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PETITIONER: K.   L. JOHAR AND COMPANY

       Vs.

RESPONDENT: DEPUTY COMMERCIAL TAX OFFICER

DATE OF JUDGMENT: 10/11/1964

BENCH: WANCHOO, K.N. BENCH: WANCHOO, K.N. GAJENDRAGADKAR, P.B. (CJ) HIDAYATULLAH, M. DAYAL, RAGHUBAR MUDHOLKAR, J.R.

CITATION:  1965 AIR 1082            1965 SCR  (1) 112  CITATOR INFO :  RF         1966 SC1178  (2,23)  R          1973 SC 376  (8)  F          1974 SC1105  (5,8,9)  F          1985 SC1293  (45)

ACT: Madras General Sales Tax Act IX of 1939, Explanation 1 to s. 2(h)--Hire-purchase  transactions included in  term  ’sale’- Validity  of Explanation-Price of vehicles for  purposes  of tax how to be fixed-Sale when completed.

HEADNOTE: The  appellant  carried on hire-purchase business  in  Motor vehicles.  The course of business was that the price of  the vehicle  would be paid by the appellant to the motor  dealer and  the  vehicle  would  be  hired  out  to  the  intending purchaser.   The  latter  had  to  pay  the  hire  money  in instalments  and when all the instalments according  to  the agreement  had  been paid, he would exercise the  option  of purchasing  the vehicle by a final payment of Re.  1/-.   It was  clearly laid down in the hire-purchase  agreement  that for the duration of the hire the vehicle would remain  under the  ownership of the appellant.  The sales tax  authorities in  Madras  imposed  sales  tax on  the  appellant  for  the assessment  year  1955-56 and  1956-57.   The  hire-purchase transactions   were  treated  as  sale  transactions   under Explanation  1  to S. 2(h) of the Madras General  Sales  Tax Act, 1939.  The appellant’s writ petition before the  Madras High  Court  challenging the said assessment  failed  but  a certificate  of fitness to appeal to the Supreme  Court  was granted. The  main contentions of the appellant were : (i) there  was really  one sale in the present case by the motor dealer  to the intending purchaser of the vehicle, the appellant  being a  mere financing agent.  There was no transaction  of  sale between  the  appellant  and the  intending  purchaser  (ii) Explanation  1  to s. 2(h) of the Act which  included  hire- purchase  agreement within the term ’sale’ was  ultra  vires and  (iii) in any case sale took place only when the  option

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to purchase was exercised by the hirer by the payment of Re. 1/- which should therefore be taken as the sale price. HELD : (i) The various terms of the hire purchase  agreement showed that the appellant remained the owner of the  vehicle for  the duration of the agreement.  Therefore it could  not be  said that the appellant was a mere financier  while  the real  transaction  was  between the  motor  dealer  and  the intending  purchaser.  There were in fact two sales  one  by the dealer to the appellant, and the other by the  appellant to  the person who wanted to purchase the vehicle.   As  the Act levied a multi-point sales tax at the relevant time,  it was open to the State to tax both the sales. 11 21 B-C] (ii) The  State  Legislature when it proceeds  to  legislate either  under Entry 48 of List 1 of the Seventh Schedule  to the Government of India Act, 1935 or under Entry 54 of  List 11 of the Seventh Schedule to the constitution, can only tax a ’sale’ within the meaning of that word defined in the Sale of Goods Act. [123 H] Sales Tax Officer v. M/s.  Budh Prakash Jai Prakash  [1955]1 S.C.R.  243  and State of Madras v. Gannon Dunkerley  &  Co. [1959] S.C.R. 379, affirmed. 113 The  essence  of sale under the sale of Goodss Act  is  that property  shall pass from the seller to the buyer  when  the contract  of sale is made except in a. case  of  conditional sale.   Hire-purchase agreements are not conditional  sales. [124 A-B] Therefore any legislation by the State Legislature making an agreement  or transaction, in which property does  not  pass from  the seller to the buyer, a sale, would be  beyond  its legislative competence. [124 B] What Explanation I does is to lay down that a  hire-purchase agreement shall be deemed to be a sale in spite of fact that the  property  does not pass at the time of  such  agreement from  the seller to the buyer.  There fore Explanation 1  as it stands is beyond the legislative competence of the  State Legislature.  It must therefore be held to be invalid,  L124 B-C] (iii)     A  hire purchase agreement has two elements :  (1) element  of  bailment and (2) element of sale 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 a-re 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 multipoint sales tax at the relevant  time. As  the taxable event is the sale of goods the tax can  only be levied when the option is exercised after fulfilling  all the terms of the bire-purchase agreement.  Tax not  exigible at the time when the hire-purchase agreement is made for  at that time the taxable event has not taken place. [125  H-124 E] (iv) Although  according to the terms of the  agreement  the vehicle was purchased by the payment of Re. 1/- it would  be absurd  to say that that was the price at which the  vehicle must be taken to have been sold.  It would be equally  wrong to  say  that the total amount of hire paid  in  instalments including the final payment of Re.  1/- constituted the sale price.   The  price had to be worked out by  the  sales  tax authorities  in  a fair and reasonable  manner  taking  into account the depreciation of the vehicle between the date  of hire-purchase agreement and the exercise of the final option

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to purchase. [126 G-H; 128 B-G] Darngavil  Cool  Co. v. Francis, (1913)7 Tax Cases,  Part  1 page 1. referred to.

