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PETITIONER: INSTALMENT SUPPLY LTD.

       Vs.

RESPONDENT: THE SALES TAX OFFICER, AHMEDABAD-I & ORS.

DATE OF JUDGMENT01/05/1974

BENCH: CHANDRACHUD, Y.V. BENCH: CHANDRACHUD, Y.V.

ACT: Gujarat  Sales Tax Act-S. 2(28) whether state  could   goods inside  the  State, but agreement entered into  outside  the State. Constitution  of  India, 1950-Art. 32-When a  petition  will lie.

HEADNOTE: The petitioner, a limited company with its registered office in  New Delhi, carries on business of financing purchase  of motor  vehicles.   The intending buyer of  a  motor  vehicle enters  into a hire purchase agreement with  the  petitioner company.   Under the terms of the agreement the hirer  makes an  initial deposit by way of premium as  consideration  for granting the lease of the vehicle, which deposit becomes the absolute  property of the company.  The hirer undertakes  to pay  instalments and when all the instalments are  paid  the vehicle becomes the property of the hirer at his option,  on payment of rupee one to the company.  Till the completion of the  instalments  the vehicle remains the  property  of  the company  as  owners  but the hirer is  responsible  for  any damage  or  destruction or loss of the vehicle.   Until  the option  is exercised the hirer is at liberty to  return  the vehicle  and  to put an end to the  hiring  agreement.   The contract  of  hire  purchase  was  entered  into  in  Delhi, instalments were paid in Delhi, the option was exercised  in Delhi  but the goods were inside the State of Gujarat  which taxed the sale. Section  2(28)  of the Gujarat Sales Tax Act  which  defines sale  enacts  sale means the sale of goods made  within  the State  for  cash  or  deferred  payment  or  other  valuable consideration  and includes any supply by a society or  club or an association to its members on Payment of a price or of fees  or  subscription  but does  not  include  a  mortgage, hypothecation,  charge or pledge..... " The  explanation  to the  definition states "For the purposes of this clause  the sale  within  the  State includes a sale  determined  to  be inside   the  State  in  accordance  with   the   Principles formulated  in sub-section (2) of section 4 of  the  Central Sales  Tax Act, 1956." Sub-section (2) of Section 4  of  the Central  Sales Tax Act, 1956 enacts "A sale or  purchase  of goods  shall be deemed to take place inside a State  if  the goods  are within the State (a) in the case of  specific  or ascertained  goods  at  the time the  contract  of  sale  is made.......

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On  the question whether (1) the State of Gujarat could  tax the sales and (2)   whether a petition under Article 32 lies in this case Dismissing the petitions, HELD  :-(a) In the present case the sale itself  took  place only when the hirer exercised his option to         purchase and that was when the goods were inside the State of Gujarat and therefore, the State of Gujarat was entitled to levy tax on that transaction of sale. [392H-393A] There  can be no objection to the incorporation in s.  2(28) of  the  Gujarat Act of the definition of  sale  inside  the State  contained  in s. 4(2) of the Central Sales  Tax  Act. The Gujarat legislation could as well have incorporated  the very  words of s. 4(2) of the Central Sales Tax Act  in  the explanation  to  s.  2(28) and in either case  it  makes  no difference. [392E] (b)  There  can  be  no objection to the  State  of  Gujarat taxing what according to the Central State Tax Act is a sale inside the State of Gujarat.  There can be no objection to a State  making a sale of goods which are inside the State  at the time the sale takes place liable to sales tax under  its legislation.   The fact that the contract of  hire  purchase was entered into in Delhi that the instalments were paid  in Delhi and the option itself was exercised in Delhi does  not make  any difference to this result.  All that it  means  is that the 387 agreement  of sale was concluded in Delhi whereas  the  sale itself was completed by the property in the goods passing in Gujarat State and the sale therefore,. took place in Gujarat State. [392F-G] (c)  There can be no objection the State of Gujarat  levying a  tax in respect of the same goods even though those  goods may  have  been subject to tax earlier by the  Delhi  State. There is no rule that any goods can be subjected to tax only once.   Even in respect of the same goods sales tax can:  be levied as often as there are sales. [392G-H] Instalments  Supply (p) Ltd. v. Union of India [1962] 2  SCR 644 referred to. (2)  The  constitutionality of s. 2(28) of the  Gujarat  Act has  been,  questioned  and,  therefore,  the  petition   is ’maintainable.  An application under Article 32 will lie (1) where  action is taken under a statute which is ultra  vires of the Constitution (2) where the statute is intra vires but the  action taken is without jurisdiction and (3) where  the action  taken is procedurally ultra vires as where a  quasi- judicial  authority  under an obligation to  act  judicially passes  an  order  in violation  of  principles  of  natural justice. [1393F-H]                                            [393 F-H] Ujjambai  v. State of U.P., [1963] 1 S.C.R. 778 followed.

