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Commercial Credit Corporation (1943) Ltd. Vs. Deputy Commercial Tax Officer - Court Judgment

LegalCrystal Citation
SubjectSales Tax
CourtChennai High Court
Decided On
Case NumberWrit Petition Nos. 493 and 1273 of 1956 and 500 and 671 of 1957
Reported inAIR1958Mad561; (1958)IIMLJ316; [1958]9STC599(Mad)
AppellantCommercial Credit Corporation (1943) Ltd.
RespondentDeputy Commercial Tax Officer
Appellant AdvocateK.V. Venkatasubramania Aiyar, ;G.R. Jagadisan, ;T. Chengalvaroyan, ;K.C. Srinivasan and ;T.V. Balakrishnan, Advs.
Respondent AdvocateAdv. General and ;Additional Government Pleader
DispositionPetition dismissed
Cases Referred(vide Babcock v. Lawson
- - --were also required to arrange for the registration of the motor cycle in the name of the customer as 'owner' with the petitioners' name endorsed as 'hire-purchase company. 19. though a considerable number of english decisions have been cited to us touching the incidents of hire-purchase agreements, the difficulty in applying them arises out of the fact that they are mostly concerned with whether the agreement required to be registered on a proper construction of the bills of sales act or whether the hire-purchaser was a mercantile agent within the factors act or was one who had entered into 'an agreement to buy' within section 25 of the english sale of goods act, so as to enable him to transfer a better title than he himself had to a bona fide purchaser from him. we are therefore.....rajagopala ayyangar, j. 1. these petitions are for the issue of writs of certiorari or other appropriate orders to quash certain assessments to sales tax under the provisions of the madras general sales tax act, 1939. w. p. nos. 500 and 671 of 1957 have been filed by the same petitioners calling in question the orders of assessment in relation to two financial years, the point raised however being the same.2. broadly stated the petitioners have been assessed to sales tax by the appropriate tax authorities on the basis that they were dealers in automobiles, their assessable turnover being determined on the basis that the amounts realised by them were the price of the vehicles sold by them. the contention however urged in opposition to these assessments, and which is the foundation of these.....

Rajagopala Ayyangar, J.

1. These petitions are for the issue of writs of certiorari or other appropriate orders to quash certain assessments to sales tax under the provisions of the Madras General Sales Tax Act, 1939. W. P. Nos. 500 and 671 of 1957 have been filed by the same petitioners calling in question the orders of assessment in relation to two financial years, the point raised however being the same.

2. Broadly stated the petitioners have been assessed to sales tax by the appropriate tax authorities on the basis that they were dealers in automobiles, their assessable turnover being determined on the basis that the amounts realised by them were the price of the vehicles sold by them. The contention however urged in opposition to these assessments, and which is the foundation of these petitions, was that the transactions between them and their customers were not 'sales', but 'bailments by way of hire', and that transactions of this type could not on a proper construction of the provisions of the Madras General Sales Tax Act be brought within its charging provisions. The point was also raised that if the Madras General Sales Tax Act levied sales tax on such transactions of 'hire-purchase', the same was ultra vires of the State Legislature, as not being comprehended within the entry 'tax on the sale of goods', on which entry alone the legislative power to levy the tax imposed by the Madras General Sales Tax Act could be sustained.

3. Though the points raised in these several petitions are to some extent common, there are slight differences in the terms of the contract entered into between the petitioners in each case and their customers, and it is necessary to examine the principal terms of each agreement so as to appreciate the real nature of the transaction involved and its legal results.

4. Before doing so however it would be convenient to set out the relevant provisions of the enactment which bear upon the questions raised. The Madras General Sales Tax Act is a pre-Constitution statute, the legislative power to enact it being that contained in Entry 48 of the Provincial Legislative List to Schedule VII of the Government of India Act, 1935. This entry ran : 'Taxes on sale of goods and on advertisements.' The corresponding item in the Constitution is Entry 54 in the State List reading 'taxes on the sale or purchase of goods other than newspapers', which is not materially different. The Madras General Sales Tax Act, 1939, was designated in the preamble as 'an Act to provide for the levy of a general tax on the sale of goods in the State of Madras'. Section 3 was the charging section, and under it the charge was laid on each 'dealer' for each year on his total annual 'turnover'. 'Dealer' was defined in Section 2 (b) to mean 'a person who carried on business of buying or selling goods.' The definition of 'turnover' was contained in Section 2 (i), where it was said to mean 'the aggregate amount for which goods are either bought by or sold by a dealer whether for cash or for deferred payments or other valuable consideration....' This definition contained a few explanations of which that which was urged as having some relevance to these petitions was explanation (iv) which ran :

Where for accommodating a particular customer, a dealer obtains goods from another dealer and immediately disposes of the same to the said customer, the sale in respect of such goods shall be included in the turnover of the latter dealer but not in that of the former.

5. The expression 'sale' with its grammatical variations used in the definitions of 'dealer' and 'turnover' was itself defined in Section 2 (h) thus:

'Sale' with all its grammatical variations and cognate expressions means every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration...but does not include a mortgage, hypothecation, charge or pledge.

Explanation 1 : A transfer of goods on the hire-purchase or other instalment system of payment shall, notwithstanding the fact that the seller retains the title in the goods as security for payment of the price, be deemed to be a 'sale' ' (to set out only the portion of the definition, which is relevant to the present context).

6. We shall now proceed to consider the details of the transactions in the several petitions, which it is contended are not sales to which the charging provisions of the General Sales Tax Act are attracted.

7. The Commercial Credit Corporation (1943) Private Ltd., are the petitioners in the W.P. No. 493 of 1956. The nature of the transactions between themselves and their customers is thus set out in the affidavit in support of the petition : A person desirous of acquiring a motor bicycle (or other vehicle) makes his selection of the make and type and fixes the price therefor with the motor dealer concerned. He then approaches the petitioners for financial assistance on hire-purchase basis. He pays the petitioners a deposit of Rs. 100 and signs a proposal form and executes a hire-purchase agreement. The agreement will provide for the value of the vehicle and other charges incurred by the petitioners being recoverable from the customer in 11 or other number of equal monthly instalments. On the customer signing the hire-purchase agreement the petitioners would authorise the dealer to deliver the vehicle to the customer. The customer proceeds to the dealer, pays him a part of the purchase price and obtains the delivery of the vehicle. The balance of the purchase money due to the dealer is paid by the petitioners, and it is this sum that is collected by the petitioners from the customer in instalments. At the time when the dealer effects a sale, he is charged sales tax on his transaction, which is collected from the customer.