JUDGMENT: CIVIL, APPELLATE JURISDICTION : Civil Appeal No. 245, 246 of 1963. Appeals  from the judgment and order dated January 17,  1958 of the Madras High Court in Writ Petitions Nos. 500 and  671 of 1957. A.   V. Visivanatha Sastri, B. R. L. Iyengar, B. D.  Dhawan, S. K.     Mehta and K. L. Mehta, for the appellants (in both the appeals). A.   Ranganadham Chetty, V. Ramaswamy and A. V. Rangam,  for the respondent (in both the appeals) and intervener No. 6. S.   V. Gupte, Solicitor-General, and B. R. G. K. Achar, for intervemer No. 1. B.   V. Subramaniam, Advocate-General, Andhra Pradesh and B. R. G. K. Achar, for intervener No. 2. 114 Naunit Lal, for intervener No. 3. V.   P.  Gopalan  Nambiar, Advocate-General, Kerala,  V.  A. Syied Muhammad, for intervener No. 4. M.   Adhikari,  Advocate-General, Madhya Pradesh and  I.  N. Shroff, for intervener No. 5. R.   N. Sachthey, for interveners No. 7. C.   B. Agarwala and 0. P. Rana, for intervener No. 8. The Judgment of the Court was delivered by Wanchoo, J. These two appeals on certificates granted by the Madras  High Court raise common questions and will be  dealt with  together.   The  appellant  is  a  financing   company consisting of a number of partners.  Its main business is to advance money to persons who purchase motor vehicles but are themselves not in a position to find ready money to pay  the price.  The course of business followed by the appellant  is to  enter into hire-purchase agreements with those who  want to purchase motor vehicles.  It is necessary to refer to the terms of hire-purchase agreements which are on a set pattern in order to understand the points raised in these appeals. Any  person desirous of acquiring a motor vehicle makes  the selection of the make and type and fixes the price therefore with  the  motor dealer.  Such person  then  approaches  the appellant for financial assistance on a hire-purchase basis. Sometimes  an  initial payment is made to the  motor  dealer which is taken into account at the time of the hire-purchase agreement while at others the payment is made in a number of instalments to the appellant.  In either case the  appellant pays  the  price or the balance thereof to  the  dealer  and thereafter  the  hire-purchase  agreement  is  entered  into between  the appellant and the person who wants to  purchase the  motor  vehicle.   The appellant  is  described  in  the agreement  as  the owner of the vehicle and the  person  who wants to purchase it as the hirer. The material terms of the agreement may be summarised  here. The   agreement  provides  that  the  owner   (namely,   the appellant)  will let and the hirer (namely, the  person  who wants to purchase the vehicle) will take on hire the vehicle in  question for such period as may be fixed in  each  case, (cl. 1).  The hirer has to pay a certain amount per month to the  owner and where an initial deposit is made this  amount is larger for the first month and other monthly payments are smaller.  The hirer has to pay during the period of hire the monthly instalment, the vehicle is registered in the name of

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the owner and the hirer is forbidden to represent himself as the owner 115 thereof  or to do anything to suggest that he is  the  owner thereof;  the  hirer  has to keep the vehicle  in  good  and serviceable repair, order and condition to the  satisfaction of the owner, and he is also to insure and keep insured  the vehicle  against loss or damage by fire, accident and  third party risks and punctually pay premia and all moneys payable in  respect of such insurance : (see cl. 3).  The hirer  has further  to  pay  all taxes, licence  fees,  duties,  fines, registration charges and other charges payable in respect of the vehicle and all rents and outgoings payable by the hirer in  respect  of the premises where the vehicle  is  kept  or garaged  when the same respectively become due : [see cl.  3 (e)].  He has also to satisfy the owner about all the  above things  having  been duly done.  He  cannot  sell,  charge., pledge, assign or part with possession of the vehicle [cl. 3 (g)].   The hirer has also to make good all damages  to  the vehicle (fair wear and tear excepted) and pay the owner  the full  value  of  the vehicle in the  event  of  total  loss, whether  the  damage  or  loss  be  caused  accidentally  or otherwise  and to keep the vehicle at the sole risk  of  the hirer until the hirer purchases the vehicle or returns it to the  owner  : (cl. 5).  If the hirer makes  default  in  the payment  of any rent for seven days, the hiring  immediately determines   and  the  owner  may  without   notice   retake possession of the vehicle, and it shall be at the option  of the owner to reinstate the contract on such conditions as it deems fit after the determination of the hiring as aforesaid : (cl. 14).  Upon the determination of the hiring as  above, all arrears of rents upto the date of determination and  all costs and expenses incurred by the owner in the exercise  of the  powers conferred by the agreement shall be paid by  the hirer, and the hirer shall not be entitled to any  repayment of any sum previously paid and all such rents and sums shall belong  to the owner absolutely : (cl. 15).  The  hirer  may determine the hire at any time by delivering the vehicle  to the owner and by paying him any part of the current rent due upto  the date of such delivery and all other sums, if  any, which  upto such date, the hirer may have become  liable  to pay the owner under the agreement: (cl. 18).  Cl. 20 of  the agreement, which is important for our purposes reads thus :-               "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               rents  hereby  reserved  during  the  term  of               hiring  together with all other sums,  if  any               payable   by  him  to  the  owner  under   the               provisions of this agreement, then and at  the               termination  of  the  hiring,  the  hirer  may               purchase the vehicle from the owner for a  sum               of Re.  1/-." 116 Clause 21 provides that the hirer may at any time  determine the hiring and become purchaser of the vehicle by paying  to the owner such sum as together with the sums previously paid will  amount  to  the  total sum  payable  by  way  of  rent thereunder  together with all sums (if any) payable  to  the owner and in addition a sum of Re. 1/-.  Clause 22  provides that  "if  the  hirer  fails to  observe  and  ,perform  the conditions  and  stipulation herein contained and  fails  to exercise the option of purchasing the vehicle in  accordance with  the provisions of the last preceding clause,  and  the

