Full Judgment Text
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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