8. The contention urged was that there was only one sale involved in the entire transaction, namely, by the dealer to the customer, and that the petitioners' part in the transaction was merely to assist the customer with finance to enable him to make the purchase from the dealer. The purpose of the hire-purchase was said to be merely to put through this finance agreement, and was designed to afford security for the recovery of the instalments of the loan made to the customer, resulting from the payment to the dealer of the unpaid purchase money which as between the dealer and the customer was payable by the latter. This finance agreement, it was stated, could not and did not amount to a 'sale' of the vehicle, the petitioners were not therefore 'dealers' who 'sold' any goods and were not consequently liable to tax under this fiscal enactment. The complaint was that from and after 1953-54 the Department had been assessing the petitioners illegally to tax, and that these assessments should therefore be quashed.

9. Learned Counsel for the petitioners filed copies of documents executed between themselves and their customer in one particular case as typical of their transactions. There was no dispute that these documents represented correctly the terms upon which the petitioners conducted their entire business. In the typed form filed, a customer had agreed to purchase a Royal Enfield Motor Cycle from the Madras Motors Private Ltd., who were dealers in these motor cycles. The customer made a proposal to the petitioners on 3rd September, 1957, signed by himself and a guarantor to enter into an agreement with the petitioners for the hire-purchase of the cycle. The price of the cycle was Rs. 1,890 and with the insurance premia for two years the total came to Rs. 2,049. The customer had to make an initial payment of Rs. 762, and the balance together with the commission designated as finance charge of Rs, 208 had to be paid in 23 monthly instalments of Rs. 65 each. On the acceptance of the proposal the customer executed a hire-purchase agreement.

10. As a considerable part of the argument in this petition turned on the terms of this agreement it is necessary to refer to the material ones in some detail. The agreement was of course between the petitioners and the customer. The petitioners were designated in the agreement as 'owners' and the customer as the 'hirer'. Clause I stipulated :

Clause I: The owners being the owners of the motor vehicle with fittings, tools...agree to let and the hirer agrees to hire the vehicle from the date hereof subject to the terms and conditions herein contained and hereto annexed....

Clause II: On the execution of this agreement the hirer shall pay to the owners in Madras a sum of Re. 1 in consideration of the option to purchase given to the hirer by clause IV hereof and the said sum shall become the absolute property of the owners.

Clause III: The hirer shall pay to the owners on the execution of this agreement the sum of Rs. 762 as an initial payment by way of hire, which shall become the absolute property of the owners and will punctually pay to the owners at their address...the sums mentioned in the margin hereof by way of rents for the hire of vehicle. (In the margin was specified the 23 instalments and the monthly rental of Rs. 65).

Clause IV: If the hirer shall duly perform and observe all the terms and conditions in this agreement contained on his part to be performed and observed and shall in manner aforesaid pay to the owners monthly sums by way of rent amounting together...and shall also pay to the owners all other sums of money which may become payable to them by the hirer...the hiring shall come to an end and the vehicle shall at the option of the hirer become his property and the owners will assign and make over all their right, title and interest in the same to the hirer but until such payments as aforesaid have been made the vehicle shall remain the property of the owners.

Among the conditions set out in the contract the only relevant ones are:

4. The hirer acknowledges that he holds the vehicle as a bailee of the owners and shall not have any property or interest as purchaser therein until he shall have exercised his option of purchase as hereinbefore provided and shall have paid the whole amount due under this agreement or under any term thereof.

5. The owners may terminate with or without notice the contract of hiring and forthwith retake and recover possession of the vehicle (the contingencies are omitted as irrelevant).

8. The hirer hereby agrees to give to the owners in respect of monthly hire payments a demand promissory note or usance hundies as and by way of collateral security and he further agrees that the owners shall be entitled to negotiate the said promissory note or hundies and also to sue upon the said hundies as and when they become due.

11. In pursuance of Clause (8) of the conditions the customer in the type-form executed an 'on-demand' promissory note for Rs. 1,495. being the total of the amount payable in 23 instalments.

12. On the execution of these two documents the petitioners addressed a communication to the Madras Motors (Private) Ltd., requesting them to collect Rs. 680 on account of petitioners and deliver the vehicle to the customer. The dealers--the Madras Motors (Private) Ltd.--were also required to arrange for the registration of the motor cycle in the name of the customer as 'owner' with the petitioners' name endorsed as 'hire-purchase company.' The original registration certificate of the motor cycle was also required to be sent to the petitioners along with the bill for the balance of the purchase price. The sales tax payable by the dealers was to be collected from the customer direct.

13. The customer proceeded to the dealers on 5th September, 1957, and made the payment of, Rs. 680 and took delivery of the vehicle. He thereafter signed a receipt and handed it over to the dealers, and in this he stated that he had acknowledged the receipt of the motor cycle from the dealers, having hired the said vehicle from the petitioners. The dealers thereafter sent in their bill to the petitioners on 6th September, 1957, intimating the registration of the cycle in the manner advised, and enclosing the receipt signed by the customer along with their bill for Rs. 1,210, this amount being arrived at by deducting Rs. 680 from the price of Rs. 1,890. Of course this Rs. 1,210 was paid by the petitioners.

