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PETITIONER: SUNDARAM FINANCE LTD.

       Vs.

RESPONDENT: STATE OF KERALA AND ANOTHER

DATE OF JUDGMENT: 30/11/1965

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1966 AIR 1178            1966 SCR  (2) 828

ACT: Sales-tax-Hire-purchaye agreements-Motor vehicles  purchased with loans taken from financiers-Financier whether liable to sales-tax  as having effected ’sale’  through  hire-purchase agreement-Travancore Cochin General Sales-tax Act 11 of 1125 M.E., s. 2(i), Explanation (1).

HEADNOTE: The appellants were a limited company with their  registered office  at Madras.  The Company carried on the  business  of financing  purchases ,of motor vehicles on the  security  of those vehicles.  A customer desirous ,of purchasing a  motor vehicle but unable to pay the price to the dealer would make part payment to the dealer and then approach the  appellants for  a loan.  The appellants would advance the loan  to  the customer on ’the strength of nine documents executed by  the customer  one  of which ’Was a ’sale letter’  purporting  to sell the vehicle to the appellants on the date of the  loan; another was a promissory-note agreeing to pay the difference between the price of the vehicle and the amount paid by  the ,customer  to  the  dealer  and  interest  thereon  at   the stipulated rate.  An,other of these documents was the  hire- purchase  agreement itself; in cl. 6 it recited that on  the customer  paying  the  entire amount due  under  the  second schedule to the agreement the vehicle would become the  sole and  absolute  property of the customer.  On  September  28, 1958  the  Sales-tax  Officer, Ernakulam,  issued  a  notice calling  upon  the  appellants  to  file  returns  of  their turnover from sales in the course of business and to  secure registration as dealers under the Travancore-Cochin  General Sales-tax Act 11 of 1125 M.E. and to furnish details of  the transactions ,of sale with parties in the State of Kerala in the year 1955-56, 1956-57 and 1957-58.  Later another notice was   issued  for  the  years  1958-59  and  1959-60.    ’Me appellants contended that they were not liable to pay Sales- tax on their financing transactions as they mere  financiers and  did  not enter into any transactions of sale  of  goods with parties within ’the State of Kerala and that they  were not ’dealers’ under the Act.  The ’Sales-tax Officer however held  that  they  were dealers and that  the  hire  purchase transactions  entered into by them resulted in  sales  which

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were  liable  to  sales-tax.   According  to  the  Sales-tax authorities between the date on which the customer agreed to purchase  a  vehicle and the date ,on which he  became  full owner  without any encumbrance three sale transactions  were interposed-a  sale  by  the dealer of  the  vehicle  to  the ’Customer;  a sale by the customer to the  appellants  under the  ’sale  letter’; and a sale by virtue of cl.  6  of  the hire-purchase agreement-while the second transaction was not liable  to  tax, the first and third were.   The  appellants filed  petition  in  the  High Court  praying  for  writ  of certiorari  and prohibition against the  Sales-tax  Officer. The  High Court rejected these petitions.  With  certificate under Art. 133(1)(a) of the Constitution the appellants came to this Court. HELD  :  Per Shah and Sikri, JJ. (i) The true  effect  of  a transaction  may  be  determined  from  the  terms  of   the agreement  considered  in  the  light  of  the   surrounding circumstances.    In  each  case  the  Court   has,   unless prohibited by statute, power to go behind the documents  and to determine the nature of the transaction, whatever may  be the  form of the documents.  An owner of goods who  purports to convey absolutely                             829 or  acknowledges  to have conveyed  goods  and  subsequently purports to hire them under a hire-purchase agreement is not estopped from proving that the real bargain was intended  to be a loan on the security of the goods. [841 C] (ii) A  hire-purchase  agreement is a  complex  transaction. The  owner  under a hire-purchase agreement  enters  into  a transaction of hiring out goods on the terms and  conditions set  out  in  the  agreement, and  the  option  to  purchase exercisable   by  the  customer  on  payment  of   all   the instalments of hire arises when the instalments are paid and not  before.  In such a hire-purchase agreement there is  no agreement  to  buy  goods; the hirer being  under  no  legal obligation to buy, has an option either to return the  goods or to become its owner by payment in full of the  stipulated hire and the price for exercising the option.  This class of hirepurchase   agreements   must   be   distinguished   from transactions in which the customer is the owner of the goods and  with a view to finance, his purchase he enters into  an arrangement which is in the form of a hirepurchase agreement with  the  financier,  but in  substance  evidences  a  loan transaction  subject to a hiring agreement under  which  the lender  is given the licence to seize the goods. [841  G-842 B] (iii)The  appellants were financiers; they were not  dealing in  motor  vehicles.  The motor vehicles purchased  by  ’the customer  was  registered in the name of  the  customer  and remained  at all material times so registered in  his  name. In the letter taken from the customer under which he  agreed to  keep the vehicle insured, it was expressly recited  that the vehicle had been given on security for the loan advanced by the appellants.  As a security for repayment of the loan, the customers executed a promissory note for the amount paid by  the  appellants to the dealer of the vehicle.   The  so- called  ’sale-letter’  was a formal document which  was  not made effective by registering the vehicle in the name of the appellants  and even the insurance of the vehicle had to  be effected as if the customer was the owner.  The  appellants’ ’right  to seize the vehicle was merely a licence to  ensure compliance  with the terms of the  hire-purchase  agreement. The customer remained qua the world at large the owner,  and remained  in possession, and on condition of performing  the convenants had a right to continue to remain in  possession.

