146 of 1958
Petition under article 32 of the Constitution of India for enforcement of Fundamental Rights
Veda Vyasa section K Kapur and Ganpat Rai for the petitioners
C K Daphtary Solicitor General of India R Gopala krishnan and D Gupta for the respondents
May 2
The Judgment of the Court was delivered by SINHA C J
The petitioners have moved this sin Court under article 32 of the Constitution for a writ 646 or order in the nature of mandamus andor prohibition andor other suitable writ order or direction to the respondents not to levy charge or collect any sales tax on transactions of what the petitioners characterised as hire purchase agreements a typical example of which is contained in Annexure A  to the petition to be hereinafter examined in detail
The first petitioner is a private limited company incorporated under the Companies Act with its registered office at Janpath New Delhi
The second petitioner is the Managing Director and shareholder of that company and is directly interested in the result of this application because it is claimed that his rights and property are directly involved
The company has been carrying on in Delhi the business of financing the purchase of new as well as second hand motor cars and other kinds of motor vehicles
The system adopted by the Company for financing a purchase such as aforesaid is as follows
A person desiring to purchase a motor vehicle fixes a bargain with the owner and the petitioner Company would then advance the necessary finance on the terms and conditions appearing in a printed copy of the agreement marked Annexure A  to the petition
According to that agreement the Company charges the Hirer  an initial deposit by way of premium as a consideration for granting the lease of the vehicle which deposit becomes the absolute property of the Company the premium charged as aforesaid is a substantial amount being usually 25 of the price in respect of new vehicles
The Hirer  undertakes to pay instalments and when all the instalments are paid the vehicle becomes the property of the Hirer  at his option on payment of rupee one to the Company as a consideration for the option until all the stipulated instalments have been paid and the option exercised as aforesaid the vehicle remains the property of the Company as owners
The Hirer  is delivered possession of the vehicle and he remains responsible to the Company for damage or destruction or loss
The Hirer  has to pay interest at the rate of one per cent
per mensem on all sums overdue
Until the option of 647 purchase is exercised by the Hirer  he is at liberty to return the vehicle and to put an end to tile Hiring Agreement on certain terms
Thus under the agreement the Hirer  has the use of the vehicle which is entrusted to him as the property of the Company and it is open to the Hirer  to become the purchaser of the vehicle as aforesaid but he is not bound to do so
The hire money received by the Company it is contended is not a part of the price of the goods sold and is thus not liable to be taxed as sale price
The Bengal Finance Sales Tax Act 1941 Bengal Act VI of 1941 was extended to the State of Delhi which is now the Union Territory of Delhi
In pursuance of the provisions of that Act the Sales Tax authorities started demanding and levying sales tax on all transactions of the nature aforesaid on the ground that the instalments paid by the hirers to the Company were sales price and therefore liable to Sales Tax
The Company challenged the right of the Sales Tax authorities to levy any such tax on the ground that the law was beyond the competence of the legislature
Ultimately the Company moved the Punjab High Court Circuit Bench at Delhi under articles 226 and 227 of the Constitution
In the Writ Petition which was registered as Civil Writ Application No 289 D of 1954 the Company prayed for a writ in the nature of prohibition andor mandamus restraining the respondent from realising or levying any sales tax under the provisions of the Bengal Act extended to Delhi
There was also a prayer for a writ of certiorari quashing certain orders passed by the Sales Tax authorities in 1953 54
The said application was heard by a Division Bench which allowed the petition and issued a mandamus to the State to forbear from enforcing its notice for the realisation of the Sales Tax
It was held by the High Court that the State Legislature had not the power to enlarge the meaning of the words Sale of Goods by going beyond the meaning attached to it by the Sale of Goods Act
After tile judgment aforesaid of the High Court of Punjab it is further alleged a settlement was arrived at between the companies carrying on hire purchase 648 business in Delhi and the Commissioner of Sales Tax who issued a circular being Circular No 10 of 1956 containing the following decisions of the Department i Companies which are exclusively engaged in the hire purchase business will not be treated as dealers and their certificate of registration will be cancelled
ii Companies which are partially engaged in the business of hire purchase will continue to be dealers as hitherto fore and their hire purchase transactions will be appropriately examined in the light of the judgment of the Punjab High Court and will be liable to Sales Tax at one stage
iii As a result of i above sales made to the above Companies by the dealers in vehicles would be liable to Sales Tax at the hands of the latter
iv In respect of vehicles and machineries etc for which tax has been paid at the time of purchases thereon from the market no Sales Tax would be payable in respect of hire monies collected on them by the hire purchase companies or on their resale or rehire following repossession or on the exercise of the option of purchases by the hirer
