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CASE NO.: Appeal (civil)  6459 of 2003

PETITIONER: Federal Bank Ltd. & Ors

RESPONDENT: State of Kerala & Ors

DATE OF JUDGMENT: 21/03/2007

BENCH: S.H. KAPADIA & B. SUDERSHAN REDDY

JUDGMENT: J U D G M E N T

WITH Civil Appeal No.6460 of 2003  Badagara Co-Operative Rural Bank Ltd.         \005Appellant

             versus

State of Kerala & Ors.                                 \005Respondents

KAPADIA, J.

       A short question which arises in these two civil appeals is  : whether banks are "dealers" under Section 2(viii) read with  Explanation I of the Kerala General Sales Tax Act, 1963.          Since common question of law arises in both the civil  appeals, they are heard together and disposed of by this  common judgment.  For the sake of convenience, we may refer  to the facts in C.A.No.6459 of 2003 filed by Federal Bank  Ltd. and Ors. V. State of Kerala and Ors.   

       By the Kerala Finance Act, 1998 a clause (g) was inserted  in Section 2(viii) by which the definition of the word "dealer"  was expanded to cover a bank or a financial institution which,  whether in the course of its business or not, sells any gold or  other valuables pledged with it to secure any loan, for the  realization of such loan amount.  After the said amendment,  the Department called upon Federal Bank to furnish details of  the gold auction during the year 1998-1999 and 1999-2000.   This was vide notice dated 31.8.99 issued by the Sales Tax  Officer to the assessee.   On 1.11.99 the Department called  upon the bank to furnish details of the turnover relating to the  gold auction sale on and after 1.4.98; the Department also  called upon the assessee to pay tax at 4% on the sale turnover  within 15 days.  This was vide notice dated 1.11.99.  Federal  Bank submitted its reply contending that a scheduled bank  cannot be compared with a pawn broker and, therefore, it was  not a dealer under the 1963 Act.  The Federal Bank refused to  file its return on the ground that there was no sale of  ornaments pledged to the bank and that the position of the  bank remained unaltered even after introduction of clause (g)  in Section 2(viii) of the 1963 Act vide Kerala Finance Act 1998  dated 29.7.98.   

Ultimately, Federal Bank Ltd. filed O.P.No.1169 of 2000  in the Kerala High Court challenging the validity of Section  2(viii)(g) of the 1963 Act as also the notices issued by the  Department pursuant to the Kerala Finance Act, 1998

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directing Federal Bank to file returns and pay tax on sale of  pledged articles.   

       By judgment and order dated 11.4.2002 the Single Judge  held that in view of Kerala Finance Act, 1998, by which clause  (g) stood incorporated under Section 2(viii) of the 1963 Act, the  transaction of sale, whether in the course of business or not,  would cover auction sale or ornaments pledged with the bank.   Therefore, banks, according to the learned Single Judge, came  within the definition of the word "dealer" and since the pledged  articles were goods and since the sale was for money  consideration, Section 5 of the 1963 was applicable and in the  circumstances the leaned Single Judge upheld the demand  notices leaving the question of legislative competence open to  challenge.   

       Aggrieved by the said decision of the learned Single  Judge, Federal Bank along with other banks carried the  matter in appeal.  By the impugned judgment dated 3.4.03 it  was held that in view of the Kerala Finance Act, 1998 under  which the definition of the word "dealer" is expanded to cover  banks, the Department was right in seeking to cover the  transactions of auction sale of pledged gold articles.  It was  further held that amended Section 2(viii)(g) was intra vires the  Constitution of India and that the said section did not infringe  Articles 14 and 19 of the Constitution.  It was further held  that even assuming that the transaction of sale of pledged  articles is not a part of the main business activity still the said  transaction would come within the meaning of incidental or  ancillary to the business of banking and in the circumstances  there was no infirmity in the judgment of the learned Single  Judge.  Accordingly, the Division Bench dismissed the writ  appeals filed by the appellants herein.  Hence, this civil  appeal.   