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vehicle  is not returned to the owner on the termination  of the  hiring,  the hirer shall pay the owner  a  certain  sum every month until the vehicle is handed over to the owner by the hirer." Clause 23 provides that until the vehicle  shall have  become the property of the hirer under the  provisions of  the agreement it shall remain the absolute  property  of the owner, and the hirer shall have no right or interest  in the  same other than as the hirer under the agreement.   The agreement :is not assignable : (cl. 24).  It is  unnecessary to  refer  to  other clauses of the agreement  as  they  are immaterial  for our purposes.  After such an  agreement  has been made, the hirer takes possession of the vehicle and  if all  its terms are carried out, the hirer becomes the  owner of the vehicle when he exercises his option to purchase  the vehicle  after  paying  the sum of Re.   1/-  including  the instalments then outstanding, if any. The appellant commenced business in February 1955 and in the course  of such business entered into several  hire-purchase agreements  relating to motor vehicles both new and  second- hand.   On April 28, 1956, the appellant submitted a  return to the Assistant Commercial Tax Officer, Coimbatore, showing a turnover for the purposes of sales tax for Rs.  2,37,993/- for  the  year 1955-56.  The appellant  had  also  collected (though it now claims that it was done erroneously) from the hirers of motor vehicles amounts equivalent ’to sales tax on their  transactions and those amounts were kept in  suspense account.   The hirers however began to claim refund of  this amount on the ground that hire-purchase agreements were  not within the ambit of "sale" as defined in the Madras  General Sales  Tax Act, No. IX of 1939, (hereinafter referred to  as the  Act).  But the Assistant Commercial Tax Officer made  a provisional assessment on the basis of the return  submitted by the appellant and fixed instalments for payment  thereof. The appellant paid the instalments but preferred a  revision to  the Commercial Tax Officer objecting to  the  assessment mainly on the ground that hire-purchase agreements were  not transactions of sale liable to be taxed under the Act.   The revision was however dismissed on the ground that there  was no necessity for interfering with the provisional assess-                             117 ment  at  that  stage.  Later,  the  Deputy  Commercial  Tax Officer passed the final order of assessment relating to the year  1955-56  holding that the  hire-purchase  transactions were subject to sales, tax and overruled the objection  that the  transactions  were only a system of financing  and  not sales.  The appellant preferred an; appeal to the Commercial Tax  Officer  against the order of assessment for  the  year 1955-56.   That  appeal is said to have been  heard  but  no orders  had been passed thereon, when the writ petition  was filed  in the High Court on June 29, 1957.  In the  meantime provisional  assessment had been made for the  year  1956-57 and the appellant was being pressed to pay that amount also. Consequently the appellant filed a writ petition on June 29, 1957 challenging the provisional assessment with respect  to the  year 1956-57. Later lie filed another writ petition  on August  18,  1957 challenging the final assessment  for  the year 1955-56. The  main  contention  of  the appellant  in  the  two  writ petitions  was  that levy of sales tax in  respect  of  hire purchase  transactions was illegal and  unconstitutional  as Explanation  1  to s. 2(h) of the Act  defining  "sale"  was beyond  the  competence  of  the  State  legislature.    The Explanation is in these terms:-               "A  transfer of goods on the hire-purchase  or               other  instalment  system  of  payment  shall,