v In respect of second hand vehicles purchased by the companies from private individuals for purposes of hire purchase the companies will not be liable to any sales tax either at the time of purchase or in respect of subsequent transaction thereon
The Companies will be as other nonregistered dealers in view of i their Registration Certificates in respect of Hire purchase business having been cancelled
vi The assessment which are already made will not be reopened except in the case of Ms Installment Supply Co Ltd for which there are specified orders of the High Court
vii In their up to date assessment the hire purchase Companies should take upon themselves the responsibility to pay tax which they have save by making tax free purchases either from dealers or from non registered dealers
The assessment will however be made accordingly as before in the normal way
 649 Thereafter in the case of Mithan Lal vs State of Delhi 1 this Court examined the vires of the Bengal Finance Sales Tax Act 1941 as extended to Delhi and came to the conclusion that the law had been validly promulgated
According to that decision the definition of sale  could be legally extended so as to make it permissible to tax sale of goods involving the supply of materials in pursuance of building contracts
As a result of the decision aforesaid of this Court a press note was issued by the Commissioner of Sales Tax Delhi to the effect that provision regarding levy of tax on hire purchase transactions was valid and that all hire purchase dealers as come within the purview of sections 4 and 7 of the Bengal Finance Sales Tax Act 1941 as extended to Delhi are liable to pay sales tax and to get themselves registered under the Act that all such hire purchase dealers as were formerly registered with the Sales Tax Department shall be deemed to be registered with effect from the first of April 1958 for the purpose of the Act and that all hire purchase dealers who had not got themselves registered so far should immediately have themselves so registered in order to avoid being penalised for contravention of the provisions of the Act
In pursuance of the aforesaid circular of the Department the petitioner company was also called upon to comply with the requirements of the Act
The Company made representation to the Commis sioner of Sales Tax that the Company and other such companies which deal in hire purchase were not liable to pay sales tax but the Commissioner of Sales Tax refused to accept the Company s contention and answered to the following effect 1
The incidence of Sales Tax on such transactions is to be governed by the provisions of Sections 3 and 4 of the 
If however the vehicles are purchased by a Company having its place of business in Delhi from a dealer outside Delhi on payment of Sales Tax of that State and the vehicle is hire purchased to the party in that very State neither Delhi Sales Tax 1  650 nor Central Sales Tax will be leviable on the Delhi firm irrespective of the fact that the Hire purchase Agreement is entered into at Delhi
If however vehicle is purchased in State A  but is hire purchased to a party in State B  Central Sales Tax will be leviable in the State according to the rules in force in that State
The hire purchase transactions of secondhand vehicles where the owner approaches the Hire Purchase Co for finances against the vehicles will be leviable to Sales Tax because according to the Hire purchase Agreement the property in the vehicle vests in the Hire Purchase Co and this property is to be transferred to the so called owner by virtue of the Hire purchase transactions
Secondhand vehicles purchased outside Delhi and hire purchased to the parties outside Delhi or hire purchase transactions conducted outside Delhi in which owner approaches the Hire purchase Co for finance will be governed by the clarification given in 1 above
In the case of vehicles purchased by the Hire purchase Companies from the local registered dealers they will not be required to pay any Sales Tax because all Hire purchase companies will be registered and will be entitled to make tax free purchases of such vehicles
It is therefore regretted that it is not possible to accede to the request made in this behalf
Sales Tax will be payable on total amounts charged by the Hire purchase Co from the hirer and it is not possible to waive Sales Tax on the so called incidental charges
It is regretted that it is not possible to alter the date of liability of the Hire purchase Co which has already been fixed with effect from 1st of April 1958 in pursuance of the Supreme Court Judgment
It is true that the Press Note was issued in the month of June and so Hire purchase Companies have been making purchases of vehicles on payment of sales tax
The Hire purchase companies are advised to approach the dealers for 651 refund of the Sales Tax paid by them on such purchases
If however it is not possible for any Hire Purchase Co to obtain refund of the Sales Tax so paid by them the amounts so paid may be adjusted towards their liability on the hire purchase transactions
 On receipt of the answer of the Department as set out in the previous paragraphs the petitioners moved this Court under article 32 of the Constitution on the ground that the threatened action of the respondents is illegal and unconstitutional as the petitioner company is not liable to pay sales tax on the transactions described above