       At the outset, we may point out that before us the  constitutional validity of Section 2(viii)(g) of the 1963 Act was  not argued.  Before us it was urged on behalf of banks  (appellants) that although by the Kerala Finance Act, 1998 the  definition of the word "dealer" under Section 2(viii) of the 1963  Act stood expanded so as to include banks, the said Act was  still not applicable to "sale" of pledged ornaments as the said  transaction did not take place in the course of banking  business in terms of Section 2 (xxi).  It was submitted that the  word "sale" is defined in the said section to mean every  transfer of the property in goods by one person to another in  the course of trade or business for cash, deferred payment or  other valuable consideration excluding mortgage,  hypothecation charge or pledge.  According to the banks  (appellants) since the auction sale of pledged ornaments did  not fall within the definition of the word "sale" in Section  2(xxi), such transaction are not exigible to tax under the said  Act, even after the insertion of clause (g) to Section 2(viii).  On  behalf of the banks it was further submitted that even under  1949 Act the word "banking" has been defined under Section  5(b) to mean accepting, for the purpose of lending or  investment, of deposits of money from the public, repayable on  demand or otherwise.  According to the banks (appellants)  auction sale of pledged ornaments does not come under the  definition of the word "banking" under Section 5(b) of the 1949  Act and, therefore, it cannot be said that the banks were in the  business of selling pledged ornaments.  On behalf of banks it  was further submitted that under Section 6 of the 1949 Act, in  addition to the business of banking, a banking company may  engage in one of the following forms of business, namely,

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borrowing, raising of loans, lending with or without security,  drawing of bills, accepting bills, discounting, buying, selling,  collecting and dealing in bills of exchange.  According to the  banks (appellants) the "banking business" consists of  accepting deposits from the public.  However, under Section 6  a bank is permitted to engage in the other form of business  apart from acceptance of deposits.  According to the banks  (appellants) Section 6 enables a banking company if it so  desires to engage in other form of business stipulated in  Section 6(1)(a) of the 1949 Act.  It was further contended that  under Section 8 of the said 1949 Act, banks are prohibited  expressly from trading in goods except to the extent of buying  or selling of goods in realization of security given to it by the  borrower.  Under the Explanation to Section 8 of the 1949  "goods" are defined to mean every kind of movable property  other than actionable claims, stocks, shares, money etc.  It is  submitted that in view of Section 8 banks cannot sell goods in  the course of business and in view of the said prohibition it  cannot be said that banks are in the business of selling  pledged ornaments.  Therefore, according to the banks  (appellants) auction sale of pledged ornaments by banks for  realization of security will not fall in the course of banking  business and, therefore, such transactions will not come  within the definition of the word "sale" as defined in Section  2(xxi) of the 1963 Act.            We do not find any merit in the above contention.  As  stated above, we are not concerned in the present civil appeals  with the question of legislative competence of the State  Legislature to insert clause (g) in Section 2(viii) of the 1963  Act.  In the present case, we are concerned only with the  limited question argued before us, namely, whether auction  sale of pledged goods by scheduled banks is a "transaction"  which takes place in the course of banking business in terms  of the 1949 Act.  In the present case, we are concerned with  the situation which arose after enactment of the Kerala  Finance Act, 1998.  By that amendment the definition of the  word "dealer" in Section 2(viii) was expressly amended to mean  any person who carries on business of buying, selling,  supplying or distributing goods for cash or deferred payment  or for any other valuable consideration.  It is important to note  that prior to Kerala Finance Act, 1998 there was litigation.   The result of that litigation was that the High Court had taken  the view in the earlier rounds that sale of pledged ornaments  did not fall "in the course of banking business" and in order to  get over the judgments, the Kerala Legislature introduced  clause (g) to Section 2(viii) by making it clear that even if the  sale of pledged ornaments took place, not in the course of  business, still such a transaction would make the person  (banks/financial institutions) a "dealer" under Section 2(viii) of  the 1963 Act.  Therefore, in deciding the matter we have to  keep in mind the object behind the Kerala Finance Act, 1998.

