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PETITIONER: M/S. JAY BHARAT CREDIT AND INVESTMENT PVT. LTD.

       Vs.

RESPONDENT: COMMISSIONER OF SALES-TAX & ANR.

DATE OF JUDGMENT:       09/08/2000

BENCH: B.N.KIRPAL, J., S.N. PHUKAN. J., & RUMA PAL. J.

JUDGMENT:

KIRPAL, J. L.........I.....T.......T.......T.......T.......T.......T.......J

         The only question which arises for consideration in all these  cases  is:   Whether  the respondents  were  justified  in holding  that  hire  purchase transactions entered  into  by  the appellants  were  liable  to  imposition  of  sales  tax  on  the consolidated proceeds?

         The  appellants carry on the business of hire purchase. They  enter  into  agreements  with hirers  for  the  purpose  of enabling the hirers to bobtain a vehicle.  The normal term of the agreement   entered  into  between  a  hirer  and  the  appellant contemplates  a vehicle being purchased by the appellant and  the said  vehicle is then taken by the hirer on hire purchase  basis. The  terms of the agreement provide that on the execution of  the hire purchase agreement an initial amount is paid by the hirer by way  of  premium  for  granting a lease  and  thereafter  regular instalments are required to be paid.  The amount which is paid by the  hirer  would include the price of the vehicle and  the  hire purchase  charges.  As and when all the instalments are paid, the hirer is given an optio to obtain the ownership of the vehicle on the  payment of a nominal amount.  On the payment being so  made, the vehicle is transferred in the name of the hirer.

         As  already indicated above, the sales tax  authorities came  to the conclusion that on the correct interpretation of the provisions  of the Bengal Finance (Sales Tax) Act, as extended to the  Union  Territory of Delhi (hereinafter referred to  as  "the Act"),  as in force at the relevant time, the time being  between 1.10.1959 and the coming into force of the Delhi Sales Tax Act in 1975, the finance charges would be regarded as a part of the sale price.   On  the Financial Commissioner coming to  the  aforesaid conclusion,  the  question of law was referred to the High  Court who  affirmed the decision of the sales tax authorities.   Hence, these appeals by special leave.

         It has been contended by the learned senior counsel for the  appellants  that with the amendement in the  Bengal  Finance (Sales  Tax) Act, 1941 with effect from 1st October, 1959, in the case  of hire purchase agreements sales tax can be levied not  on the  full  amount paid by the hirer which would include the  fire charges,  but the sale consideration on which tax can be  imposed will  only be the price of the vehicle at the time when the hirer exercises  the option to purchase the same.  It was submitted  by the  learned senior counsel that under the Sale of Goods Act, the

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definition  of  the word "sale" would not include or take  within its  ambit  a  hire  purchase agreement.   Delhi  being  a  Union Territory,  the Parliament could in exercise of its powers  under Entry  97  of List 1 of the Seventh Schedule of the  Constitution regard  a hire purchase agreement as a sale and tax can be levied but  with the amendment made in 1959 the tax is leviable only  on the  sale  and  the amount paid towards hire  charges  cannot  be included  in the sale price.  In support of this contention,  our attention  has  been  drawn to three decisions of this  Court  to which we shall presently refer.

         In  order  to appreciate the contention of the  learned senior counsel for the appellants, we may refer to the definition of  the  word  "sale" as occurring in the Act  before  1.10.1959, after  1.10.1959  and under the Delhi Sales Tax Act,  1975.   The said definition is as follows :

         Under  the  Bengal  Finance (Sales Tax)  Act,  1941  as           extended to Delhi.

         BEFORE 1.10.1959

         "2(g) - "Sale" means any transfer of properrty in goods for  money  consideration and includes a transfer of property  in goods  supplied  in  the  execution of a contract  but  does  not include  a  mortgage, hypothecation, charge or pledge;   and  any grammatical   variations  of  the   expression  ’sale’  shall  be construed accordingly.