In support of the petition the learned counsel for the petitioners has raised the following contentions 1 that the transactions in respect of which the petitioners are sought to be taxed are not covered by the explanation to section 2g of the Bengal Finance Sales Tax Act as extended to Delhi 2 alternatively that is to say if it is held that the explanation covers the transactions of the nature aforesaid then the explanation extending the concept of sale  is unconstitutional 3 That in any case it is unconstitutional as it infringes article 14 of the Constitution in so far as the State of Delhi has been selected for hostile discrimination 4 that the judgment of the Punjab High Court in Installment Supply Ltd New Delhi vs State of Delhi 1 is final and conclusive as between the parties to that judgment 5 that if it is held that the judgment of the Punjab High Court referred to above has been superseded by the judgment of this Court in Mithan Lal s case 2 that judgment cannot be given retrospective operation and 6 lastly that the settlement between the Department and the Companies transacting business in Hire purchase is binding until the decision of this Court in Mithan Lal s case 3 aforesaid
We shall examine these arguments in the order in which they have been stated
The most important question in this case is What 1 AIR 1956 Puaj
2 1959 SCR 445
652 is the true nature and character of the transaction which is the subject matter of the present controversy Do the terms and conditions of the agreement typified by Annexure A  to the petition as described above constitute a mere agreement of hiring as contended on behalf of the petitioners or do they constitute a contract of hire purchase within the meaning of explanation 1 to the definition of sale  contained in the statute in question as contended on behalf of the respondents There is no doubt that the concept of sale  as it appears from the following words of the definition along with explanation 1 is rather extended
In the definition of the term sale  for the purposes of the Act the words are as follows  Sale  means any transfer of property in goods for cash or deferred payment or other valuable consideration including a transfer of property in goods involved in the execution of a contract but does not include a mortgage hypothecation charge or pledge
Explanation I A transfer of goods on hire purchase or other instalment system of payment shall notwithstanding that the seller retains a title to any goods as security for payment of the price be deemed to be a sale
 It is clear from the definition that it includes not only what may be compendiously described as a sale under the Sale of Goods Act but also transactions which strictly speaking are not sales not even contracts of sale  but only contain an element of sale that is the option to purchase and that is the reason why the explanation ends with the words be deemed to be a sale thereby indicating that a legal fiction has been introduced into the concept of sale  as ordinarily understood
The explanation has included within its amplitude a mere transfer of goods without the transfer of title to the goods if it is in the course of an agreement of the nature of hire purchase or other instalment system of payment
A contract of hiring under the Common Law is one of the species of a contract of bailment and has during the last 60 70 653 years undergone a series of refinements as a result of modern industrial and commercial developments
The term hire purchase  has not been defined in the Act
We have therefore to construe the expression in its ordinary Common Law sense which may best be expressed in terms of the Dictionary of English Law by Earl Jowitt at pages 913 914 which runs as follows Hire purchase a system whereby the owner of goods lets them on hire for periodic payments by the hirer upon an agreement that when a certain number of payments have been completed the absolute property in the goods will pass to the hirer but so that the hirer may return the goods at any time without any obligation to pay any balance of rent accruing after return until the conditions have been fulfilled the property remains in the owner
The instrument by which the hire purchase is effected does not ordinarily require registration as a bill of sale Exp
Crawcour  the hirer is reputed owner  within the Bankruptcy Act 1914 Exp
Brooks  but the hirer does not agree to buy  within the Factors Act or the Sale of Goods Act 1893 so as to be able to sell or pledge the goods as if he were a mercantile agent Helby vs Matthews  Brooks vs Bernstein 1909 1 KB 98
Such agreements are to be distinguished from agreements such as in Lee vs Butler  which are in fact a sale the price being paid in instalments with the condition that the property passes when all the instalments have been paid here there is a binding agreement for the party to purchase where in a true hire purchase agreement there is not
 In Halsbury s Laws of England Third Edition Volume 19 paragraph 823 at pages 510 511 the nature of a hire purchase transaction is thus expressed The contract of hire purchase is one of the variations of the contract of bailment but it is a modern development of commercial life and the rules with regard to bailments which were laid down before 83 654 any contract of hire purchase was contemplated cannot be applied simpliciter because such a contract has in it not only the element of bailment but also the element of sale
At common law the term hire purchase  properly applies only to contracts of hire conferring an option to purchase but it is often used to describe contracts which are in reality agreements to purchase chattels by instalments subject to a condition that the property in them is not to pass until all instalments have been paid
