cost of Rs. 1,15,000. While the plaintiff was to be financed to the extent of Rs. 1,00,000 by the State the balance was to be met by the plaintiff-firm. After negotiations with M/s. R. H. Windser (India) Ltd., the purchase of the machine was arranged for a price of Rs-. 1,42,982. Rs. 42,982 was provided by the plaintiff and the rest by the State by way of loan. A hire-purchase agreement was also executed between the parties on the usual terms with obligation in the plaintiff to pay hire money in instalments and with option to purchase. The defendant had the right to take possession of the machinery in case of default in the payment of hire money. The machinery was at Alleppey and the agreement contemplated a transfer in the plaintiff's name after a period of 3 years if the plaintiff so desired. But the plaintiff wanted such transfer after a period of two years evidently because he wanted to shift the machinery from Alleppey. That was allowed by exhibit B 5 order dated 1st March, 1971, and that is how the plaintiff came into complete control of the machinery. On payment of the amount due to the State the plaintiff was discharged of all obligations. There was only one controversy, the liability to pay sales tax insisted upon by the State and denied by the plaintiff. Nevertheless the plaintiff paid it, and filed the suit claiming the money back.

3. A hire-purchase agreement is normally an agreement under which the hirer is the owner of the vehicle and the person who takes on hire has only the right to hold subject to the obligation thereunder with an option to purchase on payment of the hire monies in accordance with the terms of the hire-purchase agreement. Parties to such a hire-purchase agreement may not intend to transfer the ownership until money due to the seller is fully paid. There may be instances where though an agreement purports to be a hire-purchase agreement with the usual terms embodied in such instrument, in fact and in truth parties may not intend the document to operate as anything more than an arrangement by way of security for the financing obligations undertaken by one party to the other to supply him with funds for purchase. The financing companies which are interested only in getting back the principal and interest, quite often usurious, are not really interested in the ownership of the subject-matter of the hire-purchase and the term in regard to the right to repossess and the obligation to convey are all usual terms intended to secure such rights as may be necessary to safeguard the interests of the financing companies in the subject-matter of the agreement. We need only refer to the decision of the Supreme Court in Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489 (SC). That was a case where Sundaram Finance Limited was carrying on the business of financing purchase of motor vehicles on the security of vehicles and naturally any person who approaches the company for finance will have to enter into an agreement as if the vehicle stands sold to the company and taken back on hire from the company. On the question of the liability to sales tax the Supreme Court examined the real nature of the agreement despite its apparent character of a purchase and sale. Dealing with this the Supreme Court said thus :

The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In such a case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents. An owner of goods who purports absolutely to convey or acknowledges to have conveyed goods and subsequently purports to hire them under a hire-purchase agreement is not estopped from proving that the real bargain was a loan on the security of the goods. If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into was to raise money. If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostensibly passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer's title, and confer a licence to seize.

The possible distinction between a case where an owner of goods ceases to be the owner when entering into a hire-purchase and an owner continuing to be owner and seeking only a financing arrangement is referred to at pages 601 and 502 of the same decision. In the case before the Supreme Court it was held that the hire-purchase agreements were only to secure the return of the loans advanced to customers and no real sale was involved.

4. On the facts of the case we notice that the Government did not deal with any machinery, that it did not intend to deal with machinery, that its intention in advancing the loan for purchase was only to facilitate the purchase of machinery and that was one of the terms of a scheme of the Government which would serve to promote persons like the petitioner. The plaintiff sought only a loan and the Government gave the loan. The loan was not of the entire amount representing the value of the goods. It was only for 1,00,000 out of Rs. 1,42,982. The balance was met by the plaintiff. The original of invoice, exhibit B 12, is seen to be issued in the name of the plaintiff and not the State Government though a copy of it is seen sent to the Government as evidenced by exhibit B 3. The Government at no time would have had an intention of appropriating the machine for itself and selling it. The right it had to seize the machinery was only with a view to enforce the recovery of the money advanced by it. Those being the clear circumstances in this case the agreement has to be read and understood only as a financing agreement in favour of the Government which advanced the loan to the plaintiff for purchase of machinery for the purpose of his business. The Government's interest is only to see that the amount advanced is not lost but is secured in the best way possible. That is done by hire-purchase agreement. If a hire-purchase agreement could be read as a financing agreement the circumstances of the case positively indicate only a loan arrangement. The terms of the arrangement, are consistent with a loan arrangement as held by the Supreme Court in the decision adverted to.

5. The learned counsel for the State referred to Clause 6 of the agreement, exhibit B 1, in support of his case that the plaintiff had undertaken to pay sales tax and therefore he could not now contend that he is not liable to pay tax. A reading of the clause would show that there is no specific undertaking to pay sales tax but the obligation is to pay such taxes as are levied or leviable. If in law the plaintiff was not liable to pay tax that could not be imposed by reason of an arrangement reached under exhibit P 1. The clause does not create a liability which does not independently exist. Therefore that clause is also of no avail to the defendant, the State.

In the circumstances we are in agreement with the Court below that the suit is to be decreed. The appeal is dismissed with costs.


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