JUDGMENT: ORIGINAL       JURISDICTION : Writ petition Nos. 129, 131 of 1969. (Petition Under Article 32 of the Constitution of India). Ved  Vyas, Bishamber Lal, H. K. Puri, P. V. Kapur and S.  C. Patel, for the petitioner. M.   C.  Bhandare,  G.  L. Sanghi, M. N. Siroff  and  R.  N. Sachthey, for the respondents. The Judgment of the Court was delivered by- ALAGIRISWAMI, J. The very same question that arises in these three   petitions,  though  from  a  different  angle,   was

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considered  by this Court in an earlier litigation to  which the  Petitioner was a party (Instalment Supply (P)  Ltd.  v. Union of India, [1962] 2 SCR 644.) The question is when does sale  liable to sales tax take place under a  hire  purchase agreement.   On the earlier occasion it was the Delhi  State that sought to tax certain transactions under  hire-purchase agreements In the present case it is the Gujarat State  that has  sought to tax certain transactions under certain  hire- purchase agreements. The,  petitioner  is a limited company with  its  registered office  in  New  Delhi.   It  carries  on  the  business  of financing  the  purchase  of  motor  vehicles.   The  person desiring  to  purchase a motor vehicle enters into  a  hire- purchase  agreement with the petitioner company.  It may  be useful  to  give  within a short compass the  terms  of  the agreement: The company charges the hirer an initial  deposit by way of premium as a consideration for granting the  lease of the vehicle, which deposit becomes the absolute  property of  the  company,  the premium charged  as  aforesaid  is  a substantial  amount,  being  usually 25% of  the  prices  in respect  of  new  vehicles.  The  hirer  undertakes  to  pay instalments  and  when  all the instalments  are  paid,  the vehicle becomes the property of the hirer at his option,  on payment of rupee one to the company, as a consideration  for the  option; until all the stipulated instalments have  been paid and the option exercised as aforesaid, the 388 vehicle remains the property of the company as owners.   The hirer is delivered possession of the vehicle and he  remains responsible  to  the company for damage  or  destruction  or loss.  The hirer has to pay interest at the rate of one  per cent  per mensem on all sums overdue.  Until the  option  of purchase  is  exercised  by the hirer he is  at  liberty  to return  the  vehicle  and  to  put  an  end  to  the  hiring agreement, on certain terms.  Thus, under the agreement  the hirer  has the use of the vehicle which is entrusted to  him as the property of the company, and it is open to the  hirer to become the purchaser of the vehicle as aforesaid, but  he is not bound to do so. The  liability  to sales tax on the earlier  occasion  arose under  the Bengal Finance (Sales Tax) Act, 1941,  which  was extended to the State of Delhi.  Under section 2(g) of  that Act ’Sale’ means any transfer of property in goods for  cash or   deferred  payment  or  other  valuable   consideration, including  a transfer of property in goods involved  in  the execution  of a contract, but does not include  a  mortgage, hypothecation,  charge or pledge.  There was an  explanation thereto as follows :               "Explanation I.. A transfer of goods on  hire-               purchase or other instalment system of payment               shall, notwithstanding that the seller retains               a  title to any goods as security for  payment               of the price, be deemed to be a sale." This  Court  pointed out that "the definition  includes  not only what may be compendiously described as a sale under the Sale  of Goods Act, but also transactions,  which,  strictly speaking,  are  not sales, not even contracts of  sale,  but only  contain  an  element of sale, that is  the  option  to purchase,  and that is the reason why the  explanation  ends with the words "be deemed to be a sale", thereby  indicating that a legal fiction has been introduced into the concept of ’sale’  as ordinarily understood, and that  the  explanation has  included within its amplitude a mere transfer of  goods without the transfer of title to the goods." To  the  attack  oil  behalf  of  the  petitioner  that  the