       In order to answer the controversy in hand we quote  hereinbelow the relevant sections of the 1963 Act:  "Section 2. Definitions. \026 In this Act, unless the  context otherwise requires:

(vi) "Business" includes \026  

(a)     any trade, commerce or manufacture or  any adventure or concern in the nature of  trade, commerce, or manufacture, whether  or not such trade, commerce,  manufacture, adventure or concern is

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carried on with a motive to make gain or  profit and whether or not any profit  accrues from such trade, commerce,  manufacture adventure or concern; and  (b)     any transaction in connection with, or  incidental or ancillary to such trade,  commerce, manufacture, adventure or  concern.

(viii) "dealer" means any person who carries on the  business of buying, selling, supplying or  distributing goods, executing works contract,  transferring the right to use any goods or supplying  by way of or as part of any service, any goods  directly or otherwise, whether for cash or for  deferred payment, or for commission remuneration  or other valuable consideration and includes:-

(a)     xxx             xxx             xxx (b)         a casual trader; (c)         a commission agent, a broker or a  delcredere agent or an autioneer or any  other mercantile agent, by whatever name  called, who carried on the business of  buying, selling, supplying or distributing  goods [executing works contract,  transferring right to use any goods or  supplying by way of or as part of any  service, any goods] on behalf of any  principal;  (d)      a non-resident dealer or an agent of a non- resident dealer, or a local branch of a firm  or company of [association of body of  persons whether incorporated or not]  situated outside the State;  (e)      a person who, whether in the course of  business or not, sells;

(i)     goods produced by him by  manufacture, agriculture,  horticulture or otherwise; or (ii)    trees which grow spontaneously and  which are agreed to be severed  before sale or under the contract of  sale;

(f)     a person who whether in the course of  business or not: -

(1)     transfers any goods, including  controlled goods whether in  pursuance of a contract or not,  for cash or deferred payment  or other valuable  consideration; (2)     transfers property in goods  (whether as goods or in some  other form) involved in the  execution of a works contract; (3)     delivers any goods on hire- purchase or any system of  payment by instalments; (4)     transfers the right to use any  goods for any purpose (whether  or not for a specified period) for

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cash, deferred payment or  other valuable consideration; (5)     supplies, by way of or as part  of any service or in any other  manner whatsoever, goods,  being food or any other articles  for human consumption or any  drink (whether or not  intoxicating), where such  supply or service is for cash,  deferred payment or other  valuable consideration);

Explanation.-(1) A society (including a co- operative society, club or firm or an  association or body of persons, whether  incorporated or not) which whether or not in  the course of business, buys, sells, supplies or  distributes goods from or to its members for  cash or for deferred payment, or for  commission, remuneration or other valuable  consideration, shall be deemed to be a dealer  for the purposes of this Act;

Explanation.-(2) The Central Government or a  State Government, which, whether or not in  the course of business, buy, sell, supply or  distribute goods, directly or otherwise, for cash  or for deferred payment, or for commission,  remuneration or other valuable consideration,  shall be deemed to be a dealer for the purposes  of this Act.

(g)     a bank or a financing institution which,  whether in the course of its business or not,  sells any gold or other valuable article  pledged with it to secure any loan, for the  realization of such loan amount;

Explanation I.-Bank for the purposes of this  clause includes a Nationalised Bank or a  Scheduled Bank or a Co-operative Bank;

Explanation II.- Financing Institution means  a financing institution other than a bank.

(xii) "goods" means all kind of movable  property (other than newspapers, actionable  claims, electricity, stocks and shares and  securities) and includes live stock, all  materials, commodities and articles (including  those to be used in the construction, fitting  out, improvement or repair of immovable  property or used in the fitting out,  improvement or repair of movable property)  and every kind of property (whether as goods  or in some other form) involved in the  execution of a works contract, and all growing  crops, grass or things attached to, or forming  part of the land which are agreed to be severed  before sale or under the contract of sale.