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The  right of the appellants may be extinguished by  payment of  the  amount  due to them under the terms  of  the  hire- purchase  agreement even before the date fixed for  payment. The   agreements  undoubtedly  contained   several   onerous covenants  but  they  were all intended  to  secure  to  the appellants recovery of the amounts advanced.  The  intention of  the  appellants in obtaining  hire-purchase  and  allied agreements  was  to secure the return of loans  advanced  to their  customers.   The transactions were  merely  financial transactions. [844 C-H] As  there  was no sale no sales-tax could be levied  on  the transactions as decided by this Court in Gannon Dunkerley  & Co. State  of  Madras v. Gannon Dunkerley & Co.,  [1959]  S.C.R. 379,  Re  Watson Ex Parte Official Receiver  in  Bankruptcy, (1890).  25 Q.B.D. 27. Mays v. Pepper, (1905) A.C.  102  and Polsky v. S. And A. Services [1951] 1 All E.R. 185, referred to. K.   L. Johar & Co. v. Deputy Commercial Tax Officer, A.I.R. (1965) S.C. 1082, distinguished. Per  Subba Rao, J. (i) There was no question in the  present case  of going behind the documents executed by the  parties to  determine  their true intentions.  The  transactions  in question were in accordance with mercantile usage.  Both the financiers and the customers entered with 830 eyes   open  into  transactions  of  hire-purchase.    Their intention  was ex. pressed in clear terms.  They could  have executed  hypothecation bonds but they did not, and  entered instead  into  hire-purchase  transactions.   There  was  no reason  to camouflage the real nature of  the  transactions. None was suggested.  They were therefore bound by the  terms of the agreement. [833 A-B] (ii)Neither  the fact that the agreements were entered  into because the customers had no funds to purchase the motor car nor  the  circumstance that part of  the  consideration  was already  paid  to  the  dealer affects  the  nature  of  the transaction.   The  fact that the customer executed  a  pro- missory  note for the money advanced by the  financier  does not  affect  the question for that was merged in  the  hire- purchase  transaction.  If the said terms were  not  carried out  the  customers  could not claim any  rights  under  the agreements and the financier continued to be the owner freed from any obligation created under the agreements.  Could the financier  thereafter return the promissory note ? He  could not.    The  transactions  purported  to  he   hire-purchase agreements  and they must be treated as such as  the  common intention   of   the  parties  was  to   enter   into   such transactions.   A  deeper study of the  transactions  showed that  the  dealer and the financier were  closely  connected Companies  and for their own reasons they had split  up  the business  of hire-purchase between them.  In effect  and  in substance, the dealer without receiving the whole money  put the  customers  in possession of the cars  under  the  hire- purchase agreements. [833 H; 834 C] (iii)  If the transactions were hire-purchase agreements  in terms  of the judgment of this Court in M/s.  K. L. Johar  & Co. when all the terms of the agreements were satisfied  and the  option  was exercised,, sales took place in  the  goods which till then had been hired.  Having thus fructified into sales the transactions were liable to sales-tax. [831 B; 834 B] M/s.   K.  L.  Johar  & Co. v.  The  Deputy  Commerical  Tax Officer, Coimbatore III, [1965] 2 S.C.R., 112 relied on.

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JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  673  and 677 of 1964. Appeals  from  the judgment dated December 5,  1963  of  the Kerala  High  Court in Original Petition  Nos.  1153,  1012, 1880, 1885 and 1886 of 1962. A.   V. Viswanatha Sastri and R. Ganapathy Iyer, for  appel- lant. P.   Govinda  Menon and M. R. K. Pillai, for respondent  No. 1. SUBBA RAO, J. delivered a dissenting Opinion.  The  Judgment of SHAH and SIKRI, JJ. was delivered by Shah, J. Subba Rao, J. I regret my inability to agree.  The facts  of the case and the arguments of earned counsel have been fully stated  by  my  learned brother, Shah, J., and  I  need  not recapitulate them here. The  short question is whether the hire-purchase  agreements entered  into  by  the  appellant  with  its  customers  are transactions                             831 of  sale of goods or are only documents securing the  return of the loans advanced by it to its customers. It  is  common  case  that  the  said  documents  ex   facie purported’  to be hire-purchase agreements and if  that  was their real character, in terms of the judgment of this Court in  Messrs.  K. L. Johar & Co. v. The Deputy Commercial  Tax Officer,  Coimbatore  III(1),  when all  the  terms  of  the agreements  were  satisfied and the  option  was  exercised, sales  take  place  in the goods which till  then  had  been hired.  The contention, therefore, was that in executing the documents the common intention of the parties was that  they should be documents securing the loans and that the form  of hirepurchase agreement was adopted to achieve that purpose. At the outset the nature of hire-purchase agreements may  be briefly noticed.  Hire-purchase agreements have come to stay as  part of the social service in the commercial world.   It enables persons of ordinary means to buy the necessities  of life which the modern scientific advancement offers.   Under that  system one can buy a car, a  refrigerator,  furniture, cooking  apparatus, and as a matter of fact any  article  of utility.   It  enables the hirer to own the article  of  his choice  by  paying on easy instalments, and  the  dealer  to provide  it for him for profit without any risk to  himself, It has become a common and familiar instrument of mercantile social  service.   Simonds,  J., in  Transport  and  General Credit Corporation Ltd. v. Morgan (2) said :               "It  must  be  remembered  that  hire-purchase               agreements  now play a very large part in  the               commercial  and social life of the  community,               and  the  financing  of  those   hire-purchase               agreements  is an enormous business,  both  in               the city of London and elsewhere.  It  appears               to me that the financiers and the dealers  co-               operate  in  the  common  venture  of   making               feasible  the whole business of  hire-purchase               agreements,  which  is now, for  good  or  for               evil, a necessary part of our social life.  To               regard one party to that common venture, which               is  now  a recognized mercantile  service,  as               carrying on the business of a money-lender is,               as I have said before, an abuse of language." What  is  true of England is, to a lesser  degree,  true  of India, particularly in the big cities of India.