         Explanation-1.  A transfer of goods on hire-purchase or other  instalment  system of payment shall, notwithstanding  that the  saller retains a title to any goods as security for  payment of the price, be deemed to be a sale;

         Explanation-2.   A  sale shall be deemed to  have  tken place  in the State of Delhi if the goods are actually  delivered in  the  State of Delhi as a direct result of such sale  for  the purpose of consumption in the State of Delhi, notwithstanding the fact that under the general law relating to the sale of goods the property  in  the  goods  has by reason of such  sale  passed  in another State."

         Under  the  Bengal  Finance (Sales Tax)  Act,  1941  as           extended to Delhi.

         After 1.10.1959.

         "2(g)  -  "Sale" - with its grammatical variations  and cognate  expressions, means any transfer of property in goods  by one person to another for case or for deferred payment or for any other  valuable consideration and includes a transfer of goods on hire-purchase or other system of payment by instalments, but does not  include a mortgage or hypothecation of or a charge or pledge on goods.

         Explanation  -  A  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

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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."

         Under Delhi Sales Tax Act, 1975

         "2(1)  -  "Sale", with its grammatical  variations  and cognate  expressions, means any transfer of property in goods  by one person to another for case or for deferred payment or for any other valuable consideration, and includes:-

         (i)  a  transfer  of goods on  hire-purchase  or  other system of payment by instalments, but does not include a mortgage or hypothecation of or a charge or pledge on goods;

         (ii)  supply  of  goods  by   a  society  (including  a co-operative  society),  club,  firm or any  association  to  its members  for  case  or for deferred payment, or  for  commission, remuneration  or other valuable consideration, whether or not  in the course if business;  and

         (iii) transfer of goods by an auctioneer referred to in sub-clause (iv) of clause (e);

         It would also be relevant to refer to the definition of the  expression "sale price" occurring in Section 2(h) of the Act which reads as follows :

         "Sale  price", means the amount payable to a dealer  as consideration  for the sale of any goods, less any sum allowed as cash  discount  according to the practice normally prevailing  in the  trade, but inclusive of any sum charged for anything done by the  dealer in respect of the goods at the time of or before  the delivery  thereof other than the cost of freight or deliverry  or the  cost of installation in cases where such cost is  separately charged."

         In  Instalment  Supply (p) Ltd.  and Another  vs.   The Union of India and Others, 1962 (2) SCR 644, the challenge was to the  levy of sales tax on hire purchase transactions, similar  to the ones in the present case.  M/s.  Instalmentt Supply (P) Ltd., which  is also an appellant in one of these appeals, was carrying on  the  business  of  hire purchase and had  entered  into  hire purchase  agreements with different hirers.  It was sought to  be contended  in  a petition underr Article 32 of  the  constitution that  sales tax could not be levied on hire purchase transactions because  hire purchase was not ’sale’ within the meaning of  that expresion  under  the  Sale of Goods Act.   While  upholding  the validity  of  Explanation I, this Court first considered what  is the  true  nature  and character of a  hire  purchase  agreement. After  adverting  to  definition of the word  "sale"  this  court observed  that the transaction in question partakes of the nature of  a contract of bailment with an element of sale.  It held that the  definition  in  Section  2(g) included  not  only  what  was 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 which  is the option to purchase and that is why the  Explanation to  Section  2(g) ended 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.  It was  clarified that  the  Explanattion  included  within its  amplitude  a  mere transfer  of goods without the transfer of title to the goods  if

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it  was  in  the  course of an agreement of the  nature  of  hire purchase.