The distinction between these two types of hire purchase contracts is however a most important one because under the latter type of contract there is a binding obligation on the hirer to buy and the hirer can therefore pass a good title to a purchaser or pledge dealing with him in good faith and without notice of the rights of the true owner whereas in the case of a contract which merely confers an option to purchase there is no binding obligation on the hirer to buy and a purchaser or pledge can obtain no better title than the hirer had except in the case of a sale in market overt the contract not being an agreement to buy within the Factors Act 1889 or the Sale of Goods Act 1893 The observations quoted above are based mostly on two leading cases which have come to be regarded as the locus classics upon the subject namely Lee vs Butler 1 in which the transaction was described by Lord Esher MR as Hire and Purchase Agreements and Helby vs Matthews 2 in which the House of Lords distinguished the former case on the ground that in that case there was a binding contract to buy and not merely an option to buy without any obligation to buy
Both these cases were decided in terms of Factors Act of 1889 52  53 Vict c 45 section 9
Both the kinds of agreements exemplified by the two leading cases aforesaid would now be included in the definition of hire purchase  as contained in section 21 of the Hire Purchase Act 1938 1  2 Geo 6 c 53  Hire purchase agreement  means an agreement for the bailment of goods under which the bailer 1 2 655 may buy the goods or under which the property in the goods will or may pass to the bailee and where by virtue of two or more agreements none of which  by itself constitutes a hire purchase agreement there is a bailment of goods and either the bailee may buy the goods or the property therein will or may pass to the bailee the agreements shall be treated for the purposes of this Act as a single agreement made at the time when the last of the agreements was made
 It is clear that under the Law as it now stands which has now been crystallised into the section of the Hire Purchase Act quoted above the transaction partakes of the nature of a contract or bailment with an element of sale as aforesaid added to it
In such an agreement the hirer may not be bound to purchase the thing hired he may or may not be
But in either case if there is an obligation to buy or an option to buy the goods delivered to the hirer by the owner on the terms that the hirer on payment of a premium as also of a number of instalments shall enjoy the use of the goods which ultimately may become his property the transaction amounts to one of hire purchase even though the title to the goods has remained with the owner and shall not pass to the hirer until a certain event has happened namely that all the stipulated instalments have been paid or that the hirer has exercised his option to finalise the purchase on payment of a sum nominal or otherwise
But it has been contended on behalf of the petitioners that there is no binding agreement to purchase the goods and that title is retained by the owner not as a security for payment of the price but absolutely
According to third term of the agreement on the hirer duly performing and observing the terms of the agreement with particular reference to the payment of the monthly instalments the hiring shall come to an end and the vehicle shall at the option of the hirer become his absolute property but until such payments as aforesaid have been made the vehicle shall remain the property of the owners
The hirer shall also have the option of purchasing the vehicle at any 656 time during the currency of this Agreement by paying in one lump sum the balance of all the hire hereinbefore mentioned and any other expenses incurred by the owners relating to the transaction
 It is clear therefore that in addition to the contract of hiring an option has been given to the hirer to purchase or not to purchase
The more serious question on this part of the petitioners  contention is whether the non obstante clause in the explanation notwithstanding that the seller retains a title to any goods as security for payment of the price governs the main clause of the explanation
In our opinion it does not
The non obstante clause has been added only to emphasise the categorical statement of the law contained in the main clause to the effect that a transfer of goods on hire purchase etc shall be deemed to be a sale  even though there may be a stipulation to the effect that in spite of the transfer of goods to the hirer the owner retains title to those goods until the happening of the ultimate event namely completion of title at the option of the hirer
There is thus no doubt that the agreement in question does contain not only a contract of bailment simpliciter but also an element of sale which element has been seized upon by the legislature for the purpose of subjecting a transaction like that to the Sales Tax
This leads us to the second ground of attack raised by the petitioners namely that the explanation if it has the effect of extending the concept of sale  to what in law is not a real sale but only an incipient or inchoate sale then in so far as the law has extended the definition of sale  it is unconstitutional
This contention has lost all its force if ever it had any in view of the decision of this Court in Mithan Lal s case 1
But then it is argued that Mithan Lal s case 1 requires reconsideration and that in any view of the matter this Court did not consider the further attack based on article 14 of the Constitution
It is true that in Mithan Lal s case 1 the contention that the enactment in question had infringed article 14 of the 1  657 Constitution had not been raised
This Court therefore had no occasion to pronounce on that aspect of the controversy We have therefore to consider the contention under head 3 namely that though the Parliament may have had the power to tax something which was not strictly speaking a sale  the law is open to the attack that it discriminates against traders in Delhi inasmuch as it is further contended such a law has not been made applicable to the whole of India
In our opinion there is no substance in this contention because no proper foundation was laid in the pleadings for supporting such a contention