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Now, let us see how this system was evolved.  At first  the- said  transaction took place directly between a  dealer  and his, (1) [1965] 2 S.C.R. 112. (2) [1939] 2 All E.R 17, 28. 832 customer : the dealer wanted to sell his goods and the buyer was  not in a position to pay the entire sale price  of  the goods in one lump sum.  The parties, therefore, entered into hire-purchase agreement where under the dealer continued  to be  the owner till the entire consideration was paid by  the customer in terms of the agreement and till he had exercised his  option to buy the goods covered by the said  agreement. But  the dealer was not always financially sound  enough  to wait  till such time as all the instalments would  be  paid. The  second  stage  in the evolution  in  the  hire-purchase system  was when a financier intervened between  the  dealer and the customer.  The financier used to purchase goods from the  dealer  and then to enter into an  agreement  with  the customer.  At that stage the financier became the owner  and the  customer became the hirer till such time as he  carried out the terms of the agreement.  A further variation of  the transaction  was  that the customer purchased the  goods  by paying the entire consideration to the dealer with the  help of  the financier; he then sold the goods to  the  financier and entered into an agreement of hire-purchase with him.  In this type of transaction, the dealer went out of the picture altogether : the financier took the place of the dealer  and the customer continued to be the hirer.  Some times, as  the present case illustrates, the customer might find some money but  could  not provide the whole  consideration.   In  that event  also,  the transaction could be put  through  in  the aforesaid manner either with the dealer or the financier, as the case may be. The  object  of  the hire-purchase system  was  to  help  to finance  the  customer in order that he might  purchase  the property.  Though that was the object, the transaction  took the form of hirepurchase agreement.  The main feature of the agreement, apart from small variations, was that the  dealer or the financier continued to be the owner till the terms of the  agreement were fully complied with by the customer  and the  option to purchase the same was exercised by  him.   If the  terms  were  not  complied  with,  the  dealer  or  the financier, as the case may be, could terminate the agreement and take back the goods.  In such a transaction, the  common intention of the dealer, the financier and the customer  was that the transaction should take the form of a  hirepurchase agreement which would become a sale on the compliance of the terms  of that agreement.  No doubt the financing  operation could  have taken the form of a mortgage or pledge, but  the parties,  for their mutual benefit and convenience,  entered into a hire-purchase transaction. 833 In the absence of any fraud or undue influence, the question resolves  itself into a simple question of  intention.   The transactions  were in accordance with the mercantile  usage. Both ’the financier and the customers with open eyes entered into the transactions of hire-purchase.  Their intention was expressed   in  clear  terms.   They  could  have   executed hypothecation  bonds, but they did not, and instead  entered into  hire-purchase  transactions.  There was no  reason  to camouflage  the real nature of the transactions.   None  was suggested.  They were, therefore, bound by the terms of  the agreements. The  subtle distinction sought to be made between the  tran-