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explanation, in so far as it sought to extend the concept of ’sale’   to   what  in  law  was  not  a  real   sale,   was unconstitutional, this Court pointed out that in view of its decision in Mithan Lal’s case (1959 SCR 445) this contention had  lost  all its force.  In Mithan Lal’s case  this  Court upheld the right of Parliament to impose a tax on the supply of materials in building contracts even though in the  State of Madras v. Cammon Dunkerley, & Co. (Madras) Ltd. (1959 SCR 379) it had been held that ’it could not be done.  This  was on  the basis that the power of Parliament to  legislate  in respect  of Part C States is untremmalled by the  limitation prescribed  by Art. 246, Cls. (2) and (3), and Entry  54  of List  II,  and  is  plenary and absolute  and  there  is  no restriction   which  is  material  to  the   competency   of Parliament  to legislate on this topic.  Though  this  Court did  not  say so the reference is obviously to Entry  97  of List I of the 7th Schedule under which only Parliament would be  competent to legislate in respect of matters which  are, not  mentioned  in any other entry in the 7th  Schedule  and therefore could 389 pass  a law which makes a transaction which would not be,  a sale  under  the  Sale  of Goods Act  a  sale  for  taxation purposes which a State Legislature would not be competent to do. Before we proceed to deal with this case further it would be useful  to  clear  the  ground by  bringing  out  the  legal incidents  of  a  ’sale’ and  of  hire-purchase  agreements. These  have been set out in the decision in the  Installment Supply case (1962 2 SCR 644) as well as another decision  of this  Court in Johar & Co. v. C.T.O. (1965 2 SCR  112).   We propose  to  discuss  this  question  for  facilitating  the decision in the present case. Section 4 of the Sale of Goods Act reads as follows               "4.(1)  A  contract  of sale  of  goods  is  a               contract  whereby  the  seller  transfers   or               agrees  to transfer the property in  goods  to               the  buyer  for  a  price.   There  may  be  a               contract  of sale between one  part-owner  and               another.               (2)   A  contract of sale may be  absolute  or               conditional.               (3)   Where  under  a  contract  of  sale  the               property in the goods is transferred from  the               seller  to  the buyer, the contract  called  a               sale,  but where the transfer of the  property               in the goods is to take place at a future time               or subject to some condition thereafter to  be               fulfilled, the contract is called an agreement               to sell.               (4)   An agreement to sell becomes a sale when               the   time  elapses  or  the  conditions   are               fulfilled subject to which the property in the               goods is to be transferred." The  definition is the same as in the English Sale of  Goods Act, 1893.  The points to be noticed are that the essence of sale  is  the transfer of the property in a thing  from  one person  to another for a prim.  The term "contract of  sale" includes  an  agreement to sell.  An agreement  to  sell  is known  as  an executory contract of sale, while, a  sale  is known  as an executed contract of sale.  The term  "contract of sale" thus includes both actual sales and agreements  for sale.   It is important to distinguish clearly  between  the two classes of contract.  An agreement to sell is a contract pure  and  simple  whereas  a sale  is  a  contract  plus  a