It has not been averred that other Part II States have not been similarly treated
On the other hand it does appear that under the LXXIV of 1956 the definition of Sale  contains the extended definition without the non obstante clause discussed above
Section 2g of the  has the following definition  Sale  with its grammatical variations and cognate expressions means any transfer of property in goods by one person to another for cash or for deferred payment or for any other valuable consideration and includes a transfer of goods on the hire purchase or other system of payment by instalments but does not include a mortgage or hypothecation of or a charge or pledge on goods
 It would thus appear that hire purchase transactions have been included within the definition of sale  for the purpose of Central Sales Tax and this definition has become applicable throughout India and it cannot therefore be said that the State of Delhi and now the Union Territory of Delhi has been selected for hostile discrimination
In our opinion therefore there is no substance in the contention that the extended definition of sale  in the main statute infringes article 14 of the Constitution
Now the remaining contentions raised on behalf of the petitioners may be disposed of by observing that what the Sales Tax Department does or does not do cannot change the law
The Department issued its 658 instructions to the Sales Tax Officers in conformity with the law as laid down in the judgment of the Punjab High Court in Instalment Supply Ltd New Delhi vs State of Delhi 1
This Court later laid down the law more authoritatively in Mithan Lal s s case 2 and the Department was bound to take notice of what this Court had laid down
It cannot therefore be argued that the Department had in any sense estopped itself by issuing those instructions or that this Court by laying down the law in Mithan Lal s case 2 had laid down a new rule of law which has no application to pending proceedings for levy assessment and realisation of sales tax either in Delhi or elsewhere
There is another answer to the point of res judicata raised on behalf of the petitioners relying upon the decision of the Punjab High Court in Instalment Supply Ltd New Delhi vs State of Delhi 1
It is well settled that in matters of taxation there is no question of res judicata because each year s assessment is final only for that year and does not govern later years because it determines only the tax for a particular period
See the decision in the House of Lords in Society of Medical Officers of Health vs Hope Valuation Officer 3 approving and following the decision of the Privy Council in Broken Hill Proprietary Company Limited vs Municipal Council of Broken Hill 4
As all the contentions raised on behalf of the petitioners fail this petition is dismissed with costs
Petition dismissed
1 A IR 1956 Punj I77


Summary:
Section 2g of the Bengal Finance Sales Tax Act 1941 as extended to Delhi State provided as follows  Sale  means any transfer of property in goods for cash or deferred payment or other valuable consideration including a transfer of property in goods involved in the execution of a contract but does not include a mortgage hypothecation charge or pledge
Explanation I A transfer of goods on hire purchase or other instalment system of payment shall notwithstanding that the seller retains a title to any goods as security for payment of the price be deemed to be a sale
 The hire purchase agreement entered into by the petitioner company provided that after all the monthly instalments had been paid the hiring shall come to an end and the vehicle shall at the option of the hirer become his absolute property but until such payments as aforesaid have been made the vehicle shall remain the property of the owners
The hirer shall also have the option of purchasing the vehicle at any time during the currency of this agreement by paying in one lump sum the balance of all the hire hereinbefore mentioned and any other expenses incurred by the owners relating to the transaction
 The question for determination was whether the agreement was a transaction of mere hiring or one of hire purchase within the meaning of Explanation 1 to section 2g of the Act
645 Held that the language of Explanation 1 to section 2g of the Act was wide enough to include a mere transfer of goods without the transfer of the title thereto if such transfer took place in the course of an agreement of hire purchase or any other instalment system of payment
As the Act did not define the term hire purchase  it had to be construed in its ordinary Common Law sense ie that it partook of the nature of a contract of bailment with an element of sale added to it
Lee vs Butler 1893 z Q B 318 and Helby vs Matthews  referred to
The non obstacle clause in Explanation 1 to section 2g of the Act did not govern the main clause of the said Explanation and its sole purpose was to emphasise the categorical statement of the law Contained therein
Since the agreement in the instant case contained not merely a contract of bailment simpliciter but also an element of sale the transaction had rightly been subjected to sales tax
There could be no force in the contention that the Act in so far as it sought to extend the concept of sale to what in law was not a real sale was unconstitutional
Mithan Lal vs State of Delhi   referred to
Nor was there any substance in the contention that the extended definition of the word sale  in the Act infringed article 14 of the Constitution
It is well settled that in matters of taxation there can be no question of res judicata
Society of Medical Officers of Health vs Hope Valuation Officer and Broken Hill Proprietary Company Ltd vs Municipal Council of Broken Hill 1925 A C 94 referred to
Installment Supply Ltd New Delhi vs State of Delhi AIR 1956 Punj
177 considered