(xxi) "sale" with all its grammatical variations  and cognate expressions means every transfer  (whether in pursuance of a contract or not) of

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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.

(xxv) "taxable turnover" means the turnover  on which a dealer shall be liable to pay tax as  determined after making such deductions from  his total turnover of purchase or sale in the  course of inter-state trade or commerce or in  the course of export of the goods out of the  territory of India or in the course of import of  the goods into territory of India;

(xxvi) "total turnover" means the aggregate  turnover in all goods of a dealer at all places of  business in the State, whether or not the  whole or any portion of such turnover is liable  to tax including the turnover of purchase or  sale in the course of inter-state trade or  commerce or in the course of export of the  goods out of the territory of India or in the  course of import of the goods into the territory  of India.

Section 5 \026 Levy of tax on sale of goods.-  (1) Every dealer (other than a casual trader or  agent of a non-resident dealer or the Central  Government, or Government of Kerala or the  Government of any other State or of any Union  Territory, or any local authority) whose total  turnover for a year is not less than two lakh  rupees and every casual trader or agent of a  non-resident dealer, the Central Government,  the Government of Kerala, the Government of  any other State or of any Union Territory or  any local authority, whatever be its total  turnover for the year, shall pay tax on his  taxable turnover for that year in respect of  goods included in the Schedule at the rate  mentioned against such goods."

       We also quote hereinbelow the relevant provisions of the  1949 Act: "Section 5. Interpretation.- In this Act,  unless there is anything repugnant in the  subject or context,-  

(b) "banking" means the accepting, for  the purpose of lending or investment, of  deposits of money from the public,  repayable on demand or otherwise, and  withdrawable by cheque, draft, order or  otherwise.   Section 6. Forms of business in which  banking companies may engaged.-(1) In  addition to the business of banking, a banking  company may engage in any one or more of the  following forms of business, namely:-

(a) the borrowing, raising, or taking up of  money; the lending or advancing of money

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either upon or without security; the drawing,  making, accepting, discounting, buying,  selling, collecting and dealing in bills of  exchange, hoondees, promissory notes,  coupons, drafts, bills of lading, railway  receipts, warrants, debentures, certificates,  scrips and other instruments, and securities  whether transferable or negotiable or not; the  granting and issuing of letters of credit,  traveller’s cheques and circular notes; the  buying, selling and dealing in bullion and  specie; the buying and selling of foreign  exchange including foreign bank notes; the  acquiring, holding, issuing on commission,  underwriting and dealing in stock, funds,  shares, debentures, debenture stock, bonds,  obligations, securities and investments of all  kinds; the purchase and selling of bonds,  scrips or other forms of securities on behalf of  constituents or others, the negotiating of loans  and advances; the receiving of all kinds of  bonds, scrips or valuables on deposit or for  safe custody or otherwise; the providing of safe  deposit vaults; the collecting and transmitting  of money and securities;

(b) acting as agents for any   Government or local authority or any other  person or persons; the carrying on of agency  business of any description including the  clearing and forwarding of goods, giving of  receipts and discharges and otherwise acting  as an attorney on behalf of customers, but  excluding the business of a (managing agent or  secretary and treasurer) of a company;  

(c) contracting for public and private loans and  negotiating and issuing the same;

(d) the effecting, insuring, guaranteeing,  underwriting, participating in managing and  carrying out of any issue, public or private, of  State, municipal or other loans or of shares,  stock, debentures, or debenture stock of any  company, corporation or association and the  lending of money for the purpose of any such  issue;

(e) carrying on and transacting every kind of  guarantee and indemnity business;

(f) managing, selling and realizing any property  which may come into the possession of the  company in satisfaction or part satisfaction of  any of its claims;

(g)acquiring and holding and generally dealing  with any property or any right, title or interest  in any such property which may form the  security or part of the security for any loans or  advances or which may be connected with any  such security;

(h) undertaking and executing trusts;

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(i) undertaking the administration of estates as  executor, trustee or otherwise;