14. The question for our consideration is whether the petitioners put through any transaction of sale of the vehicle to the customer. Before referring to and dealing with the principles of law and the decisions relied on by Mr. Changalvarayan, learned Counsel for the petitioners, it would be convenient to analyse the transactions and localise the precise point in controversy. The first matter to be noticed is that the dealers, to take the example we have given earlier, the Madras Motors (Private) Ltd., did effect a sale of the vehicle. There could be no dispute that the purchaser in that transaction of sale was not the customer but the petitioners. Though the customer had entered into preliminary negotiations with the dealers in the matter of the selection of the vehicle, the person however to whom the property in the vehicle was transferred by the dealers was not the customer but the petitioners. In this connection it must be mentioned that no significance could be attached to the registration under the Motor Vehicles Act of the vehicle in the name of the customer as owner, because of the definition of owner in that Act. Section 2(19) of the Motor Vehicles Act defines 'owner' thus: ' 'owner' means where the person in possession of a motor vehicle is a minor the guardian of such minor and in relation to a motor vehicle which is the subject of hire-purchase agreement the person in possession of the vehicle under that agreement.' It was by reason of this transfer of title that the petitioners were able to figure as owners in the hire-purchase agreement. If ultimately the customer is found to be the owner of the vehicle, it could only be by reason of a further transfer of title effected by the petitioners as owners. It would thus be clear that there are two distinct sales of the vehicle involved in the process by which the property in the vehicle passed from the Madras Motors (Private) Ltd. to the customer. There is, therefore, no point gained by placing any reliance on the fact, that for the sale effected by the Madras Motors Ltd., the dealers became liable to sales tax which they collected from the customer. If there were two sales involved, under the provisions of the Madras General Sales Tax Act which levies a multi-point tax on each successive dealer it is no answer that the same goods bore a tax at the point of a prior sale.

15. We have thus this situation, that there was a transfer by a sale of the property in the vehicle from the dealers to the petitioners with the further fact that at the termination of the hire-purchase agreement, the ownership of the vehicle is vested in the customer. The transfer of absolute title or property in goods from one to another can take place in one of three modes: (1) gift, which is a transfer of title without any consideration moving from the transferee, and which is completed by the acceptance of the transfer; (2) by exchange or barter, where the consideration that moves from the transferee is not money but goods or other species of property other than money ; (3) where the transfer is for a consideration and this in the form of money. It was not contended by learned Counsel for the petitioners that the transfer of the title in the vehicle to the customer was by way of gift. Nor was it suggested that the consideration which moved from the customer took the form of exchange or barter. We are therefore left with this, namely, that a transfer of title has taken place, and through the medium of a transaction, which is a sale.

16. With this background we shall proceed to consider the contention urged by learned Counsel for the petitioners. The first point sought to be made was that the transaction between the petitioners and the customer, which was the subject of the impugned assessment was one of hire-purchase and not a sale and therefore could not constitutionally give rise to a liability to sales tax. In this connection learned Counsel urged that hire-purchase transactions were brought within the definition of 'sale' only by reason of explanation (i) to Section 2(h), and that the expansion effected by the explanation was ultra vires the State Legislature. Learned Counsel sought support for this argument in the decision in Sales Tax Officer v. Budh Prakash : [1955]2SCR243 . The question which the Supreme Court was called on to consider was whether a forward contract, which still remained a contract without delivery of goods, could amount to a 'sale' on which tax could be levied under the entry 'tax on the sale of goods'. The Uttar Pradesh Sales Tax Act defined 'sale' as to include 'forward contracts' and this extension was impugned as ultra vires. The Supreme Court upheld this objection and his Lordship Venkatarama Ayyar, J., who delivered the judgment of the Court said :

The position therefore is that a liability to be assessed to sales tax can arise only if there is a completed sale under which price is paid or is payable and not when there is only an agreement to sell, which can only result in a claim for damages....The power conferred under Entry 48 to impose a tax on the sale of goods can therefore be exercised only when there is a sale under which there is a transfer of property in the goods, and not when there is a mere agreement to sell. The State Legislature cannot, by enlarging the definition of 'sale' as including forward contracts, arrogate to itself a power which is not conferred upon it by the Constitution Act.

17. To the extent, therefore, to which the definition of 'sale' in the Madras Act includes transactions whereunder there is no transfer of title in goods, the decision of the Supreme Court could be held to rule out the validity of the provision. The proposition which the learned Counsel has to establish in order to have the benefit of this ruling is that no sale was involved in this transaction of hire-purchase.

18. The next decision referred to by learned Counsel was a decision of the Punjab High Court in the Instalment Supply Ltd. v. State of Delhi [1956] 7 S.T.C. 586. The enactment in question--the West Bengal Sales Tax Act--defined-'sale' in the same manner as in the Madras Act and contained the same explanation as regards hire-purchase as explanation (i) of the Madras Act. The agreement of hire-purchase and the attached conditions were in terms the same as those entered into between the petitioners and the customer. Kapur, J., then a Judge of that Court, referred to the decision of the House of Lords in Helby v. Mathews [1895] A.C. 471 and certain other decisions of the English Courts and held that there was no 'sale' involved in the hire-purchase contract so as to bring the 'hirer' within the charging provision of the sales tax enactment. The entire discussion of the cases and of the principles by the learned Judge related to the nature of the transaction before the property in the vehicle stood transferred to the customer. The learned Judge held that at that stage, the customer was merely a bailee of the vehicle, and that the Legislature could not treat a bailee as a vendee and levy sales tax on the transaction of bailment. What the position would be when as a result of the completion of the hire-purchase agreement, the title to the goods passed to the hire-purchaser raises different problems in regard to which the decision of the Punjab High Court affords no assistance.

19. Though a considerable number of English decisions have been cited to us touching the incidents of hire-purchase agreements, the difficulty in applying them arises out of the fact that they are mostly concerned with whether the agreement required to be registered on a proper construction of the Bills of Sales Act or whether the hire-purchaser was a mercantile agent within the Factors Act or was one who had entered into 'an agreement to buy' within Section 25 of the English Sale of Goods Act, so as to enable him to transfer a better title than he himself had to a bona fide purchaser from him. We are therefore unable to attach any determinative effect to the dicta contained in these decisions, except to note it is assumed to be well settled that a hire-purchase is not a contract of bailment simply, but creates proprietory interests in the buyer. This however does not detract from the usefulness of observations such as are found in some of them which are of wider application. Thus for instance Goddard, J., as he then was, observed in Karflex Ltd. v. Poole [1933] 2 K.B. 251:

'...It must be remembered that hire-purchase is a very modern development in commercial life, and surely it is a commonplace in commercial law that if one finds commercial men inventing new methods of business and using documents which are, perhaps, unfamiliar at the time when they are first brought into use, but which are invented to meet the requirements of a particular time or peculiar circumstances, the law has to be moulded and developed to meet the commercial developments which are taking place.'