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sactions in question and other transactions are out of place :  little clues have no bearing, as there was no attempt  to camouflage  the real nature of the transactions.  It may  be that  the consideration was not the full value, but  nothing prevented  the owners from selling their cars for a  smaller price, for they expected to got them back on their returning the  amount  in terms of the agreements.   The  circumstance that  there  was  no express term  for  reconveying  is  not material,  for the term that on the compliance of the  terms of  the  agreement the hirer would become  the  owner  would serve the same purpose. The  whole  fallacy of the argument lies in the  attempt  to equate  such commercial transactions with ordinary sales  of property and agreements to evade statutory provisions. it is true that in India there are reports replete with  decisions where courts attempted to find out the real intention of the parties  when  documents were executed to  hide  their  real intention.   There are also decisions, both in India and  in England, where courts applied various tests to find out  the real  intention of a document when it was executed to  evade certain  statutory  provisions.   These  decisions  have  no bearing in the context of a hire-purchase agreement  entered into  in the course of business.  All the parties  knew  the nature  of the transaction and accepted the  terms  embodied thereunder. In  the present case the transactions were admittedly  hire- purchase  agreements.  The financier purchased the cars  for the  amounts required to be paid to the dealer  and  entered into  specific hire-purchase agreements with the  customers. They contained all the usual terms that are found in a hire- purchase  agreement.  Neither the fact that  the  agreements were  entered  into because the customers had  no  funds  to purchase  the motor-cars nor the circumstance that  part  of the consideration was already paid to the dealer affects the nature  of  the  transaction.  The fact  that  the  customer executed a promissory note for the money advanced by 834 the  financier  does not affect the question, for  that  was merged in the hire-purchase transaction.  If the said  terms were  not  carried out, the customers could  not  claim  any rights  under the agreements and the financier continued  to be  the  owner freed from any obligation created  under  the agreements.   Can  the  financier  thereafter  enforce   the promissory  note  ?  I think he cannot.  As  I  have  stated earlier,  the  transactions purported  to  be  hire-purchase agreements  and they must be treated as such, as the  common intention   of   the  parties  was  to   enter   into   such transactions.   A deeper scrutiny of the transactions  shows that  the  dealer and the financier were  closely  connected companies  and for their own reasons they have split up  the business  of hire-purchase between them.  In effect  and  in substance, the dealer without receiving the whole money  put the  customers  in possession of the cars  under  the  hire- purchase agreements. For the aforesaid reasons, I hold that if the agreements had fructified  into sales, they were liable to sales-tax.   The High  Court,  in  my  view, gave a  correct  answer  to  the question propounded for its opinion. In  the  result,  the appeals fail and  are  dismissed  with costs. Shah,  J. On September 29, 1958 the Sales Tax  Officer,  1st Circle,   Ernakulam,  issued  a  notice  calling  upon   the appellants  to file returns of their turnover from sales  in the course of business and to secure registration as dealers under the Travancore-Cochin General Sales Tax Act 11 of 1125

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M.E. and to furnish details of the transactions of sale with parties in the State of Kerala in the years 1955-56, 1956-57 &  1957-58.   A similar notice was issued by the  Sales  Tax Officer  on  March 3, 1962 in respect  of  the  transactions within  the  State for the years 1958-59 and  1959-60.   The appellants  contended  that  they  were  not  liable  to  be assessed under the Act.  They contended that they were  mere financiers and that they did not enter into any transactions of sale of goods with parties within the State of Kerala and that they were not "dealers" within the meaning of the  Act. The  Sales  Tax Officer by orders dated March 25,  1962  and July  6,  1962  held  that  the  transactions  between   the appellants  and certain parties within the State  of  Kerala were sales within the meaning of the Act and the  appellants were dealers liable to be assessed under the Act.  The Sales Tax  Officer  accordingly  reiterated his  demand  upon  the appellants  to file returns of their turnover in respect  of sales  for the five years in question along with details  of all  transactions in the State and "to produce evidence  to. prove the correctness and completeness of their returns".                             835 The  appellants  then moved the High Court of  Kerala  under Art.  226  of  the  Constitution  for  writs  of  certiorari quashing  the proceedings of the Sales Tax Officer  and  for writs  of prohibition restraining that Officer  from  taking further proceedings against the appellants under his  orders dated  March 25, 1962 and July 6, 1962.  The High  Court  of Kerala  rejected these petitions upholding the view  of  the Sales  Tax  Officer  that on the  transactions  between  the appellants  and their customers sales tax was payable  under the   Travancore-Cochin   General  Sales  Tax   Act.    With certificate granted by the High Court under Art. 133(1)  (a) of the Constitution, these appeals are preferred. The  appellants are a company incorporated under the  Indian Companies  Act,  1913, and have their registered  office  in Madras.   The  Company  carries  on  business  of  financing purchases  of  motor  vehicles  on  the  security  of  those vehicles.   The  manner  in which  these  transactions  were effected is briefly this.  A customer desirous of purchasing a motor-vehicle, but unable to pay the price to the  dealer, agrees to purchase the vehicle and makes part payment of the price to the dealer.  He then approaches the appellants  and requests that a loan be advanced to him.  On the appellants’ agreeing  to grant a loan, the customer executes nine  docu- ments-(1) an application requesting the appellants to  grant a  loan  of a stated amount on the security  of  the  motor- vehicle; (2) a "sale letter" reciting that the customer  had on  the  date  of  the application  for  loan  sold  to  the appellants the motor-,vehicle; (3) a bill which recites that for  the amount mentioned in the "sale letter" and  received in full, the customer has sold to the appellants the vehicle belonging  to the customer; (4) a receipt for the amount  of the  bill describing it as the value of the vehicle sold  to the  appellants; (5) an agreement called  the  hire-purchase agreement under which the appellants agree to let out to the customer and. the customer agrees to take on hire the motor- vehicle  for  a specified term subject to  determination  on conditions mentioned therein; (6) a promissory-note agreeing to  pay the difference between the price of the vehicle  and the amount paid by the customer to the dealer, and  interest thereon  at  the  stipulated rate; (7)  a  letter  from  the customer requesting the appellants to pay to the dealer  the amount agreed to be advanced to him; (8) a letter  addressed to  the  appellants  agreeing and undertaking  to  keep  the vehicle,  on  the security of which the  loan  was  granted,