(j) establishing and supporting or aiding in the  establishment and support of associations,  institutions, funds, trusts and conveniences  calculated to benefit employees or ex- employees of the company or the dependents  or connections of such persons; granting  pensions and allowances and making  payments towards insurance; subscribing to or  guaranteeing moneys for charitable or  benevolent objects or for any exhibition or for  any public, general or useful object;   (k)  the acquisition, construction, maintenance  and alteration of any building or works  necessary or convenient for the purposes of  the company;

(l) selling, improving, managing, developing,  exchanging, leasing, mortgaging, disposing of  or turning into account or otherwise dealing  with all or any part of the property and rights  of the company;

(m) acquiring and undertaking the whole or  any part of the business of any person or  company, when such business is of a nature  enumerated or described in this sub-section;

(n) doing all such other things as are  incidental or conducive to the promotion or  advancement of the business of the company;  

(o) any other form of business which the  Central Government may, by notification in the  Official Gazette, specify as a form of business  in which it is lawful for a banking company to  engage.

(2) No banking company shall engage in any  form of business other than those referred to  in sub-section (1).

Section 8. Prohibition of trading.-  Notwithstanding anything contained in section  6 or in any contract, no banking company  shall directly or indirectly deal in the buying or  selling or bartering of goods, except in  connection with the realization of security  given to or held by it, or engage in any trade,  or buy, sell or barter goods for others  otherwise than in connection with bills of  exchange received for collection or negotiation  or with such of its business as is referred to in  clause (i) of sub-section (1) of Section 6.

Explanation.- For the purposes of this section,  "goods" means every kind of movable property,  other than actionable claims, stocks, shares,  money bullion and specie, and all instruments  referred to in clause (a) of sub-section (1) of  section 6.

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Section 29. Accounts and balance-sheet.- (1) At the expiration of each calendar year (or  at the expiration of a period of twelve months  ending with such date as the Central  Government may, by notification in the Official  Gazette, specify in this behalf,) every banking  company incorporated (in India), in respect of  all business transacted by it, and every  banking company incorporated (outside India),  in respect of all business transacted through  its branches (in India), shall prepare with  reference to (that year or period, as the case  may be,) a balance-sheet and profit and loss  account as on the last working day of (that  year or the period, as the case may be) in the  Forms set out in the Third Schedule or as near  thereto as circumstances admit:         Provided that with a view to facilitating  the transition from one period, of accounting  to another period of accounting under this  sub-section, the Central Government may, by  order published in the Official Gazette, make  such provisions as it considers necessary or  expedient for the preparation of, or for other  matters relating to, the balance-sheet or profit  and loss account in respect of the concerned  year or period, as the case may be.

(2) The balance-sheet and profit and loss  account shall be signed,-

(a)     in the case of a banking company  incorporated (in India), by the manager or  the principal officer of the company and  where there are more than three directors  of the company, by at least three of those  directors, or where there are not more than  three directors, by all the directors, and  (b)     in the case of a banking company  incorporated (outside India) by the  manager or agent of the principal office of  the company (in India).

(3) Notwithstanding that the balance-sheet of  banking company is under sub-section (1)  required to be prepared in a form other than  the form (set out in Part I of Schedule VI to the  Companies Act, 1956 (1 of 1956), the  requirements of that relating to the balance- sheet and profit and loss account of a  company shall, insofar as they are not  inconsistent with this Act, apply to the  balance-sheet or profit and loss account, as  the case may be, of a banking company.

(3-A) Notwithstanding anything to the contrary  contained in sub-section (3) of Section 210 of  the Companies Act, 1956 (1 of 1956), the  period to which the profit and loss account  relates shall, in the case of a banking  company, be the period ending with the last  working day of the year immediately preceding  the year in which the annual general meeting  is held.

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Explanation.-In sub-section (3-A), "year" means  the year or, as the case may be, the period  referred to in sub-section (1).