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             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." The  appellant contended that this amounted to an  extension of the meaning of the word "sale" as used in Entry 54,  List II of the Seventh Schedule to the Constitution and Entry  48 of List H of the Seventh Schedule to the Government of India Act  1935 beyond what it meant in the Indian Sale  of  Goods Act,  No. 3 of 1930.  The State legislature therefore  could not arrogate to itself the power to levy a tax in respect of transactions  which  in  form  and  in  substance  did   not constitute  sales as understood in the Indian Sale of  Goods Act by merely adopting a wide definition.  It was  therefore incompetent  for the State legislature to enact  Explanation 1.  If the Explanation falls on account of the  incompetence of  the legislature, no sales tax could be levied  on  hire- purchase   transactions   in  view  of  Art.  265   of   the Constitution which lays down that "no tax shall be levied or collected, except by authority of law". These  two writ petitions along with a number of  others  of the  same  kind dealing with hire-purchase  agreements  were heard by 118 the  High Court together.  The first question to  which  the High Court addressed itself was whether there were two sales in  case or only one sale, for the contention on  behalf  of the  appellant, apparently was that there was only one  sale by  the  dealer to the ;person who wanted  to  purchase  the motor vehicle and that the appellant was merely a  financing agent  of  such person.  The High Court  however  held  that there were two sales in these cases, first sale by the motor dealer  to the appellant and the second by the appellant  to the  person who wanted to purchase the motor vehicle.   Thus there were two distinct sales of the vehicle involved in the process by which the property in the vehicle passed from the dealer to the person who wanted to purchase it.  It  appears that  sales tax was paid on the sale by the dealer  and  the contention  of  the appellant was that was all  the  tax  to which  the transaction could be subjected.  The  High  Court however  held that as there were two sales involved  in  the transaction  and the Act levied a multipoint tax  on  sales, tax  could  be  levied again when  the  appellant  sold  the vehicle to the intending purchaser. The  High Court then considered the nature of  hire-purchase agreements,  with particular reference to the  agreement  in the present case and held that a hire-purchase agreement  of this kind had two elements, one of bailment and the other of sale, and rejected the contention of the appellant that such hire-purchase  agreements  were  nothing  more  than  hiring agreements  involving bailment.  Having held that the  hire- purchase agreement of this type involved two elements  which were  both  real (i.e. element of bailment  and  element  of sale),  the next question to which the High Court  addressed itself  was whether tax liability could be fastened  on  the appellant immediately it entered into the agreement of hire- purchase  or whether the tax could only be  constitutionally and  legally  levied  after  the  intending  purchaser   had exercised  the  option  which resulted in  the  transfer  of property in the vehicle to such person.  The High Court held that  in  most  of  the  transactions  of  this  nature  the intending  purchaser pays up the instalments  and  exercises the  option  and thus acquires title to  the  vehicle.   But there might be cases where such a person might be unable  to become the owner, in the sense of obtaining the title to the vehicle  by  paying  the instalments.  In such  a  case  the

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property  would  remain  with  the  appellant  and  bailment element  would be the only element, the option  to  purchase having  not been exercised.  In this latter class of  cases, there  would  be  no sale, though  there  was  an  agreement granting  an  option to purchase which by itself  would  not amount  to a sale.  Such transactions could not in the  view of the High Court be brought within the charging  provisions of the section.  The                             119 Court  therefore held that Explanation 1 to s. 2(h)  of  the Act  referred to those hire-purchase agreements  only  which fructify  into sale and not to those which did not,  and  in this  view  of  the  matter  upheld  the  validity  of   the Explanation. The High Court then considered when the tax should be levied even in those cases which fructify into sales.  It held that where a hire-purchase agreement fructifies and results in  a sale  there  could be no impediment in the way  of  the  tax being  levied  even  when  the  hire-purchase  agreement  is entered  into.  The High Court then considered the  question as  to  what would be the quantum of consideration  for  the sale that is ultimately effected, and held that the total of all the instalments paid made up the sale price, though they were designated as instalments of hire.               The High Court summed up its conclusion thus:               (1)That  the transaction  of  hire-purchase               entered  into  by  the  appellant   constitute               sales, rendering it liable to sales tax on its               turnover,  excepting in cases where  owing  to               the  default on the part of the hirer  in  the               payment of instalments of hire, the vehicle is               seized by the appellant and therefore no title               passes to the intending purchaser.               (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 elimination of such portion  of               the turnover where no sale resulted;               (3)That  for the purpose of  computing  the               turnover  of the appellant, the total  of  the               hire  stipulated  to be  paid  in  instalments               should  be treated as price  or  consideration               for the sale. On  this view the High Court dismissed the  writ  petitions. The  appellant  then  applied for  certificates  which  were granted; and that is how the matter has come up before us. The matter first came up for hearing before us on August 31, 1964.   It was then represented that there  were  provisions similar to Explanation 1 to s. 2(h) of the Act, in the sales tax statutes of other States.  We therefore decided to  give notice to the Advocates General of all States.  It was  also decided  to  give notice to the Attorney-General  of  India, particularly as the view taken by this Court in two  earlier cases, namely, the Sales Tax Officer v. Messrs 120 Budh  Prakash  Jai  Prakash(1) and the State  of  Madras  v. Gannon  Dunkerley & Co.(2) was being assailed as  incorrect. The  appeals were then finally heard on September  29,  1964 and subsequent dates after such notice had been served. The  first  question that has been urged before us  is  that there  was really one sale in the present case by the  motor dealer  to the intending purchaser of the vehicle  and  that the appellant was a mere financing agent of such person  and that the High Court was in error in holding that there  were