         While  explaining  the  nature  of  the  hire  purchase agreement,  the  Court  took  note of the fact that  in  such  an agreement,  the  hirer  may not be bound to  purchase  the  thing hired.  It was observed as follows :

         "It  is  clear,  therefore,  that in  addition  to  the contract  of  hiring  an option has been given to  the  hirer  to purchase  or not to purchase.  The more serious question on  this part  of the petitioners, contention is whether the non  obstante clause  in  the  explanation  "notwithstanding  that  the  seller retains  a  title  to any goods as security for  payment  of  the price"  governs  the  main  clause of the  explanation.   In  our opinion it does not.  The non obstante clause has been added only to  emphasise  the categorical statement of the law contained  in the  main  clause  to  the effect that a  transfer  of  goods  on hire-purchase,  etc., shall be deemed to be a ’sale’ even  though there  may  be a stipulation to the effect that in spite  of  the transfer  of goods to the hirer, the owner retains title to those goods  until  the  happening  of   the  ultimate  event,  namely, complettion of title at the option of the hirer."

         The  Court  then  concluded, on interpreting  the  said provisions,  that the agreement in question contained not only  a contract  of  bailment  simplicitor but also an element  of  sale which  element  has been seized upon by the legislature  for  the purpose  of subjecting a transaction like that to the sales  tax. Another  ground of attack in that case was based on Article 14 of the  Constitution.   It was submitted that though the  Parliament may  have  had the power to tax something which was not  strictly speaking  a  sale,  the said law was discriminatory  against  the traders  in  Delhi as such a law has not been made applicable  to whole  of  India.   This contention was rejected firstly  on  the ground  that  it had not been averred that other Part ’C’  States had  not  been similarly treated, but what is important  for  our purposes  in  the present case, the Court took note of  the  fact that  under the Central Sales Tax Act, the definition of the word "sale"  contained  the  extended definition as in the  Delhi  Act without  the  non obstante clause.  Section 2(g) of  the  Central Sales  Tax Act, 1956 to which reference was made reads as follows :

         "Sale’  with  its  grammatical variations  and  cognate expressions,  means  any  transfer of property in  goods  by  one person  to  another for case or for deferred payment or  for  any other valuable consideration, and includes a transfer of goods on the  hire purchase or other system of payment by instalments, but does  not  include a mortgage or hypothecation of or a charge  or pledge on goods".

         After referring to the same, the Court observed as follows:

         "It  would, thus appear that hire-purchase transactions have  been  included  within  the definition of  ’sale’  for  the purpose  of  Central  Salex Tax, and this definition  has  become applicable  throughout  India, and it cannot, therefore, be  said that  the  State of Delhi, and now the Union Territory of  Delhi, has  been  selected for hostile discrimination.  In our  opinion, therefore,  there  in  no substance in the  contention  that  the extended  definition of ’sale’ in the main statute infringes Art. 14 of the Constitution."

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         Definition  of  "sale" in the Central Sales Tax Act  is similar  to  that which was applicable in Delhi with effect  from 1.10.1959.

         After  reading  the  aforesaid judgment, it  leaves  no manner  of doubt that this Court in unequivocal terms came to  to the  conclusion  that as far as Delhi was concerned, it  being  a Part  ’C’ State at that point of time, the Parliament could enact a law which had the effect regarding a hire purchase agreement as a sale even though under the Sale of Goods Act it could have been so  regarded.   The definition of the word "sale"  under  Section 2(g)  had  been  expanded  and was to  include  a  hire  purchase agreement.   The hire purchase agreement had two elements :   one being  the element of bailment and the other being the element of sale  at  the option of the hirer.  By referring to  the  Central Sales  Tax Act, the contention based on Article 14 was  rejected, the  implication clearly being that even without the non-obstante clause  the  position was similar to that which was there in  the Delhi  Act, namely, a hire purchase transaction could be regarded as a sale for the purpose of Sales Tax Act.

         After  the amendement of the Act on 1st October,  1959, the  words "transfer of goods on hire-purchase or other system of payment  by  instalments"  occurring  in  Explanation  I  in  the original  Section  2(g)  were incorporated in the  main  part  of Section  2(g).  The non obstante words occurring in Explanation I in  the  unamended Section were excluded.  It is because of  this change  that  the learned senior counsel for the appellants  have contended  that now with the amendment on 1st October, 1959 there can  be  sale  in a hire purchase agreement only when  the  hirer exercised the option and the transfer of property takes place and the  effect  of  that would be that it is only the price  of  the article, namely, the vehicle, which can be subjected to sales tax hire charges cannot be included therein.