The learned Judge went on :

Now it does not seem to me by any means to follow that the doctrines which were applied to ordinary simple bailments in bygone days apply to this modern class of bailment which has in it, not only the element of bailment but also the element of sale. This and other authorities establish that a 'hire-purchase' is a complex contract transcending a mere bailment and conferring on the hirer a legal state. In the words of a modern writer, the interest of a hirer is sui generis and cannot be fitted into the general classifications of jurisprudence.

20. To revert to the facts of the present case under Clause II of the agreement the 'hirer' obtains 'an option to purchase' the vehicle, and under Clause IV if the 'hirer' performs the conditions of the agreement, namely, the payment of what is termed the 'hire', the vehicle becomes at the option of the hirer his property, and the owners undertake to assign and make over their right, title and interest in the same to the hirer. This is emphasised and underlined by condition 4, under which the 'hirer' acknowledges his possession of the vehicle as a bailee and he is denied any interest as purchaser until he exercises his option to purchase the vehicle. It is now common ground that in most if not the entire number of transactions entered into by the petitioners, the hirers pay their instalments and exercise the option. What the effect of default on the part of the hirers and their failure to exercise the option would be we shall consider later. But we shall first examine those cases where the option is exercised. There cannot be a dispute that in that event a sale results. This 'sale-element' which started with the grant of 'the option to purchase' at the inception of the agreement of hire-purchase was an integral part of the hire-purchase transaction, as integral and as important as the bailment element in the shape of the 'hire'. It cannot therefore be said that there was no sale at. all involved in the hire-purchase so as to preclude the State Legislature from taxing the transactions.

21. Pausing here, it is necessary to advert to a submission of the learned Advocate-General that the entries in the Legislative List should be given the widest possible construction of which they are reasonably capable, and that their import or content should not be cut down by any pedantic construction. In this connection he urged that there was no justification for reading the word 'sale' in the expression 'tax on the sale of goods' in the legislative entry as confined to 'sales' within the Sale of Goods Act, but that the word should be held to comprehend all transactions which in modern commercial practices are the methods or mechanism by which sales are facilitated or put through. We are unable to uphold this rather extreme contention. No doubt it is a generally accepted principle of constitutional interpretation that in interpreting a constituent and organic statute that construction most beneficial to the widest amplitude of the power of the Legislature must be adopted (British Coal Corporation v. The King [1935] A.C. 500 . But even applying this principle we find it not possible to hold that the expression 'sale' in the Constitution was meant to designate a transaction which in the ordinary acceptation of the term would not amount to a 'sale'. It might very well be that the nice distinctions between a sale and an exchange might not apply to determine the scope of the expression in the Constitution. But that apart, when the Constitution confers a power with reference to a specified transaction which has well-known incidents, it would not be interpretation but legislation to hold that within that power was included that transaction as well as others, which in essence were entirely distinct from it and created between the parties to it, not the relation of buyer and seller but quite a different one, of bailor and bailee. We are strengthened in this conclusion by the approach to the problem by the Supreme Court in Sales Tax Officer v. Budh Prakash 1954 S.C.J. 573. Unless therefore there were an element of 'sale' involved in the transaction--sale in the sense of transfer of property in goods from one person to another for consideration--the transaction would not be liable to sales tax under Entry 54, and the Sales Tax Act should, in our opinion, be so construed as not to impose a tax in such transactions.

22. As we have already stated, there are these two elements of bailment and sale involved in the hire-purchase agreement entered into by the petitioners. No doubt the learned Advocate-General was right in saying that function of the 'hire' of the bailment-element was only secondary and introduced in order effectively to safeguard the right of the petitioners as sellers to recover the price, but this does not detract from that element being real, for its reality was essential to ensure full protection to the rights of the petitioners as owners of the vehicle who had conferred an option on the customer to purchase it subject to stated conditions.

23. If this element of bailment is real, and so is the element of sale, the next question that arises for consideration is whether a tax liability could be fastened on the petitioners immediately they entered into an agreement of hire-purchase or could the tax be constitutionally and legally be levied only after the customer exercised his option which effected a transfer of property in the vehicle to himself. As already stated, in most of these transactions the customer--the hirer--pays up the instalments and thus acquires title to the vehicle. In fact the very large advance payable (large in relation to the price of the vehicle as between the petitioners and the customer) that is insisted on from the hirer renders it uneconomic for the hirer to discontinue the payment. An analysis of the sums payable on each instalment would show that the monthly payment would include and is designed to include, not merely what might represent the proper hire for the vehicle, in the sense of consideration for use including therein compensation for depreciation and wear and tear, but also a fraction of the price towards the ultimate purchase. There is however still the possibility that owing to acts beyond his control, the customer might be unable to complete the transaction in the sense of obtaining title to the vehicle by paying the instalments regularly. In such cases the property in the vehicle would remain with the petitioners, and the bailment element would alone represent the transaction, the option to purchase not being exercised ; and in these cases there would certainly be no sale, though there was an agreement granting 'an option to buy' which by itself would not amount to a sale ; and transactions in that form could not be brought within the charging provision of the Madras General Sales Tax Act. In passing we might mention that we read explanation (1) to Section 2 (h) as referring to those hire-purchase agreements which involve a sale, and in which this sale element has fructified.

24. The question is thus narrowed down to finding out when a hire-purchase agreement leads ultimately to a sale, (1) whether sales tax could be levied at the inception of the contract of hire-purchase or is the taxing authority bound to wait till the option is exercised and title passes before levying the tax ; (2) what is the amount of consideration for which the sale, which takes place when the option is exercised, should be deemed to be effected.

25. The first point is by no means free from difficulty. If finally the transaction results in an out and out sale, the constitutional difficulty put forward in the way of treating a contract which in part is one of bailment as a sale for the purpose of the levy of sales tax vanishes. The only problem is whether when a sale ultimately takes place, but this is the end result of a form of transaction which though not strictly a sale is designed to achieve it, as its primary purpose, the Legislature might not treat the transaction of hire-purchase itself as having been entered into to effect a sale. In this connection it may not be out of place to call attention to the analogy of an agreement for sale not complicated by the introduction of the bailment element. Let us take a case where there is an agreement for sale, pure and simple, the price being payable in instalments with a stipulation that the property shall not pass until the last instalment is paid. In such cases if the sale does not go through, because of the failure on the part of the intending purchaser to pay the instalments of the price, there can be no transaction attracting the sales tax. But if the instalments are paid arid the sale is completed, there could be no constitutional inhibition against the State Legislature levying the tax, even when the contract is entered into, subject of course to adjustment in the event of the sale not resulting. This is exactly what one of the limbs of explanation (1) to Section 2(h) provides, and we have heard no argument impugning the validity of this provision. From this it would logically follow that the addition of an element of bailment operating during some stages of the transaction cannot materially affect the result. To hold otherwise would be to ignore the fact that hire-purchase is a modern development designed to serve the needs of credit buying, while at the same time protecting the 'vendor'. In cases therefore where the transaction ultimately results in a sale we can see no impediment in the way of a tax levy even at the inception of the contract.