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two  sales one by the dealer to the appellant and the  other by the appellant to the person who intended to purchase  the vehicle.  We are of opinion that the view taken by the  High Court in this behalf is correct.  This will be clear from  a consideration  of  the various terms of  the  hire  purchase agreement  which  we have already  summarised  above.   That agreement  shows that the whole of the price of the  vehicle is  paid by the appellant to the dealer.  Even where a  part of the price is paid by the intending purchaser, the payment is  shown  as hire for the first month and is  made  to  the appellant.   So  far as the dealer is  concerned  the  whole price  is paid by the appellant.  The agreement  also  shows that  the  appellant  is the owner of the  vehicle  and  the intending  purchaser  is  merely a  hirer  thereunder.   The vehicle  has to be registered in the name of the  appellant, though  the  fact of registration by itself in one  name  or another  may  not be determinative of the ownership  of  the vehicle.   Clauses 14 and 15 of the agreement  clearly  show that  there  was  no sale by the  dealer  to  the  intending purchaser  of the vehicle at the time of  the  hire-purchase agreement.   These  clauses give power to the  appellant  to retake  possession of the vehicle and determine  the  agree- ment.  Now if the property in the vehicle had passed to  the intending  purchaser  at  the  time  of  the   hire-purchase agreement  it would not have been open to the  appellant  to take  possession of the vehicle or to insist on  payment  of arrears  or to become entitled to everything that  had  been paid  upto that day.  Under the law all that  the  appellant would  have been entitled to was to realise the loan he  had given  by filing a suit and then attaching and  selling  the vehicle.   These two clauses are therefore clear  indication of  the  fact that there was no sale by the  dealer  to  the person who wanted to purchase the vehicle at the time of the hire-purchase agreement, and that at that time the sale  was by  the  dealer to the appellant.  Then clauses  20  and  21 enforce  this conclusion inasmuch as they give an option  to the  person who wanted to purchase the vehicle to do  so  by exercising his option under the conditions mentioned (1)  [1955] 1 S.C.R. 243. (2) [1959] S.C.R. 379. 121 therein.   If  he  had already become  the  owner  when  the agreement had been entered into, these two clauses could not have  been  included in the agreement.  Then  again  cl.  23 makes it clear that till the option is exercised the vehicle remains  the  absolute  property of the  appellant  and  the intending  purchaser  has no right in it except  that  of  a hirer.  We therefore agree with the High Court that in cases of  this kind there are two sales, one by the dealer to  the financier (namely, the appellant in this case) and the other by  the financier (namely, the appellant) to the person  who wanted to purchase the vehicle.  As the Act levied a  multi- point  sales  tax at the relevant time it was  open  to  the State  to tax both the sales and the fact that the  sale  by the  dealer to the appellant had been taxed will not  affect the  liability  of the second sale by the financier  to  the person  who  wanted to purchase the vehicle.   What  is  the extent  of that liability and when is that tax to be  levied will  be  considered  by us in connection  with  the  second contention urged on behalf of the appellant. This  brings  us  to  a consideration  of  the  validity  of Explanation  1,  which  we  have already  set  out.   It  is necessary  in this connection to understand the nature of  a typical  hire purchase agreement as distinct from a sale  in which the price is to be paid later by instalments.  In  the

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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.  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 agreement,  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 in- tending  seller,  and only passes later when the  option  is exercised  by the intending purchaser.   The  distinguishing feature  of a typical hire purchase agreement  therefore  is that  the property does not pass when the agreement is  made but only passes when the option p./65-9 122 is  finally exercised after complying with all the terms  of the agreement. Explanation 1 specifically brings out this characteristic of hire  purchase agreements.  It provides that a  transfer  of goods on hire purchase or other instalment system of payment (which  presumably is of the same type as the hire  purchase agreement)  shall  be deemed to be a sale, even  though  the property  in  the  goods  does not  pass  to  the  intending purchaser   and  remains  in  the  intending  seller.    The Explanation  recognises by using the words "deemed to  be  a sale"  that there is no passing of the property at the  time of  the hire purchase agreement, but provides by  a  fiction that   the   property  shall  be  deemed  to   have   passed notwithstanding  the terms of the agreement.   This  deeming takes  place under the Explanation immediately on  the  hire purchase agreement being made. The contention on behalf of the appellant is that the  State legislature was not competent thus to expand the meaning  of the words "sale of goods" used in Entry 54 of List II of the Seventh  Schedule to the Constitution, which corresponds  to Entry  48 of the Provincial List of the Government of  India Act,  1935,  and make something a sale which is not  a  sale under the law contained in the Indian Sale of Goods Act.  It is clear that if the Explanation is good, the second sale in the  present  case must be held to have taken place  at  the time  the  hire purchase agreement was made.  On  the  other hand,  if  the Explanation is beyond the competence  of  the State legislature and falls, the sale cannot be said to have taken  place when the hire purchase agreement was  made  and can  only take place when the option is exercised after  all the terms of the agreements have been satisfied. This  Court had occasion to deal with the interpretation  of Entry  48  of  List  II  of  the  Seventh  Schedule  to  the Government  of India Act, 1935 in The Sales Tax  Officer  v. Messrs  Budh Prakash Jai Prakash(1).  It held that Entry  48 in question conferred power on the Provincial legislature to impose  a tax only when there had been a completed sale  and