         In  support of this contention, learned senior  counsel has sought to place reliance on the second case of the Instalment Supply  Co.  entitled Instalment Supply Ltd.  vs.  The Sales  Tax Officer,  Ahmedabad-I  & Ors, 1975 (1) SCR 386, That was  a  case where  the  State  of  Gujarat in the case  of  a  hire  purchase agreement between the hirer and the Instalment Supply Co.  sought to  tax  the  sale of the vehicle when the  hirer  exercised  his option  to purchase the same.  At that time the goods were inside the  State of Gujarat.  The Gujarat Act being a State  enactment, did  not  enable  that  State to tax transfer of  goods  on  hire purchase  but  tax was sought to be levied at the time  when  the hirer  had  exercised his option to obtain the ownership  of  the vehicle.   This Court dealt at length with the meaning of a  hire purchase agreement.  It observed that at common law the term hire purchase  properly  applied  to contracts of hire  conferring  an option  to  purchase,  but  it was often  used  to  describe  the contracts  which were 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.   It recongnised  the  difference  between two types of  agreements  - first  where,  as  in the case of a hire purchase  contract,  the hirer  is  not obliged to buy.  In both the cases,  however,  the property remains with the financier and the ownership passes only when  the hirer exercises the option in the case of hire purchase agreement,  or  in  the  second type of agreement  when  all  the instalments  are paid.  Even though in the Gujarat Act sales  tax could  not  be  imposed on a contract of hire purchase  but  this Court  held  that at the time when the sale fructifies, with  the hirer  exercising thee option to purchase, tax could be levied on that  event.  It was also obseved that there in no rule that  any

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goods  could  be  subjected  to tax only  once,  the  implication clearly  being  that whereas under the Delhi Act the contract  of hiree  purchase  would  attract sales tax at the  time  when  the contract  is entered into but under the Gujarat Sales Tax Act the value  of the vehicle could be taxed att the time when option  to purchase was exercised under the same contract.

         Mr.  Vellapally, however, placed strong reliance on the following  observations  of  this  Court in the  second  case  of Instalment  Supply Ltd.  (supra) when at page 393 it was observed as follows:

         "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  case or for deferred payment or for  any  other valuable  consideration,  and  includes a transfer  of  goods  on hire-purchase or other system of payment by instalments, but does not  include a mortgage or hypothecation of or a charge or pledge on goods.

         Explanation.   -  A 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 thee 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."

         Learned senior counsel submits that by equating the two provisions  of  the  Acts,  we must give to  the  Sales  Tax  Act applicable  in Delhi after 1st October, 1959 the same meaning  as was given to the Gujarat Act.

         It  appears to us that the aforesaid observations  were by way of an obiterr.  This court was not called upon to consider the  effect of the amendment made to the Delhi Act in 1959.  This court  was  only concerned with a question whether the  State  of Gujarat  could  levy  any sales tax at the time  when  the  hirer exercises his option to purchase the vehicle which happened to be in  Gujarat  at  the time when the option was  so  exercised  and despite the fact that sales tax had already been paid on the hire purchase  transaction in Delhi earlier.  The observations  quoted above  were  merely to the effect that after the amendment  there would  be  no  case  of taxation at two  stages.   The  aforesaid decisions can be of no assistance to the appellants.