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insured  against  "comprehensive risks"; and  (9)  a  letter addressed to the Motor Vehicles Authorities intimating  that the   motor-vehicle  "is  the  subject  of  hire.   purchase agreement   between   the  customer  "as  owner"   and   the appellants,  and requesting the Authorities to "make a  note of the 836 hire-purchase  agreement"  in the  registration  certificate standing  in  the  name of the  customer.   The  scheme  for financing the purchase of the vehicle is therefore that  the customer purchases the vehicle from the dealer directly  and gets  it  registered  in  his  name.   At  his  request  the appellants  agree  to  advance  the  balance  of  the  price remaining  to be paid, and pay it to the dealer on the  cus- tomer’s  executing  a promissory-note for repayment  of  the amount,   a  hire-purchase  agreement  and   other   related documents.   On  repayment of the amount  stipulated  to  be paid, the vehicle becomes the sole and absolute property  of the customer. The relevant terms of the hire-purchase agreement may now be set  out.  In the preamble of the agreement, it  is  recited that the agreement is between the appellants to be described as "the owners" the customer to be described as "the  Hirer" and  "the  Guarantor", who guarantees  due  performance  and observance by the customer of all the clauses and  covenants of the agreement and agrees to pay on demand any monies  due or  which  may  become  payable  to  the  owners  under  the agreement  either  by  way  of  hire  expenses  or  damages, repairs,  replacements  or  other supplies.   By  the  first clause  it is recited that the owners (the appellants)  will let and the hirer (the customer) will take on hire the motor vehicle for a specified number of calendar months subject to determination as mentioned in the agreement.  Clause 2  sets out  the conditions of hiring.  Thereby the customer  agrees to  pay  rent to the appellants punctually; to  take  proper care  of  the vehicle and keep it in good condition  and  to keep it insured for its full value; to pay all rents, rates, taxes  payable by him in respect of the premises  where  the vehicle shall for the time being be garaged and all  licence fees, insurance premium and other duties payable in  respect of the said vehicle; to keep the vehicle in his sole custody and possession; and to permit the appellants to inspect  the vehicle  at all reasonable times during the hiring;  not  to cause,  permit,  allow or suffer any person to  acquire  any lion on the vehicle; not to cause, permit or allow or suffer the  vehicle to become liable to distress, execution or  any other process levied or issued against the customer; and not to  assign,  sell,  pledge,  charge,  under  let,  lend   or otherwise  part with the possession, custody  or  beneficial interest  in the vehicle of the customer therein  under  the agreement  without the consent of the owners.  By cl. 3  all monies  payable to the customer by any insurer for  loss  or damage  to  the motor-vehicle are assigned  to  the  owners. Clause  4 sets out the conditions in which the agreement  is to  stand  determined without any notice  to  the  customer. Those conditions are 837               (a)   failure   to  pay  any  of  the   hiring               instalments within the stipulated time;               (b)   customer    becoming    insolvent     or               compounding with his creditors;               (c)   customer   pledging   or   selling    or               attempting  to  pledge or  sell  or  otherwise               alienate or transfer the vehicle;               (d)   customer  suffering  any  act  or  thing

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             whereby or in consequence of which the vehicle               may   be  distrained,  seized  or   taken   in               execution under legal process;               (e)   customer breaking or failing to  perform               or observe any conditions. On  the determination of the agreement all  the  instalments previously  paid  by  the customer stand  forfeited  to  the owners who shall thereupon be entitled to sieze the  vehicle and  to sue for all the instalments due and for damages  for breach  of the agreement.  Under cl. 5 the customer has  the option at any time to determine the agreement by  delivering up  the vehicle at his own cost to the owners, and by cl.  6 on  the  customer paying the entire amounts  due  under  the second  schedule, the vehicle becomes the sole and  absolute property  of the customer.  By el. 7 it is provided that  if the  appellants seize the vehicle and take possession of  it under cl. 4, or if the customer returns it under cl. 5,  the customer  shall remain liable to the appellants for  arrears of  the  amount of hire up to the date of  such  seizure  or return.   Under cl. 8 it is agreed that the  customer  shall maintain  registration  of  the vehicle  in  his  own  name, provided  that the customer shall transfer the  registration in the name of the appellants whenever required to do so  by them,  and especially when the customer commits a breach  of any of the conditions of the agreement. According to the sales-tax authorities, between the date  on which the customer agreed to purchase a vehicle and the date on  which  he became full owner of the vehicle  without  any encumbrance,  three  sale transactions were interposed  :  a sale  by the dealer to the customer; a sale by the  customer to  the  appellants  under the  "sale  letter"  referred  to earlier; and a sale by virtue of cl. 6 of the  hire-purchase agreement.   It is common ground that the first  transaction is  taxable under the appropriate Sales Tax Act.  On  behalf of  the  State  of Kerala it is  conceded  that  the  second transaction  is  not  taxable,  but it  is  so  because  the customer  is ordinarily not a dealer within the  meaning  of the  Act,  but  they contend that  inasmuch  as  under  that transaction the appellants 838 become  transferees  of the rights of the  customer  in  the vehicle under the sale letter, when by the operation of  cl. 6 of the hirepurchase agreement the rights of the appellants are  extinguished,  there results a sale in  favour  of  the customer  which  is taxable under the Act.  We are  in  this case concerned with the exigibility to tax of what the State of  Kerala contends is a sale resulting from the payment  of all the instalments under the hire-purchase agreement. The  appellants submit that execution of a "sale letter"  by the ,customer acknowledging sale of the vehicle to them does not create in them any right of ownership, the "sale letter" being  merely  one  of  a  set  of  documents  under   which arrangement for granting a loan and for ensuring-  repayment of  the  money  advanced by the appellant’s  is  made.   The appellants say that they do not become owners of the vehicle under  the  "sale  letter",  that the  true  effect  of  the transaction  on  the execution of the nine documents  is  to hypothecate  the vehicle in favour of the  appellants,  that the  vehicle  ,continues to remain of the ownership  of  the customer,  and  that  under  cl.  6  of  the   hire-purchase agreement  there  is extinction of ,encumbrance  and  not  a transfer  of title which may be called a sale taxable  under the ’Travancore-Cochin General Tax Act. The Travancore-Cochin General Sales Tax Act 11 of 1125  M.E. was  brought into force in May 1950.  The State  authorities