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not  when  there  was only an agreement  to  sell.   It  was pointed  out  that  there  was  a  well  defined  and   well established  distinction between a sale and an agreement  to sell.   Consequently, the definition in s. 2(h) of the  U.P. Sales Tax Act, No. XV of 1948, enlarging the meaning of  the word  "sale" so as to include forward contracts was to  that extent  declared ultra vires.  That case dealt with  forward contracts  but it brings out the distinction between a  sale and  an  agreement to sell and it was held  that  the  State legislature had no power under the relevant Entry (1)  [1955] 1 S.C.R. 243.                             123 in  the Government of India Act to extend the definition  of sale so as to include an agreement to sell. The  matter came up again before this Court in  Gannon  Dun- kerley’s(1)  case and it was held that the expression  "sale of  goods’ was at the time when the Government of India  Act was  enacted a term of well recognised legal import  in  the general law relating to sale of goods and in the legislative practice  relating to that topic and must be interpreted  in Entry  48 in List II of the Seventh Schedule as  having  the same meaning as in the Sale of Goods Act.  Entry 54 of  List III  of  the Seventh Schedule to the Constitution  uses  the same  words (namely, taxes on sale of goods) as in Entry  48 of List H of the Seventh Schedule to the Government of India Act  and therefore the words must bear the same  meaning  as explained in these two cases. Learned  counsel for the respondent however urges  that  the view  taken  by  this Court in  Gannon  Dunkerley’s(1)  case requires   reconsideration.   We  have  given  our   earnest consideration  to  this  argument and are  of  opinion  that considering  that view has stood for so many years  and  has been accepted in later cases, there is no case made out  for reconsideration  thereof.  In this connection our  attention was drawn to Entry 92-A of List 1 of the Seventh Schedule to the  Constitution,  which refers to taxes on sale  of  goods where  such  sale takes place in the course  of  inter-State trade or commerce and to the provisions of the Central Sales Tax  Act, No. 74 of 1956, where "sale" has been  defined  as including "a transfer of goods on the hire purchase or other system  of payment by instalments".  It is urged  that  this definition  of "sale" under the Central Sales Tax Act  shows that  the  words "sale of goods" used in Entry 92-A  have  a wider meaning.  We are of opinion that there is no force  in this  argument, for the Central Sales Tax Act was passed  by Parliament  and its validity has to be considered  not  only with  reference  to  Entry 92-A of List  1  of  the  Seventh Schedule to the Constitution but also with reference to Art. 248(2)  of the Constitution read with Entry 97 of List 1  of the Seventh Schedule to the Constitution.  The fact that the definition  of "sale, in the Central Sales Tax Act  includes words contained in Explanation 1 therefore is of no help  in construing  the meaning of the words "sale of goods",  which have  been authoritatively pronounced upon by this Court  in Gannon  Dunkerely’s(1)  case following  Budh  Prakash’s  (2) case.  It is clear therefore that the State legislature when it proceeds to legislate either under Entry 48 of List II of the Seventh Schedule to the Government of India Act 1935  or under Entry 54 of List H of the Seventh Schedule to the (1) 1959] S.C.R. 379. (2) [1955] 1 S.C.R. 243. 124 Constitution,  can only tax sale within the meaning of  that word  as defined in the Sale of Goods Act.  The  essence  of sale under the Sale of Goods Act is that the property should