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conveyance.   By an agreement to sell a jus in  personam  is created, by a sale a jus in rein also is transferred.  Where goods have been soId and the buyer makes default, the seller may  sue  for  the contract price on  the  count  of  "goods bargained  and  sold",  but where an  agreement  to  buy  is broken,  the  seller’s  normal  remedy  is  an  action   for unliquidated  damages. if an agreement to sell be broken  by the seller the buyer has only a personal remedy against  the seller.   The goods are still the, property of  the  seller, and  he can dispose of them as he likes.  But if  there  has been a sale, and the seller breaks his engagement to deliver the goods, the buyer has not only a personal remedy  against the  seller,  but  also the usual  proprietary  remedies  in respect  of the goods themselves.  In many cases,  too,  he, can  follow  the  goods into the, hands  of  third  parties. Again, if there be an agreement for sale, and 390 the  goods  are destroyed, the loss as a rule  falls-on  the seller, while, if there has been a sale, the loss as a  rule falls  upon the buyer though the goods have never come  into his possession. (Chalmers’ Sale of Goods Act 14th Edn. pp. 4 &  12; Halsbury’s Laws of England, 3rd Edn., Vol. 34,  paras 29 to 31). A  contract of sale should be distinguished from a  contract of  hire-purchase.  A contract of hire-purchase is  properly speaking a contract of hire by which the hirer is granted on option to buy but is not, as under a contract of sale, under a legal obligation to do so.  The contract of hire  purchase is one of the variations of the contract of bailment, but it is  a modern development of commercial life, and  the  rules with  regard to bailments, which were laid down  before  any contract  of  hire-purchase  was  contemplated,  cannot   be applied  simpliciter  because such a contract has in it  not only  the element of bailment but also the element of  sale. At common law the term "hire purchase" properly applied only to  contracts of hire conferring an option to purchase,  but it is often used to describe contracts which are in  reality agreements to purchase chattels by instalments, subject to a condition that the property in them is not to pass until all instalments  have been paid.  The distinction between  these two  types  of hire purchase contracts is, however,  a  most important  one,  because under the latter type  of  contract there  is a binding obligation on the hirer to buy  and  the hirer  can  therefore pass a good title to  a  purchaser  or pledge dealing with him in good faith and without notice  of the  rights  of  the true owner, whereas in the  case  of  a contract which merely confers an option to purchase there is no  binding obligation on the hirer to buy, and a  purchaser or  pledge  can obtain no better title than the  hirer  had. (Halsbury’s  Laws of England, 3rd Edn., Vol. 19,. para  823, pp.  510-51 1).  These propositions of law have been  quoted with  approval  by this Court in the two  decisions  earlier referred to. The  main  point  to  notice  is  that  in  a  hire-purchase agreement  there is only an option to purchase and there  is no sale till that option is exercised.  It is, however, this option that was described, based on the statement of law  in Halsbury already referred to, as an element of sale in  this Court’s  decision in Instalment Supply case and the  Parlia- ment  was held competent to levy a sales tax even though  it was  riot a sale within the meaning of the term in the  Sale of Goods Act nor a sale as commonly understood.  In Johar  & Co.  v.  C.T.0.  (1965 2 SCR 112) this Court  again  had  to consider  the  incidents of a hire-purchase  agreement.   In doing  so it set out the nature of a  typical  hire-purchase