         Our attention was also drawn to K.L.  Johar and Company vs.   Deputy  Commercial Tax Officer, 1965 (2) SCR 112.   We  are unable  to see how that case can be of any assistance.  The Court there was concerned with the validity of Explanation I to Section 2(h)  of  the  Madras General Sales Tax Act  which  purported  to include  a  hire purchase transacttion within the meaning of  the

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term  "sale".  This court held that explanation I was beyond  the competence  of the State Legislature and the same was  acordingly struck  down.   The  Court then dealtt with the  question  as  to whether a hire purchase agreement ever ripened into a sale and if so when.  It took note of the fact that a hire purchase agreement had two elements, namely, the element of bailment and the element of sale, in the sense that it contemplates an eventual sale.  The Court  came to the conclusion that a sale does take place and the same  could  be  taxed  when the hirer exercises  the  option  to purchase  the  vehicle.   With regard to the price at  which  the transaction  would  be regarded as having been entered into,  the Court  observed that the hire charges have to be excluded and the price  of the vehicle worked out.  The said decision, as we  have already  observed,  can be ofno assistance because the  State  of Madras,  as it then was, had no legislative competence to seek to tax a hirepurchase agreement to sales tax whereas in Delhi such a transaction  could  be  subjected to tax and the  same  had  been specifically upheld by this Court in the first case of Instalment Supply (P) Ltd.  (supra).

         It  appears to us that the amendment of the Act on  1st October,  1959 has, in effect, not altered the position from what existed  prior  to  that date and even after  the  amendment  the principle laid down by this Court in the first case of Instalment Supply Co.  (supra) would continue to hold goods.

         We  would like to point out that Section 2(g) uses  two expressions,   namely,  "transfer  of   property  in  goods"  and "transfer  of  goods  on  hire-purchase".   If  the  latter  part relating to hire purchase had not been there, there can be little doubt  that  the  principle  enunciated by  this  Court  in  K.L. Johar’s case (supra) would have clearly been applicable, the hire purchase  agreement itself would have been taxable and tax  could have been levied only at that time when the option was exercised. This definition of the word "sale", the first part of which is in pari  materia  with the Sale of Goods Act, was expanded so as  to include  a transfer of goods on hire purchase or other system  of payment by instalments.  In the latter portion, in order that the tax  is levied there is no requirement that the property in goods should  be  transferred.  What is required is transfer of  goods, unlike  the first part of this definition which requires transfer of  property in goods.  The reason for this is very obvious.   In the  case of hire purchase, there are two elements, namely,  that of  bailment  and  an element of sale and when  a  hire  purchase agreement  is  entered  into there is transfer of goods  on  hire purchase  which  would  not include, at that point of  time,  any transfer of property in the said goods.  If the contention of the learned senior counsel for the appellants is accepted, the effect of  that would be that the latter portion of the definition could be  otiose.   If  the definition of Section 2(g) was  to  include within its ambit only that transfer which takes place at the time of purchase when the option is exercised, then it would nott have been  necessary  to widen the scope of the definition to  include transfer  of  goods  on  hire  purchase and  to  provide  for  it separately.

         Coming to the definition of the expression "sale price" we  find  that if we substitute the defined meaning of  the  word "sale"  occuring  in Section 2(g) into the said Section 2(h),  it would  in  effect read as follows :  sale price means the  amount payable  to  a dealer as consideration for transfer of  goods  on hire  purchase".   The word "sale" occurring in Sec.   2(h)  must have  the meaning ascribed to it as in Section 2(g) when the word "sale" includes transfer of goods on hire purchase, then whatever is  the  amount  which is paid/payable to the dealer  on  such  a

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transfer  would be included within the meaning of the  expression "sale  price"  in  Section 2(h).  This being so,  the  sales  tax authorities  in the present cases were justified in including  in the  turnover of the appellants the hire charges as provided  for in the hire purchase agreements.

         For  the  aforesaid reasons, we affirm the decision  of the  High Court and dismiss these appeals.  There will,  however, be no order as to costs. .UP 10 2; Fixed-pitch, printer 1; -n -ml4 -PA4 -dFX-NORMAL -Fx -e -j; dumbp L.......T.......T.......T.......T.......T.......T.......T.......T....R L.......T.......T.......T.......T.......T.......T.......T.......J