26. The second question is as to how the quantum of consideration for the sale that is ultimately effected should be computed. If, instead of a transaction of a hire-purchase, the sale were for a stated price payable in instalments, the property passing, on the payment of the last instalment, it could not be contended that as it was the payment of the last instalment that resulted in the passing of the property, it was that alone that constituted the consideration for the sale. The question here, however, is not quite so simple but is complicated by the purchaser being for a time in possession of the goods as a bailee the contract stipulating for the payment of hire during that period. Two matters have to be borne in mind : (1) that the object of the entire transaction was to enable the customer to become the owner by purchase of the vehicle, and (2) that the contract of hire-purchase was designed to enable the owner of the vehicle to keep complete control over the title and possession of the vehicle to ensure the payment of moneys due from the customer. That is why we consider that, though in one aspect the monthly instalments paid or stipulated to be paid represent the 'hire' for the use of the vehicle, still they represent in another aspect the instalments of price payable as consideration for the transfer of title in the vehicle to the customer. One thing is clear that, if the transaction were one of pure 'hiring' without its containing any purchase element, the hire would as we have already pointed out be much less. It is really the price element that goes to add to what might strictly be called the hire to yield the figures stipulated in the margin of the hire-purchase agreement. For the purpose, therefore, of evaluating the consideration for the sale, the entering into the hiring agreement with the stipulation as to the rate of hire to be paid could be seen to furnish the proper criterion. In other words, the consideration for the sale is the entering into the agreement of hire and the fulfilment of its terms. Notwithstanding therefore that in the hire-purchase agreement no consideration is required to be paid after the 23rd instalment of the hire, the transfer of ownership is not by reason of any gift but is in truth and substance a sale the price paid being designated the instalments of 'hire.'

27. The results of the foregoing discussion are : (1) that the transactions of hire-purchase entered into by the petitioners constituted sales rendering them liable to sales tax on their turnover excepting in cases where owing to the default on the part of the hirer in the payment of the instalments of hire the vehicle is seized by the petitioner and therefore no title passed to the customer ; (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 the elimination of such portion of the turnover where no sale resulted; and (3) that for the purpose of computing the turnover of the petitioners, the total of the 'hire' stipulated to be paid in instalments should be treated as the price or consideration for the sale.

28. There was no evidence that the taxing authorities had included in the turnover of the petitioners any transaction which remained a bailment without getting perfected into a sale.

29. Mr. Chengalvarayan next urged that the petitioners' case would be covered by explanation (iv) to the definition of sale which we have already extracted. The argument has, in our opinion, no substance. The explanation has reference to cases where there are really no two sales before the customer becomes the owner and it does not cover a case where the essence of the transaction consists in the intermediate dealer becoming an owner before the property passes to the customer. We have therefore no hesitation in rejecting this submission.

30. The assessment on the petitioners was therefore in order and the petition fails and is dismissed.

31. We shall next take up for consideration W. P. Nos. 500 and 671 of 1957, as the nature of the hire-purchase agreements effected by the petitioners in those petitions is very nearly the same as in W. P. No. 493 of 1956. The petitioners are Messrs. K. L. Johar and Co., Coimbatore, which is a firm of partners. In the case of these petitioners also, the customer having selected the vehicle which he intended to purchase, approached the petitioners with a proposal form. The customer paid a deposit which was made over to the motor dealer. The motor dealer effected a sale of the vehicle to the petitioners, who as owners entered into a hire-purchase agreement with the customer. In this agreement also the petitioners were designated the 'owners', while the customer was called the 'hirer'. The material terms of the agreement were as follows :

1. The owner will let and the hirer will take on hire upon the terms and conditions hereinafter expressed, the motor vehicle...for the term...months...from the rent specified in the B schedule hereto and payable without demand on the date therein mentioned.' (Schedule A was the description of the vehicle to identify the subject matter of the hire. Schedule B stipulated for payment of the rent in 20 instalments).

'2. It is agreed between the parties that on account of the expected depreciation in the price of the vehicle the hire for the first month is fixed at Rs....The hire for future months shall be as mentioned in the B schedule.

3. The hirer will, during the hiring--

(a) punctually pay said rents specified in the B schedule ;

(b) register the vehicle in the name of the owners and the hirer shall not represent or hold himself out as or do or suffer anything whereby he may be reputed to be the owner of the said vehicle;

(c) ....

(d) insure and keep insured the vehicle against loss or damage by fire, accident and third party the name of the owners ...and punctually pay premia and all moneys payable in respect of such insurance ;

(e) pay all taxes, licence fees, duties etc. ;

(f) ....

(g) not sell, charge, pledge, assign or part with possession of the vehicle.

5. The hirer agrees to make good to the owner all damages to the vehicle...and pay the owners the full value of the vehicle in the event of a total loss whether the damage or loss be caused accidentally or otherwise and....

13. The vehicle being the property of the owners shall not be subject to any lien charge or claim in respect of any rent due by the hirer to the landlord in respect of the premises where the hirer is residing or where he is carrying on business or in respect of the premises where the vehicle is garaged or placed at any time.

14. If the hirer shall (a) make a default in payment of any rent specified in the B schedule hereto or (b) shall make a default in payment of the insurance premium...or (c) shall become insolvent...or (d) shall suffer any distress or execution...or (e) shall fail to observe or perform any stipulation or condition in this agreement...then and in any such cases...the hiring shall immediately determine and the owners may without notice or demand retake possession of the vehicle....

15. Upon the determination of the hiring under the last preceding clause herein all arrears of rents specified in the B schedule...shall forthwith be paid by the hirer....