(4) The Central Government, after giving not  less than three months’ notice of its intention  so to do by a notification in the Official  Gazette, may from time to time by a like  notification amend the Form set out in the  Third Schedule.      "THE THIRD SCHEDULE (see section 29) FORM A Form of Balance-sheet      C                         CAPITAL AND LIABILITIES PROPERTY AND ASSETS Rs.  P.  Rs.  P.                                   Rs.  P.  Rs.  P. 1. CAPITAL: (i) Authorised Capital ..... shares of Rs. ....each ..... shares of Rs. .... each ................................ _______________ (ii) Subscribed Capital ..... shares of Rs. .... each ..... shares of Rs. .... each _______________ (iii) Amount called up On.....shares of Rs..... each less class unpaid On..... shares of Rs..... each less calls unpaid of (iii) above, held by (a) Individuals (b) Co-operative institutions (c) State Government ______________ ______________ 1. CASH: In hand and with Reserve Bank 31[National Bank] State Bank of India, State Co-operative Bank and Central Co-operative Bank   2. BALANCES WITH OTHER BANKS: (i) Current deposits (ii) Savings bank deposits (iii) Fixed deposits 3. MONEY AT CALL AND SHORT NOTICE: 4. Investments: (i) In Central and State Government  Securities (at book value) Face value Rs. Market value Rs. (ii) Other Trustee securities (iii) Shares in co-operative institutions  other than in item (5) below (iv) other investments (to be specified)                        2. RESERVE FUND AND OTHER RESERVES (i) Statutory Reserve (ii) Agricultural (Credit stabilization fund)

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(iii) Building Fund (iv) Dividend Equalization Fund (v) Special Bad Debts Reserve (vi) Bad and Doubtful Debts Reserve (vii) Investment and Depreciation Reserve (viii) Other Funds and Reserves (to be specified) 5. INVESTMENT OUT OF THE  PRINCIPAL SUBSIDIARY STATE  PARTNERSHIP FUNDS In shares of: (i) Central Co-operative Banks (ii) Primary agricultural credit societies (iii) Other societies 6. ADVANCES\006: (i) Short-term loans, cash credits,  overdrafts and bills discounted Of which secured against: (a) Government and other 3. PRINCIPAL/SUBSIDIARY   STATE PARTNERSHIP FUND ACCOUNT: For share capital of:   (i) Central co-operative banks (ii) Primary agricultural credit societies (iii) other societies ____________ approved securities (b) Other tangible securities @ Of the advances, amount due from  Individuals Of the advances, amount overdue Considered bad and doubtful of recovery (ii) Medium-term loans Of which secured against: 4. DEPOSITS AND OTHER ACCOUNTS: (i) Fixed deposits* (a) Individuals** (b) Central co-operative banks (c) Other societies (ii) Savings Bank Deposits (a) Individuals** (b) Central co-operative banks (c) Other societies (iii) Current deposits (a) individuals** (b) Central co-operative bank (c) Other societies (iv) Money at call and short notice ____________ (a) Government and other approved securities (b) Other tangible securities @ Of the advances, amount due from individuals Of the advances, amount overdue considered bad and doubtful of recovery (ii) Long-term loans Of which secured against (a) Government and other approved securities (b) Other tangible securities @  5. BORROWINGS:

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(i) From the Reserve Bank of India 32[the National Bank] State/Central co-operative Bank: (a) Short-term loans, cash, credits and overdrafts (A) Government and other approved securities (B) Other tangible securities @ (b) Medium term loans Of which secured against (A) Government and other approved securities (B) Other tangible Securities @   Of the advances, amount due from individuals   Of the advances, amount over due Considered bad and doubtful of recovery ____________ 7. INTEREST RECEIVABLE Of which overdue Considered bad and doubtful of recovery     (A)   (B) (ii)         (A)   (B)     (A)   (B)     (A)   (B) (iii)     (A)   (B)     (A)   (B)     (A)   (B) (iv) (c) Long-term loans