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pass from the seller to the buyer when a contract of sale is made  except in a case of conditional sale.   Hire  purchase agreements  are  not  conditional  sales.   Therefore,   any legislation by the State legislature making any agreement or transaction  in  which the property does not pass  from  the seller  to the buyer a sale would be beyond its  legislative competence.   What Explanation 1 does is to lay down that  a hire  purchase  agreement shall be deemed to be  a  sale  in spite  of  the fact that the property does not pass  at  the time  of  such  agreement  from the  seller  to  the  buyer. ’Therefore,  Explanation  1  as  it  stands  is  beyond  the legislative  competence  of the State  Legislature.   It  is urged  however that the property eventually does  pass  from the  seller  to the buyer when the option is  exercised  and other terms of the hire purchase agreement are fulfilled and therefore  the  Explanation should be read  as  confined  to those  cases only where property does eventually  pass  from the  seller  to  the buyer.  We are  of  opinion  that  this argument  cannot  be  accepted, for  the  intention  of  the Explanation  clearly  is to provide that the  hire  purchase agreement  shall be deemed to be a sale immediately  on  the date  it is made, even though property has not  passed  from the  seller to the buyer on that day.  If this were not  the real  purpose and intention of Explanation 1, its  enactment would  be  entirely unnecessary for the main  definition  of "sale"  under  s.  2  (h) will  apply  to  a  hire  purchase agreement  at  the time when the property passess  from  the seller  to  the buyer on the option being exercised  and  on other  terms  of the agreement being fulfilled.   We  cannot therefore  agree  with the High Court that  the  Explanation should  be confined only to those cases where  the  property does  eventually  pass  for the  obvious  intention  of  the legislature in enacting the Explanation was to provide  that the hire purchase agreement shall be deemed to be a sale  on the  very date on which it is made, even though no  property passes  from the seller to the buyer on that date.  In  this view  of the matter it must be held taking into account  the purpose, the intention and the interpretation of Explanation 1 that it is beyond the competence of the State legislature. It  must  therefore be held to be invalid  and  struck  down accordingly. 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 sale,  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 125 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 relevant time.  Where however  option is  not  exercised  or cannot be exercised  because  of  the inability of the intending purchaser to fulfill the terms of the  agreement,  there is no sale at all.   As  the  taxable event is the sale of goods, the tax can only be levied  when the  option is exercised after fulfilling all the  terms  of the hire purchase agreement.  We cannot agree with the  view of  the  High Court that because in most of such  cases  the option  is  exercised, tax is leviable  immediately  on  the making  of  the hire purchase agreement and that  in  a  few

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cases  where there is failure to carry out the terms of  the agreement or to exercise the option, there can be adjustment by elimination of such portion of the turnover.  As we  have pointed  out the taxable event under the Act is the sale  of goods and until that taxable event takes place there can  be no liability to pay tax.  Therefore, even though  eventually most  cases  of  hire purchase may result in  sales  by  the exercise  of the option and the fulfilment of the  terms  of the agreement, tax is not eligible at the time when the hire purchase  agreement  is made, for at that time  the  taxable event has not taken place; it can only be eligible when  the option has been exercised and all the terms of the agreement fulfilled  and  the sale actually takes  place.   When  sale takes place in a particular case will depend upon the  terms of the hire purchase agreement but till the sale takes place there  can be no liability to sales tax under the Act.   The High   Court  therefore  was  in  error  in   holding   that transactions of hire purchase of the kind with which we  are dealing having regard to their main intent and purpose might be  treated  as sales at the time the agreement  is  entered into; in all hire purchase agreements of the type with which we  are  dealing sale only takes place when  the  option  is exercised after all the terms of the agreement are fulfilled and it is at that time that the tax is eligible. This  brings  us to the last question, namely, what  is  the quantum ,of sale price which is to be the basis of  taxation under  the Act.  The argument on behalf of the appellant  in this  connection  is that the sale price in  the  particular cases  with which we are concerned is only Re.  1  /-  which the  hirer  has  to  pay when he  exercises  his  option  to purchase.  On the other hand the contention on behalf of the respondent is that the sale price is the entire amount  paid by  the  hirer to the financier and the tax is  eligible  on this entire amount.  We are of opinion that neither of these two contentions 126 is  correct.  It stands to reason that Re.  "A/-  cannot  be the  price  of  a vehicle in these cases  for  even  if  the vehicle  is  treated  as  secondhand  when  the  option   is exercised the sum of Re. 1/- would be an absurd price for  a second-hand vehicle of the kind with which we are concerned. The  argument in this connection is that the  entire  amount paid  as hire is really for hire and the price is  only  the sum of Re.  1 /- which is paid for the option which  finally results  in sale.  This contention overlooks the essence  of hire purchase agreements which is that the hire includes not only what would be payable really as hire but also a part of it  is towards the price.  The contention that the price  is only Re.  1/- which is paid for the option therefore  cannot be accepted. On the other hand the contention on behalf of the respondent that  the price is the entire amount paid as hire  including Re.   1/  paid  for  the option also does  not  seem  to  be correct.   This  ignores the fact that at any rate  part  of what  is  paid  as hire is really towards the  hire  of  the vehicle for the period when the hirer is only a hirer.  This will also be clear from the fact that if the entire hire  is treated as price, the result would be that the price of what is  a  second-hand vehicle when the  sale  eventually  takes place would be more than the price of the new vehicle.  This will be clear from an example of a hire purchase  agreement, which  was given to us on behalf of the appellant.   In  the particular  example,  the  price  of  the  vehicle  was  Rs. 5,0001-.   The hire purchase agreement however provided  for payment of Rs. 6,487/6/- by the hirer to the owner in seven-