16. The hirer may determine the hire at any time by (a) delivering the vehicle to the owner...and (b) paying to the owner an apportioned part of the current rent due.

20. If the hirer shall duly observe and perform all the conditions and stipulations herein contained and on his part to be observed and performed and shall duly pay to the owner all rent hereby reserved during the term of hiring together with all other sums, if any, payable by him to the owners under the provisions of this agreement, then and at the termination of the hiring, the hirer may purchase the vehicle from the owners for a sum of Re. 1.

21. The hirer may at any time determine the hiring and become purchaser of the vehicle by paying to the owner such a sum as together with the sums previously paid will amount to the total sum payable by way of rent hereunder together with all sums, if any, payable by him to the owners under the provisions of this agreement and in addition a sum of Re. 1.

23. Until the vehicle shall have become the property of the hirer under the provisions of this agreement it shall remain the absolute property of the owner, and the hirer shall have no right or interest in the same other than the hirer under this agreement.

32. It will thus be seen that the terms of the hire-purchase agreement of the petitioners in these cases were in no way materially different from those which we have to consider in W.P. No. 493 of 1956. The only point of difference consisted in this. In the agreement concerned in W.P. No. 493 of 1956 a sum of Re. 1 was paid by the customer at the moment the contract was entered into and this sum was designated as consideration for the grant of the option to purchase. No further sum was to be paid at the moment when after the payment of the instalments of hire the customer exercised his option to purchase. In the contracts concerned in these two petitions, however, the Re. 1 was paid at the end of the transaction and was designated as if it were the consideration for the exercise of the option by the customer. It is obvious that this makes no change in the jural relationship between the parties or in the nature of the transactions involved in the two cases. In the hire-purchase agreements in these cases also, there is a transfer of title from the motor dealer to the petitioners. There is a subsequent sale or transfer of property in the vehicle from the petitioners to their customers. There is the same element of sale involved in the hire-purchase transactions in these petitions, so as to bring them within the liability to the charge of sales tax. The consideration for the transfer of property is not merely Re. 1 paid for the option but the payment of the earlier instalments of hire-purchase and hence the entire sum paid to or received by the petitioners constituted the consideration for the sale. The challenge to the validity of the assessment proceedings must therefore be rejected, and the petitions will stand dismissed, the rules nisi being discharged.

33. W.P. No. 1273 of 1956 : The nature of the transaction entered into by Messrs Sundaram Finance Private Ltd., petitioners in W.P. No. 1273 of 1956, is not the same as that of the petitioners in the petitions we have disposed of. Mr. Venkatasubramania Aiyar, who appeared for these petitioners placed before us the actual documents executed in respect of one customer, Messrs Maconochie and Co., and it was agreed that this was typical of the transactions of the petitioners. The main lines of the transaction were as follow : Messrs Maconochie and Co. (whom we shall call the customer) desired to purchase a Plymouth car from Messrs Sundaram Motors (Private) Ltd., who were 'the dealers'. The advertised price of the car was Rs. 18,590. After making a deduction for discount and certain additions for extras etc., the total price came to Rs. 18,977-3-0. Further sundry sums had to be paid to the dealers totalling Rs. 61 so that the amount finally payable by the customer to the dealers [Sundaram Motors (Private) Ltd.] was R. 19,038-3-0. The entire sum was paid by the customer on 6th January, 1955, by obtaining on loan Rs, 10,000 from the petitioners himself paying the balance. This loan of Rs. 10,000 was raised on an application made on 6th January, 1955, on the security of the Plymouth car which he intended to purchase, the application form stating that the debt would be repaid in eleven months with such interest as the petitioners might fix. When the application was granted, the customer executed an on demand promissory note for Rs. 10,000, in favour of the petitioners, carrying interest at 71/2 per cent per annum. This, of course, was the sum of Rs. 10,000 paid to the dealers to enable the car to be purchased by the customer.

34. The customer having thus become the owner of the car, immediately, as part of and in continuation of that transaction, effected a sale of the car to the petitioners. The sale letter ran : 'We have this day sold to you our undermentioned motor vehicle...for Rs. 10,000' and then followed the description of the vehicle and its registration number, the customer also executing a receipt for Rs. 10,000, stated to be the value of the vehicle sold. The next stage in the transaction was the execution of the hire-purchase agreement between the petitioners and the customer, by which the vehicle purchased by the petitioners was agreed to be left in the possession of the customer on hire-purchase terms. The main clauses of the agreement ran: (the petitioners as usual being termed 'the owners' and the customer 'the hirer').

1. The owners will let and the hirer will take on hire the motor vehicle...for the term...of...calendar months from... subject to determination as hereinafter mentioned.

2. The hirer agrees with the owners as follows :

(a) to pay to the owners punctually by way of rent during the hiring at the owners' address as aforesaid, the sums mentioned in the second schedule hereto on the dates therein mentioned whether previously demanded or not.

(b) To take proper care of the vehicle....

(f) not to cause, permit, allow or suffer any person to acquire any lien on the said vehicle....

4. In case the hirer shall during the continuance of this agreement do or suffer any of the following acts or things namely, either

(a) fail to pay any of the hiring instalments within the stipulated time whether legally demanded or not

(b) become insolvent....

(c) pledge or sell or attempt to pledge or sell or otherwise alienate or transfer the vehicle.

(e) break or fail to perform or observe any conditions on their part herein contained, then in such cases the rights of the hirer under this agreement shall forthwith be determined ipso facto without any notice to the hirer and all the instalments previously paid by the hirer shall be absolutely forfeited to the owners, who shall thereupon be entitled to enter any house or place where the said vehicle may then be, and seize, remove and retake possession of them and to sue for all the instalments due and for damages for breach of the agreement and for all the costs of retaking of possession of the said vehicle and all costs occasioned by the hirer's default.

5. The hirer may at any time determine this agreement by delivering up the said vehicle to the owners.

6. Upon the hirer paying the entire amount due under the second schedule herein the said vehicle shall become the sole and absolute property of the hirer.

In the account books maintained by the petitioners the transaction was shown thus :

'Loan account ... Rs. 10,000-0-0Interest at 71/2 for 11 months 687-8-0Total Rs. 10,687-8-0This has to be paid in 10 instalments of Rs. 975 and one of Rs. 937-8-0. Security : Plymouth Car MSY 1161.