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Of which secured against: Government and other approved securities Other tangible securities @ From the State Bank of India (a) Short-term loans, cash- credits and over drafts Of which secured against: Government and other approved securities Other tangible securities @ (b) Medium term- loans Of which secured against: Government and other approved securities: Other tangible securities @ (c) Long-term loans: Of which secured against: Government and other approved securities Other tangible securities @ From the State Government (a) Short-term loans Of which secured against: Government and other approved securities Other tangible securities @ (d) Medium term loans Of which secured against: Government and other approved securities Other tangible securities @ (c) Long-term loans Of which secured against: Government and other approved securities Other tangible securities @ Loans from other sources (source and security to be specified rule)     8. BILLS RECEIVABLE BEING BILLS FOR COLLECTION As per contra _____________   9. BRANCH ADJUSTMENT _____________   10. PREMISES LESS DEPRECIATION _____________   11. FURNITURE AND FIXTURES LESS DEPRECIATION _____________   12. OTHER ASSETS (to be specified)   13. NON-BANKING ASSETS ACQUIRED IN SATISFACTION

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OF CLAIMS (standing mode of valuation) _____________       14. PROFIT AND LOSS   6. BILL FOR COLLECTION BEING BILLS RECEIVABLE As per contra ____________ 7. BRANCH ADJUSTMENTS ____________ 8. OVERDUE INTEREST RESERVE ____________ 9. INTEREST PAYABLE ____________ 10. OTHER LIABILITIES (i) Bills payable (ii) Unclaimed dividends (iii) Suspense (iv) Sundries 11. PROFIT AND LOSS Profit as per last balance-sheet Less appropriations Add profit for the year brought from the Profit and Loss Account ____________ Total ____________

                                       ___________                  Total                                         ___________   CONTINGENT LIABILITIES (i) Outstanding liabilities for guarantees issued (ii) Others ___________ Total ___________    

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                                         ____________                    Total                                         ____________  FORM B Form of Profit and Loss Account Profit and Loss Account for the year ended\027 EXPENDITURE INCOME Rs. P. Rs. P. Rs. P. Rs. P. 1. Interest on deposits,  borrowings,etc. 2. Salaries and allowances and provident fund 3. Directors and local committee members’ fees and allowances 4. Rent, taxes, insurance,  lighting, etc. 5. Law charges 6. Postage, telegrams and telephonic charges 7. Auditor’s fees 8. Depreciation on and  repairs in property 9. Stationery, printing and advertisement,etc. 10. Loss from sale of or dealing with non-banking assets 11. Other expenditure 12. Balance of profit                                         ___________ Total ___________  1. Interest and discount   2. Commission, exchange and brokerage   3. Subsidies and donations   4. Income from non-banking  Assets and profit from sale  of or dealing with such assets   5. Other receipts   6. Loss (if any)             _

___________ Total ____________ General Instructions\027The corresponding figures (to the nearest rupee,  if so desired for the year immediately preceding the year to which the  profit and loss account relates should be shown in separate columns." In order to answer the contentions raised on behalf of the