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had, it is conceded, no power to enact a statute for levying tax  on  a  transaction  which  does  not  conform  to   the definition  of ’sale’ within the meaning of the Indian  Sale of  Goods  Act : State of Madras v. Gannon Dunkerley  &  Co. (Madras)  Ltd.(1) The ’Travancore-Cochin General  Sales  Tax Act by S. 2(j) defines ’sale’ as follows :               " ’ sale’ with all its grammatical  variations               and  cognate expressions means every  transfer               of  the  property in goods by  one  person  to               another in the course of trade or business for               cash or for deferred payment or other valuable               consideration and includes also a transfer  of               property in goods involved in the execution of               a  works  ,contract, but does  not  include  a               mortgage, hypothecation’, charge or pledge;               Explanation  (1).--A transfer of goods on  the               hirepurchase  or  other instalment  system  of               payment  shall, notwithstanding the fact  that               the  seller retains the title in the goods  as               security  for payment of the price, be  deemed               to be a sale.               (1)   [1959] S.C.R. 379.                839               Explanation               (2).-   .     .      .     .     ." It is in the light of this definition that the liability  to tax  of  the  transactions  resulting  from  cl.  6  of  the agreement  falls to be determined.  If, by the operation  of cl.  6, title to the vehicle is, under an existing  contract to  sell,  transferred  to the. customer for  a  price,  the transaction is a sale, and is taxable. The  appellants  are  financiers and their  business  is  to advance  loans  on  favourable  terms  on  the  security  of vehicles.   This is effected by obtaining a  promissory-note for  repayment of the amount advanced, and  a  hire-purchase agreement  which  provides a mechanism for recovery  of  the amount.   It is true that a "sale letter" is  obtained  from the  customer, but the consideration for the sale letter  is only  the  balance remaining payable to  the  dealer,  after giving  credit against the price of the vehicle  the  amount paid  by the customer.  The application for a loan, and  the letter addressed to the appellants undertaking to insure the vehicle  expressly  mention  that a loan is  asked  for  and granted on the security of the motor-vehicle under the hire- purchase  agreement.   It is the customer  who  insures  the vehicle,  and in the books of the Motor Vehicle  Authorities he remains, with the consent of the appellants, owner of the vehicle.  Undue importance to the acknowledgment of sale  in the "sale letter" and the recital of sale in the bill and in the   receipt   cannot   therefore   be   attached.    These documents--"sale letter", bill and receipt-must be read with the  application for granting a loan on the security of  the vehicle,  the  letter  in which the  customer  requests  the appellants  to pay the balance of the price remaining to  be paid  by him to the dealer, the promissory-note executed  by him for that amount, the undertaking to insure the  vehicle, and  intimation  to the Motor Vehicles Authorities  to  make note of the hire-purchase agreement. The  hire-purchase  agreement executed by the  customer  un- doubtedly contains several onerous covenants.  The  customer has  to  pay all rents, rates, taxes and  other  out  goings regularly,  to  take proper care of the vehicle, to  get  it insured, to keep it fully repaired, and not to assign, sell, pledge,  charge, underlet, lend or otherwise to  create  any lien  thereon.  The hire-purchase agreement is liable to  be