35. The ledger page then proceeded to raise against the customer a total debit of Rs. 10,687-8-0, each monthly payment being shown as a credit against it. The debit was thus progressively reduced until with the payment of the last instalment a nil balance was shown. In the letters addressed by the petitioners to the customer reminding the latter or demanding payment, of the several instalments as and when they fell due the transaction was described as 'loan on hire-purchase'; and learned Counsel laid considerable emphasis on this heading as correctly describing the nature of the transaction.

36. It may also be mentioned that the petitioner collected sales tax from the customer in respect of the transaction, but this is not really relevant for determining the question involved in this petition.

37. In regard to the hire-purchase agreement there is one feature which has to be noticed, and that is, it does not provide for the grant of any option by the owner to purchase the vehicle or the exercise of that option by the customer such as we had in the agreements involved in the other petitions.

38. Mr. Venkatasubramania Aiyar urged that, if the transaction were viewed as a whole, it would be seen that it was not a case of a sale by the petitioners to the customer, but merely a transaction of financing, to enable the customer to purchase the vehicle from the dealers. He stressed the fact that to start with there was a direct sale by the dealers to the customer and that on that sale being effected, the property in the vehicle did pass to the customer. Of course, the dealers were liable to sales tax on that sale and this was collected and paid over to the department. It is really the transaction of sale by the customer to the petitioners with the concurrent hire-purchase agreement that requires examination to find out whether in fact and in law there were two further sales of the vehicle one by the customer to the petitioners and the second a resale by the petitioners to the customer at the completion of the hire-purchase agreement. Learned Counsel urged that the sale by the customer to the petitioners was not a real but only an ostensible sale, just as sales in the case of a mortgage by conditional sale of immovable property. For this purpose he relied on the tests usually adopted to distinguish sales with a covenant to repurchase from mort- gages by conditional sale in transactions regarding immovable property; (1) the disproportion between the price of the vehicle and the price as stipulated for the sale to the petitioners. (2) The debtor and creditor relationship simultaneously created between the petitioners and the customer by the execution of the pronotes. (3) The manner in which the transaction was entered in the books of the petitioners. (4) The headings in the correspondence emanating from the petitioners underlining the transaction as a loan. (5) The customer continuing throughout in possession of the vehicle and his right to retain it, subject to the operation of the forfeiture clause. He therefore contended that the sale by the customer, though in form absolute, was in reality but a transfer of the property for the limited purpose of enabling the petitioners to have complete security over the vehicle, and that when the purpose of that security was fulfilled and the moneys due to the petitioners were realised, the redemption had to take the form of a re-sale, because of the form which the original conveyance in favour of the petitioners took. His further contention was that, as admittedly the transaction between the petitioners and the customer, if it amounted only to the hypothecation of the vehicle, would not attract liability to sales tax, the transaction should be judged by its substance and not by its mere form, for the purpose of determining liability to sales tax. He finally pointed out that there were obvious difficulties and risks involved in a hypothecation of movable property and that it was only with a view to avoid these risks and afford the petitioners a full control over the security that the machinery of sale and re-sale was adopted, but that the form ought not to obscure the real nature of the transaction.

39. The questions therefore for our consideration are two: (1) Whether, the sale to the petitioners was real and effective, or was it not intended by the parties to operate as an absolute assignment of the property in the vehicle (2) Whether even if the substance of the transaction was one of the creation of a security even the vehicle and the form of sale and resale was resorted to, in order to clothe the petitioners with better and more effective rights than they would have had if the transaction were in form and on its face a hypothecation pure and simple, the legislative power to tax the transaction of sale would not arise, there being no dispute that if the tax were within the competence of the Legislature to impose, the provision in the Madras General Sales Tax Act was wide enough to bring it to charge. In other words, whether or not the petitioners should be held to the form of the transaction, because it was a form deliberately chosen by reason of the advantages and security which it offered.

40. As regards the first question, we do not consider it very useful to* advert to the analogy of the distinction between sales with covenants. for re-purchase and conditional sales which are treated as mortgages in the case of immovable property. The problem there is complicated by reference to the doctrines developed by the Chancery Courts as to the 'equity' of redemption and the related rule 'once a mortgage always a mortgage.' We might however refer to Mass v. Pepper [1905] A.C. 102 where the House of Lords affirmed a decision of the Court of Appeal in Mellor v. Mass [1903] 1 K.B. 226 which in its turn confirmed a judgment of Wright, J., in Mellor's Trustees v. Mass and Co. [1902] I K.B. 137 as the one most favourable to the petitioners' contention. The headnote to the report sufficiently sets out the facts :

In 1899 A contracted with B, to purchase an hotel and the chattels in and about the same for a sum of 30,000. A, being short of money, went to C and asked for a loan of 2,000 on a fourth mortgage of the hotel. C declined the mortgage, and A refused to give a bill of sale. On the morning of the day for completion of A's contract C went to B, told him that A was short of money, and offered to buy the chattels for 2,000. B accepted this offer, and C paid him the money. C then purported to sell the chattels to A on a hire-purchase agreement for 2,412-16-0 payable by instalments, and the purchase of the hotel was completed. The hire-purchase agreement was in common form and contained the usual licence to seize. In 1900 A became bankrupt, and his trustee in bankruptcy claimed the chattels as part of the bankrupt.

41. Under the Bills of Sales Act, 1878, a pledge or hypothecation of movables had to be registered in order to be valid, and the contention urged for the Trustee in bankruptcy was that the sale by C to A was only colourable and was intended to and did operate only by way of security over property which A purchased from B, and that by reason of the Bills of Sales Act C could not enforce any rights against the Trustee in bankruptcy. Wright, j., said : Mellor's Trustees v. Mass and Co. [1902] I K.B. 137:

The question is, was there a real sale to the defendants (C) in their own right ?....It is obvious that the sale to the defendants was to be solely for the purpose of such a transfer. It was to be a sale only on the terms of leaving the goods in the public house for Mellor (insolvent-B) at the price of 2,000. No one can suppose that the defendants were to become absolute beneficial owners, free to remove the goods and deal with them as they pleased....It seems to me clear that Sykes (the original owner of the goods--A) and Mellor could have prevented the defendants from removing the goods, or from selling to any one but Mellor. Under these circumstances, I think that the defendants must be regarded as trustees for Mellor, and Mellor as being the real owner, unless the property is taken out of Mellor or charged by the hiring agreement. But, if Mellor is to be regarded as the real owner, then the hiring agreement was an assurance to the defendants or was an essential part of their title, and it operated as a licence by Mellor to the defendants to take possession of the goods as against Mellor's equitable interest, and it was a security for a loan.