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banks (appellants) it is important to note that we are  concerned with the 1963 Act.  The said Act is enacted to  consolidate and amend the law relating to the levy of tax on  sale or purchase of goods in State of Kerala.  In our opinion,  the word "sale" in Section 2(xxi) of the 1963 is very important.   The word "sale" is defined to mean transfer of the property in  goods in the course of trade or business for cash, deferred  payment or for any other valuable consideration.  This  definition is different from the definition of the word "sale"  under the Sale of Goods Act, 1930.  When the pledged article  is put to auction it is no doubt for satisfaction of claims.  It  also results in an income from non-banking assets.  The first  question which, therefore, arises is : whether sale of pledged  ornaments for consideration falls in the course of trade or  business of the bank.  It is no doubt true that banks have to  act on instructions of the borrower.  In the present case, we  are not concerned with the provisions of Section 176 of the  Contract Act, 1872.  We are concerned with the definition of  the word "sale" under the 1963 Act.  When a bank sells the  pledged ornaments it is not acting as an agent of the borrower  even under the 1949 Act.  When the bank sells the goods  pledged to them they do not act as the agents of the borrower.   As pledgees, the banks, acting under Section 176 of the  Contract Act, 1872 have a right to sell the goods.  That sale is  not as agents but that sale is in exercise of the statutory power  under the 1949 Act.  No doubt the sale is on behalf of the  pledgor, however, the sale is in exercise of the statutory power  [See: The Deputy Commissioner of Commercial Taxes v.  A.R.S. Thirumeninatha Nadar Firm \026 (1968) 21 STC 184  (Mad)].  To the same effect is the judgment of the Punjab and  Haryana High Court in the case of High Channel Video v.  Enclave Electronics and others \026 (1999) 116 STC 131 (P. &  H.)]  Further on reading the provisions of the 1949 Act, one  finds that every bank is required to maintain its balance-sheet  in Form ’A" of the Third Schedule, quoted above.  The  prescribed form indicates that non-banking assets acquired by  the banks even in satisfaction of claims, are required to  declare their holdings.  The prescribed form of balance-sheet  indicates that banks are required to show on the asset side  non-banking assets acquired by them in satisfaction of claims.   Similarly, in Form ’B’ of the Third Schedule under Profit and  Loss Account, banks are required to show income from non- banking assets and profit from sale of such assets.  In our  view, therefore, sale of pledged assets takes place in the course  of banking business.  Therefore, as stated above, the banks, in  selling the goods pledged to them, did not act as agents of the  borrowers/pledgors and that their sale was in exercise of  statutory power under the 1949 Act.  Further, in our view it is  no doubt true that under Section 8 of the 1949 Act banks are  prohibited from trading in goods.  However, if one reads  Section 8 along with Third Schedule to the 1949 Act it is clear  that dealing in non-banking assets is a banking business and  the exception made in Section 8 which allows banks to realize  security and which allows banks to engage in trade in order to  realize security, falls within the banking business whenever  undertaken.  When a pledged article is sold in an auction, the  bank recovers not only its dues but also recovers interests and  its other charges.  This realization falls within the parameters  of the Third Schedule to the 1949 Act.  In the circumstances,  we are of the view that sale of pledged ornaments falls within  the course of banking business under the 1949 Act.  In the  circumstances, such transactions are taxable under Section  2(viii)(g) read with Section 5 of the 1963 Act.  We also find  merit in the contention advanced on behalf of the Department  (respondents herein) that the very object of the Kerala Finance

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Act, 1998 was to introduce clause (g) in Section 2(viii) in order  to get over the judgments of the High Court which took the  view that sale of pledged goods did not fall in the course of  banking business.  We have quoted clause (g).  That clause  makes it very clear that even if the sale of pledged ornaments  takes place outside the banking business, the 1963 Act would  cover even such transactions.  Therefore, once such  transactions fall under Section 2(viii)(g) of the 1963 Act, banks  become "dealers" and they are liable to pay sales tax under the  said 1963 Act.  It is true that the definition of the word "sale"  under Section 2(xxi) of the 1963 Act does not include  mortgage, hypothecation charge or pledge, however, the  important point to be noted is that the definition of the word  "sale" under the 1963 Act is not the same as under Section 4  of the Sale of Goods Act, 1930.  The definition of the word  "sale" in Section 2(xxi) in the 1949 is very similar to Section  2(g) of the Central Sales Tax Act, 1956 which is held to be  having a very wide meaning as compared to the definition of  the word "sale" in Section 4 of the Sale of Goods Act, 1930  [See: State of Maharashtra v. Embee Corporation, Bombay  - 1997 (7) SCC 190].  Further, when charge or pledge is  enforced that enforcement is by way of sale of the pledged or  hypothecated goods; that sale is for consideration and,  therefore, it falls within the ambit of Section 2(xxi) of the 1963  Act.

       In the circumstances, there is no infirmity in the  impugned judgments of the Division Bench of the Kerala High  Court.   

Accordingly, the above civil appeals have no merit and  they are dismissed with no order as to costs.