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agreement  as distinct from a sale in which the price is  to be paid later by instalments in the following words :               "In  the case of a sale in which the price  is               to be paid by instalments, the property passes               as  soon as the sale is made, even though  the               price has not been fully paid and may later be               paid  in instalments.  This follows  from  the               definition  of sale in s.4 of the Indian  Sale               of   Goods  Act  (as  distinguished  from   an               agreement  to  sell) which requires  that  the               seller transfers the property in the goods  to               the buyer for a price.               391               The essence of a sale is that the property  is               transferred from the seller to the buyer for a               price,  whether paid at once or paid later  in               instalments,   on  the  other  hand,  a   hire               purchase  agreement, as its very name  implies               has two aspects.  There is first an aspect  of               bailment  of the goods subjected to  the  hire               purchase, and there is next an element of sale               which fructifies when the option to  purchase,               which  is  usually  a term  of  hire  purchase               agreements  is  exercised  by  the   intending               purchaser.   Thus the intending  purchaser  is               known  as the hirer so long as the  option  to               purchase is not exercised, and the essence  of               a  hire purchase agreement properly so  called               is  that  the property in the goods  does  not               pass at the time of the agreement but  remains               in the intending seller, and only passes later               when the option is exercised by the  intending               purchaser.   The distinguishing feature  of  a               typical  hire purchase agreement is  that  the               property  does not pass when the agreement  is               made  but  only  passes  when  the  option  is               finally exercised after complying with all the               terms of the agreement               The  next  question that arises is  whether  a               hire  purchase  agreement ever ripens  into  a               sale and if so when.  We have already  pointed               out  that  a hire purchase agreement  has  two               elements  : (i) element of bailment, and  (ii)               element  of  sat.--,  in  the  sense  that  it               contemplates an eventual sale.  The element of               sale  fructifies when the option is  exercised               by  the intending purchaser  after  fulfilling               the  terms  of the agreement.   When  all  the               terms  of the agreement are satisfied and  the               option is exercised a sale takes place of  the               goods  which till then had been  hired.   When               this  sale  takes place it will be  liable  to               sales tax under the Act for the taxable  event               under the Act is the taking place of the sale,               the Act providing for a multi-point sales  tax               at the relevent time." This  Court thus pointed out that the taxable event  is  the sale  of  goods.  and the tax can only be  levied  when  the option  is exercised after fulfilling all the terms  of  the hire  purchase agreement and that till the sale takes  place there can be no liability to sales tax under the Act. In the earlier Instalment Supply case (1962 (2) SCR 644)  La which  the petitioner was a party what was taxed was not  in reality  a sale but only an agreement in which there was  an element  of  sale  Even  so,  Parliament  was  entitled   to

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legislate  treating it as a sale and that is the reason  why this  Court  upheld the levy.  But no State  legislature  is competent  to enact a legislation which would make  a  hire- purchase agreement a deemed sale.  It was so held in Johar’s case by this Court. In the present case section 2(28) of the Gujarat Act defines ’sale’ as follows :               "Sale"  means a sale of goods made within  the               State  for cash or deferred payment  or  other               valuable consideration               L 177 Sup CI/75               392               and  includes any supply by a Society or  Club               or an association to its members on payment of               a  price or of fees or subscription, but  does               not include a mortgage, hypothecation,  charge               or  pledge;  and the word "sell",  "buy",  and               "purchase"   with   all   their    grammatical               variations  and cognate expressions  shall  be               construed accordingly.               Explanation : For the purposes of this clause,               a  sale  within  the  State  includes  a  sale               determined   to   be  inside  the   State   in               accordance  with the principles formulated  in               subsection  (2)  of principles  formulated  in               sub-section  (2) of Section 4 of  the  Central               Sales Tax Act,, 1955." As  according  to the explanation a sale  within  the  State includes  a  sale  determined  to be  inside  the  State  in accordance  with the principles formulated in  sub-s.(2)  of section  4  of  the  Central Sales  Tax  Act,  1956,  it  is necessary to set out that sub-section here               "4.(2)  A sale or purchase of goods  shall  be               deemed  to  take place inside a State  if  the               goods are within the State-               (a)   in  the case of specific or  ascertained               goods,  at  the time the contract of  sale  is               made; and               (b)..................... The actual sale in this case fructified only when the  hirer exercised  his option to purchase under the  hire:  purchase agreement  and at that time goods were inside the  State  of Gujarat.   We  see  no objection  to  the  incorporation  in section 2(28) of the Gujarat Act of the-definition of a sale inside a State contained in s.4(2) of the Central Sales  Tax Act.    The   Gujarat  legislation  could  as,   well   have incorporated  the very words of s.4(2) of the Central  Sales Tax Act in the explanation to s.2(28) and in either case  it makes  no  difference.   We also see  no  objection  to  the Gujarat State taxing what according to the Central Sales Tax Act is a sale inside the State of Gujarat.  There can be  no objection to a State making a sale of goods which are inside the  State at the time the sale takes place liable to  sales tax  under its own legislation.  The fact that in this  case the contract of hire purchase was entered into in Delhi,that the instalments were paid in Delhi and the option itself was exercised  in  Delhi does not make any  difference  to  this result.   All that it means is that the agreement  of,  sale was  concluded in Delhi whereas the sale itself was,  if  we may  say so, completed by the property in the goods  passing in Gujarat, State’, and the therefore, took place in Gujarat State.   Nor do we see any objection, to Gujarat  levying  a tax  in respect of same goods even though those,  goods  may have  been  subjected, to tax earlier by  the  Delhi  State. There  is  no rule that any goods can be subjected  to  tax,