42. For these reasons the learned Judge held that the substance of the transaction amounted to the creation of a mortgage of the chattels, which, not having been registered under the Bills of Sale Act, avoided the transaction. Collins, M. R., said in the Court of Appeal, Mass v. Mellor [1903] 1 K.B. 226:

The question that had to be determined was whether the transaction to which the defendants were parties was or was not a loan on the security of the hire-purchase agreement, though the transaction was carried out in a way that at first sight might appear not to bring it within the Bills of Sales Act. If in point of fact the real transaction was a loan upon security, and the defendants have to rely upon the agreement, they must fail, because the agreement would be a bill of sale, and not being registered, would be void.

In the House of Lords, Halsbury, L.C., observed :

I do not think the sale to Mr. Mass (C) was a reality. I think the obvious purpose was that Mr. Mass was to lend 2,000 to get the security of the furniture and yet not to be within the Bills of Sales Act; that was the whole object so far as this transaction was concerned. Everything raises a very strong presumption that this was a colourable sale.

Lord Lindley added:

I have not the slightest hesitation in saying that this was a loan on security, and that there was no sale at all.

43. There is no doubt some analogy between the facts in Mass v. Pepper [1905] A.C. 102, and the nature of the transaction involved in this petition. There is also no doubt that a sale is a transfer of an absolute title in the goods, but that the absoluteness of the title conveyed is however dependent on the intention of the parties so that an assignment absolute in form need not always, nor necessarily involve a conveyance of the entire interests of the transferor which a sale implies. As Lord Moulton said in Mulraj Khatau v. Vishwanath Prabhuram Vaidya [1913] 40 I.A. 24 :

It is in form an absolute agreement....It may well be that although absolute in form it was intended to be only by way of security so as to be subject to a right of redemption....

44. But can we for these reasons hold that the sale to the petitioner was unreal, fictitious or colourable, and was but a form adopted to mask a hypothecation of movables This cannot be answered without reference to the second of the questions we have formulated above and we therefore proceed to consider it. The submissions of the learned Advocate-General were briefly these. The form of the transaction cannot be ignored because that was necessary to effectuate the main purposes which the parties had in view, viz., (i) that the petitioners should have an effective control over the title to the vehicle so as to prevent the risk of any loss arising from the customer passing title to a bonafide purchaser for value from him; (2) secure to the petitioners effective control over the possession of the vehicle. The element of sale was therefore not casual but was an integral and essential part of the transaction, on whose reality depended its effectiveness in securing to the parties those legal rights which it was designed to achieve. The sale form could not therefore be discarded as a colourable device.

45. Though the point is not free from difficulty we are satisfied that these submissions of the Advocate-General should be accepted. The parties desired to achieve the following objects :

(1) The actual possession of the vehicle must continue with the customer because he intended to purchase a vehicle for his use. Hence the transaction could not take the form of a pledge pure and simple.

(2) If the customer was to have possession notwithstanding a pledge that could be brought about only by the petitioners as pledgees permitting the customer to be in possession as their agent or bailee. In such a case, however, it would, to say the least, be a matter of grave doubt if a bona fide purchaser from the customer would not obtain a good title as against the pledgee (vide Babcock v. Lawson 5 Q.B.D. 284). A pledge would not therefore serve the needs of the parties. A real sale was necessary to ensure these objects. This inference is reinforced by some of the stipulations found in the agreement, which would appear to be not quite compatible with the transaction being one of pure bailment. For instance Clause (3) of the agreement, 'All moneys payable to the hirer by any insurer for loss or damage to the motor vehicle are hereby assigned to the owners, and the owners may notify the insurer of this condition' is more consistent with the ownership being a reality. Similarly the stipulation in Clause (4) that on default being committed by the customer the vehicle would be forfeited to the petitioners with the added right to the instalments still due, appears to emphasise the reality of the sale element. We do not think it necessary to refer to the other conditions embodied in the hire-purchase agreement which derive from the reality of the sale to the petitioners. It is therefore not correct to treat the transaction as one of pledge or bailment pure and simple, but rather as a complex one compounded of various factors and legal relationships. To sustain the efficacy of the hire-purchase agreement and indeed to serve as its very basis, the petitioners had to obtain title to the vehicle ; and to deny the existence or the reality of the sale which that acquisition of title involved, would really be not to construe the transaction between the parties, but rather to fashion one for them. We believe the correct rule to be to interpret or understand the transaction in such a manner that the several stipulations and covenants entered into by the parties might properly be fitted into the rubric chosen to designate it. In doing so we cannot obviously ignore the form which the parties have chosen, a form consistent with and a necessary foundation for, the terms and conditions agreed to between them.

46. There are thus more facets than one from which the matter could be viewed and judged as a transaction of hypothecation or pledge some of the rights conferred on the owner might be harsh on the borrower and too one-sided in favour of the lender. In the United Kingdom, Parliament has enacted in the Hire Purchase Act, 1938, provisions for the protection of the 'purchaser' under a hire-purchase. These are not matters with which we are immediately concerned. Our task is only to determine whether there is any element of sale involved in the transaction to bring it within the legislative entry. We answer this in the affirmative and hold that the transfer of title to the petitioners was necessary to be sufficiently real in order to enable the hire-purchase agreement to be entered into, and the hire-purchase agreement itself was the mode by which the property in the vehicle got re-transferred to the customer. The stipulations in the hire-purchase agreement were not terms on which the hypotheca was redeemed but a true purchase agreement by which the customer acquired title to the vehicle. Bar those instances, where owing to default of customers, the 'purchase' does not go through, they were sales within Section 2(h) effected by the petitioners, which brought them within the definition of 'dealer' subject to tax under Section 3(1) of the Act.

47. This petition also fails and is dismissed, the rule nisi being discharged. There will be no order as to costs in any of these petitions.

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