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teen  instalments.  The hirer would become the owner on  the exercise   of  the  option  after  he  had  paid   all   the instalments.  But if an the instalments are to be treated as price the result would be that a vehicle which was priced at Rs.  5,0001-  when  the agreement was  made  and  must  have depreciated during the seventeen months when it was on  hire would be valued at Rs. 6,487/6/- at the time when the option is  exercised  and  the sale in favour of  the  hirer  takes place.   This is clearly impossible to accept and  therefore the contention of the respondent must also be rejected. The real position in our opinion as to price of the  vehicle when  the option is exercised would be this.  Its  value  at that time is neither Re.  1/- which is the nominal amount to be  paid for the option nor the entire amount which is  paid as  hire  including Re.  1/-.  The value must  be  something less than the original price, which in the example mentioned by  us  above was Rs. 5,0001-.  In order to  arrive  at  the value at the time of the second sale to the hirer, the sales tax   authorities   should  take  into   consideration   the depreciation of the vehicle and such other matters as may be relevant in arriving 127 at  such price on which the sale can be said to  have  taken place  when  the option is exercised, but  that  price  must always  be  less  than the, original price  (which  was  Rs. 5,0001- in the example given above by us). We may in this connection refer to Darngavil Coal Company v. Francis(1).  That was a case under the (English) Income  Tax Act, and the question that directly arose for  consideration was with respect to deductions to be allowed from profits in the circumstances of that case.  The facts were these :  The appellant, a coal company, in order to obtain railway wagons for  the  conveyance  of coal from  its  collieries  to  its customers  from time to time entered into agreements with  a wagon company under which a certain annual sum was paid  for a  period of years for a certain number of wagons.   By  the terms of the agreements the coal company during the  periods of  the  payments used the wagons at its own  risk  and  was bound  to keep them in repair, and at the end of the  period it  had the option of purchasing the wagons at  the  nominal price of one shilling for each wagon.  It will be seen  that the  agreement was in the nature of hire purchase  agreement of  wagons.  The question then arose whether any  deductions from  profits  could be allowed to the coal company  in  the circumstances.   It was held that the annual payments  under the   agreements  were  divisible  into  two,  namely,   (i) consideration  paid  for  the use of the  wagons,  and  (ii) payments  for  an option at a future date  to  purchase  the wagons at a nominal price.  It was also held that insofar as the  payments represented the consideration for the  use  of the  wagons  during  the  period  of  agreement  they   were admissible  as  deduction  in the computation  of  the  coal company’s  profits for the purpose of assessment to  income- tax.   It  was  observed that it was  perfectly  clear  that during the course of the period of years the wagon still was the  property of the wagon company and not of the coal  com- pany; but the coal company wished to use it and  accordingly an   extra  payment  was  made  in  respect  of  that.    No discrimination was made between the two kinds of payment; it was a lumpsum that was paid.  In such cases two things  were going  on  concurrently  -there  was  a  sale  and  purchase agreement under certain terms not a sale at that moment, but an  option on certain terms on a future date to have a  sale and on the other hand there was also concurrent with that  a hiring agreement.  The Court then went on to observe that it

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had no materials for splitting up that payment showing  what was truly hire and what was truly payment towards (1) [1913] 7 Tax Cases, Pt.  I. P. 1. 128 eventual  purchase.   Finally the case was remitted  to  the Commissioners  with  instructions that they  were  bound  to allow  as deduction such portion of the yearly payment  made in  respect  of  the wagons agreements  as  represented  the consideration  paid  for being allowed to  us  wagons  which under  the  contract were not yet the property of  the  coal company and that the Commissioners must decide that question for themselves if parties did not agree. This  case in our opinion brings out the true nature of  the payment  made as hire in hire purchase agreement.   Part  of the amount is towards the hire and part towards the  payment of  price, and it would be for the sales tax authorities  to determine in an appropriate way the price of the vehicle  on the  date  the hirer exercises his option  and  becomes  the owner  of  the  vehicle after fulfilling the  terms  of  the agreement.  There is no legislative guidance available as to how this would be done and perhaps it would be better if the legislature gives guidance in such matters.  But even in the absence  of legislative guidance it would be for  the  sales tax  authorities to decide as best as they can the value  of the  vehicle  on the date the option is  exercised  and  the property  passes  to the hirer.  There may be  two  ways  of doing  it.  The sales tax authorities may split up the  hire into two parts, namely, the amount paid as consideration for the use of the vehicle so long as it was the property of the owner,  and the payment for the option on a future  date  to purchase the vehicle at a nominal price.  If the first  part is  determined  the  rest would be towards  the  payment  of price.   The first part may be determined after finding  out the  proper  amount to be paid as hire in the market  for  a vehicle  of the type concerned, or in such other way as  may be  available  to  the sales tax  authorities.   The  second method  may be to take the original price fixed in the  hire purchase agreement and to calculate the depreciation and all other factors that may be relevant in arriving at the  price when the second sale takes place to the hirer including  the condition of the vehicle at the time of the second sale.  It is  therefore for the sales tax authorities to find out  the price  of the vehicle on which tax has to be paid in  either of  the ways indicated by us above or such other way as  may be just and reasonable. We  therefore  allow the appeals in part and set  aside  the order of the High Court and the assessments made, and direct that  the sales tax authorities will determine the price  in accordance  with  what  we have said  above  and  thereafter proceed  to levy sales tax according to law.  The  appellant will  get its costs from the respondent-one set  of  hearing fee. Appeals partly allowed. 129