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only once even in respect of the same goods sales tax can be levied  as  often as there are sales.  In the  present  case there  was really no sale when the  hire-purchase  agreement was entered into, though that transaction was made liable to tax as a result of a legal fiction which the Parliament  was entitled  to ’create.  The sale itself took place only  when the hirer exercised his option to purchase and that was when the goods were 393 inside  the  State. of Gujarat. and therefore the  State  of Gujarat  was entitled to levy a tax on that  transaction  of sale. We  may however point out that the definition of  "sale"  in the  Bengal Finance (Sales Tax) Act applicable to the  State of  Delhi  has been amended in 1959 by Act 20  of  1959  and reads as follows               "Sale",  with its grammatical  variations  and               cognate  expressions  means  any  transfer  of               property in goods by one person to another for                             cash or for deferred payment. or for a ny  other               valuable   consideration,   and   includes   a               transfer  of goods on hire-purchase  or  other               system  of payment by instalments but does  no               include  a mortgage or hypothecation of  or  a               charge or pledge on goods.               Explanation.-Al  sale  or  purchase  of  goods               shall be deemed to take place inside the Union               territory  of  Delhi if the goods  are  within               that territory--               (i)   in the case of specific. or  ascertained               goods,  at the time the :contract of  sale  is               made; and               (ii)  in  the case of unascertained or  future               goods,  at the time of their appropriation  to               the  contract of sale by the seller or by  the               buyer,  whether assent of the other  party  is               prior or subsequent to such appropriation." This  definition is, in effect, the same as the one  in  the Gujarat Act.  Therefore, the type of transactions which were subjected to tax in the earlier Instalment Supply case  will not be subject to taxation hereafter and the problem of  the same   transaction  being  subjected  to  taxation  at   two different stages will not arise. Finally  we may refer to an objection taken by Mr.  Bhandare on  behalf  of the State of Gujarat that no  petition  under Art. 32 of the Constitution lies in this case.  He relied on the   decision   in   Ramjilal   v.   Income-tax    Officer, Mohindergarh’(1951  SCR 127) for this conten But in view  of the  decision of this Court in Smt.  Ujjam Bai v.  State  of Uttar Pradesh (1963 1 SCR 778) we are of opinion that  there is no substance in this contention.  It was there held  that "an  application under Art, 32 will lie (1) where action  is taken  under  a  statute,  which  is  ultra  vires  of   the Constitution,  (2) where the statute is intra vires but  the action  taken  is Without jurisdiction, and  (3)  where  the action taken. is procedurally.ultra vires as Where a  quasi- judicial   authority  under  an        obligation   to   act judicially passes an order in violation of the principles of natural  justice." The constitutionality of s.2(28)  of  the Gujarat Act has been questioned, and therefore the  petition is maintainable. The  petitions  are dismissed.  There will, however,  be  no order as to costs. P.B.R.   Petitions dismissed.

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