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determined if any of the eventualities mentioned in cl. 4 of the  agreement happens and the appellants have the right  to seize  the vehicle.  These. covenants are only  material  in considering the true intention of the parties entering  into the  hire-purchase  agreement, it is irrelevant  that  in  a given case these covenants may not be enforced by a Court in a  dispute arising between the appellants and the  customer, or relief may be granted pCI.166-7 840 on   the  ground  that  they  contain  penal  clauses.    In considering the true intention of the parties, the terms  of cl.  6 of the hirepurchase agreement are important :  it  is stipulated  there-by that "Upon the Hirer (customer)  paying the entire amount due under Second Schedule herein, the said vehicle  shall become the sole and absolute property of  the Hirer."  The intention clearly disclosed thereby is that  on payment  of  the  amount due at any  time  after  the  hire- purchase   agreement,  the  vehicle  would  be   free   from encumbrance.  It is also to be noted that the agreement does not  contemplate  exercise  of an option  on  payment  of  a nominal  sum  of  money as is to be  found  in  other  hire- purchase agreements.  Execution of the promissory-note,  the hire-purchase  agreement  and the other  documents,  in  our judgment, indicate that it was the intention of the  parties not to transfer any interest in the vehicle by the  customer to  the  appellants : it was intended to  give  security  by hypothecating  the vehicle in favour of the  appellants  and for  ensuring  repayment  of  the  loan  advanced  that  the customer submitted to the various onerous conditions of  the hire-purchase agreement. A  hire-purchase  agreement is normally one under  which  an owner  hires  goods to another party called  the  hirer  and further  agrees  that  the hirer shall  have  an  option  to purchase the chattel when he has paid a certain sum, or when the  hire-rental  payments have  reached  the  hire-purchase price stipulated in the agreement.  But there are variations when  a  financier is interposed between the  owner  of  the goods and the customer.  The agreement, ignoring  variations of detail, broadly takes one or the other of two forms : (1) when  the  owner is unwilling to look to  the  purchaser  of goods to recover the balance of the price, and the financier who pays the balance undertakes the recovery.  In this form, goods  are purchased by the financier from the  dealer,  and the  financier  obtains a hire-purchase agreement  from  the customer  under  which the latter becomes the owner  of  the goods  on payment of all the instalments of  the  stipulated hire  and  exercising his option to purchase  the  goods  on payment  of a nominal price.  The decision of this Court  in K.  L. Johar & Company v. Deputy Commercial  Tax  Officer(1) dealt with a transaction of this character. (2) In the other form  of transactions, goods are purchased by the  customer, who  in consideration of executing a hirepurchase  agreement and  allied  documents remains in possession of  the  goods, subject to liability to pay the amount paid by the financier on his behalf to the owner or dealer, and the financier (1)  [1965] 2 S.C.R. 112.                             841 obtains a hire-purchase agreement which gives him a  licence to  seize the goods in the event of failure by the  customer to abide by the conditions of the hire-purchase agreement. The true effect of a transaction may be determined from  the terms  of  the  agreement considered in  the  light  of  the surrounding  circumstances.   In each case, the  Court  has, unless  prohibited  by  statute,  power  to  go  behind  the documents  and to determine the nature of  the  transaction,

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whatever  may  be the form of the documents.   An  owner  of goods  who purports absolutely to convey or acknowledges  to have  conveyed goods and subsequently purports to hire  them under a hire-purchase agreement is not estopped from proving that  the  real bargain was a loan on the  security  of  the goods.  If there is a bona fide and completed sale of goods, evidenced  by  documents, anterior to and independent  of  a subsequent   and   distinct  hiring  to  the   vendor,   the transaction may not be regarded as a loan transaction,  even though the reason for which it was entered into was to raise money.   If the real transaction is a loan of money  secured by a right of seizure of the goods, the property  ostensibly passes under the documents em. bodying, the transaction, but subject  to the terms of the hiring agreement, which  become part  of the buyer’s title, and confer a licence  to  seize. When  a  person desiring to purchase goods  and  not  having sufficient  money on hand borrows the amount needed  from  a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan  transaction.   The real character of  the  transaction would  not be altered if the lender himself is the owner  of the goods and the owner accepts the promise of the purchaser to  pay  the  price or the  balance  remaining  due  against delivery of goods.  But a hire-purchase agreement is a more, complex  transaction.   The owner  under  the  hire-purchase agreement  enters into a transaction of hiring out goods  on the  terms and conditions set out in the agreement, and  the option to purchase exercisable by the customer on payment of all the instalments of hire arises when the instalments  are paid  and  not before.  In ’such  a  hirepurchase  agreement there is no agreement to buy goods; the hirer being under no legal obligation to buy, has an option either to return  the goods  or  to  become its owner by payment in  full  of  the stipulated  hire  and the price for exercising  the  option. This class of him-purchase agreements must be  distinguished from transactions in which the customer is the owner of  the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire purchase. 842 agreement  with the financier, but in substance evidences  a loan transaction, subject to a hiring agreement under  which the lender is given the licence to seize the goods. A  few illustrative cases decided by the courts in  England, which do not import complications arising from the Bills  of Sale  Act,  1878  and the Hire Purchase Act,  1938,  may  be briefly  noticed.  In Re Watson, Ex Parte  Official’Receiver in  Bankruptcy(1)  it was held that in  adjudging  the  true nature of a transaction purporting to be a sale of  personal chattels,  followed  by a hiring  and  purchase  agreements, whereby  the  vendor agreed to hire the  chattels  from  the purchaser  and to pay quarterly sums for such hire, until  a certain  amount was paid, when the chattels were  to  become again the property of the vendor, and power was given to the purchaser  to take possession of the chattels on default  of payment,  the form of the transaction cannot be given  undue importance.   The Court held that no sale or hiring  of  the chattel was intended, the object in truth being to create  a security for a loan of money to the supposed vendor from the supposed  purchaser.  The transaction was therefore  one  of loan.  Lord Esher, M. R., observed at p. 37 :               "..........  when the transaction is in  truth               merely  a loan transaction, and the lender  is               to  be repaid his loan and to have a  security               upon the goods, it will be unavailing to cloak               the  reality  of  the transaction  by  a  sham

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             purchase and hiring.  It will be a question of               fact  in  each case whether there  is  a  real               purchase  and sale complete before the  hiring               agreement.   If there be such a  purchase  and               sale  in  fact and afterwards  the  goods  are               hired,  the  case is not within the  Bills  of               Sale Act.  The document itself must be  looked               at  as  part of the evidence; but it  is  only               part,  and  the Court must look at  the  other               facts,  and ascertain the actual truth of  the               case." In  Mass v. Pepper(2) one M entered into a contract  with  a wine  merchant under which the latter was to  provide  pound 2,000  for  purchasing the furniture of a  hotel  which  was agreed  to be purchased by M. The wine merchant  paid  pound 2,000 to the vendor who gave a receipt for that sum as  part of  a  purchase money of the furniture.  M then  executed  a hire-purchase  agreement in favour of the wine merchant  and the  wine merchant let the furniture to M to be paid for  by instalments  and the furniture not to become property  of  M till all the instalments were paid.  It was (1) [1890] 25 Q.B.D. 27. (2) [1905] A.C. 102.                             843 held  by  the House of Lords that the  circumstances  showed that the transaction was merely colourable and was a loan on the security of the hire-purchase agreement. In Polsky v. S. and A. Services(-’) the plaintiff  purchased a  motor-car and gave a cheque for the price.  Being  unable to  make  arrangement  for the cheque,  he  entered  into  a transaction with the defendants who carried on the  business of  financing  the  purchase  of  motor-cars.   ’Though  the plaintiff  had purchased the motor-car, and merely sought  a loan,  the  transaction between him and the  defendants  was carried  out  by means of documents used by  the  defendants when financing purchase of motor-cars, and they purported to buy  the motor-car from the plaintiff and to let it  out  to him  under  a hire-purchase agreement.  The  plaintiff  then brought  an  action for a declaration  claiming  that  hire- purchase  agreement  was void under the Bills of  Sale  Act, 1882.   Lord  Goddard, C.J., in upholding the claim  of  the plaintiff observed at p. 188 :               "A   considerable   number   of   cases   were               cited......  on the point which may, I  think,               be  conveniently  divided into  two  lines  of               authority.   There  is on the  one  hand,  the               class  of  cases, of which  Yorkshire  Railway               Wagon  Co. v. Maclure-(1882) Ch.   D.  309-and               British  Railway  Traffic &  Electric  Co.  v.               Kahn-(1921)  W.N. 52-are good examples,  where               the  transaction in question has been held  to               be a genuine sale followed by a  hire-purchase               agreement,  and, therefore, unaffected by  the               Bills  of Sale Acts, and, on the  other  hand,               there is the class, which includes Re  Watson,               Ex  p. Official Receiver in  Bankruptcy-(1890)               25 Q.B.D. 27-and Madell v. Thomas & Co.-(1891)               1 Q.B. 230-where the court has held, on  facts               not very dissimilar from those in the  present               case,  that  the real transaction was  one               of  loan,  and, therefore, it was  avoided  by               reason  of  the Acts.  There is  no  doubt,  I               think,  as  to the  deciding  principle.   The               Court has to determine whether the transaction               in question is a genuine sale by the  original

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             owner  of  the chattel to the  person  who  is               finding  the money and a genuine reletting  by               the  latter  to  the original  owner  on  hire               purchase     terms,     or     whether     the               transaction   though  taking  that  form,   is               nothing more than a loan  of   money  on   the               security of the goods...........    The  Court               is not to look merely at the               (1)   [1951] 1 All E.R. 185.               844               documents.   It  must discover what  the  real               transaction  was.  As Lord Esher,  M.R.,  said               (1891) 1 Q.B. 2341 in Madell v. Thomas & Co. :                the  court is to look through or  behind  the               documents, and to get at the reality; and,  if               in  reality the documents are only given as  a               security  for  money, then they are  bills  of               sale." " In  the  light of these principles the true  nature  of  the transactions  of.  the appellants may now be  stated.   The, appellants are carrying on the business of financiers : they are  not  dealing  in  motor-vehicles.   The   motor-vehicle purchased  by the customer is registered in the name of  the customer and remains at all material times so registered  in his name.  In the letter taken from the customer under which the  latter  agrees  to  keep the  vehicle  insured,  it  is expressly  recited  that  the  vehicle  has  been  given  as security  for  the loan advanced by the  appellants.   As  a security for repayment of the loan, the customer executes  a promissory-note for the amount paid by the appellants to the dealer  of  the vehicle.  The so-called "sale letter"  is  a formal  document which is not made effective by  registering the  vehicle  in  the name of the appellants  and  even  the insurance  of  the  vehicle has to be  effected  as  if  the ,customer is the owner.  Their right to seize the vehicle is merely a licence to ensure compliance with the terms- of the hire-purchase agreement.  The customer remains qua the world at  large  the  ,owner and remains  in  possession,  and  on condition  of  performing  the  covenants  has  a  right  to continue  to  remain  in  possession.   The  right  of   the appellants may be extinguished by payment of the amount  due to them under the terms of the hire-purchase agreement  even before   the  dates  fixed  for  payment.    The   agreement undoubtedly contains several onerous covenants, but they are all  intended  to secure to the appellants recovery  of  the amount  advanced.  We are accordingly of the view  that  the intention  of the appellants in obtaining the  hire-purchase and the allied agreements was to secure the return of  loans advanced to their customers, and no real sale of the vehicle was  intended  by  the  customer  to  the  appellants.   The transactions   were  merely  financing  transactions.    The appeals  will therefore be allowed with costs in this  Court and the High Court.  One hearing fee.                            ORDER In  accordance with the opinion of the majority the  appeals are  allowed  with costs in this Court and the  High  Court. One hearing fee. 845