IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HON'BLE THE CHIEF JUSTICE MR.H.L.DATTU & THE HONOURABLE MR. JUSTICE K.M.JOSEPH TUESDAY, THE 8TH JANUARY 2008 / 18TH POUSHA 1929 OP.No. 3234 of 2000(I) ---------------------- PETITIONER: ------------------ STATE BANK OF TRAVANCORE, HEAD OFFICE, THIRUVANANTHAPURAM 695 012, REPRESENTED BY ITS ASSISTANT GENERAL MANAGER (LAW), SRI. K. SUDHAKARAN PILLAI. BY SR. ADV. SRI.M.PATHROSE MATHAI SRI.SAJI VARGHESE RESPONDENTS: ----------------------- 1. THE COMMERCIAL TAX OFFICER, FIRST CIRCLE, TRIVANDRUM. 2. STATE OF KERALA REPRESENTED BY THE CHIEF SECRETARY TO GOVERNMENT OF KERALA, GOVERNMENT SECRETARIAT, TRIVANDRUM. BY SPL. GOVERNMENT PLEADER SRI. VINOD CHANDRAN. THIS ORIGINAL PETITION HAVING BEEN FINALLY HEARD ON 20/11/2007, ALONG WITH WA. 2073 OF 2007, THE COURT ON 08/01/2008 DELIVERED THE FOLLOWING: ORDER ON C.M.P. 5234/2000 IN O.P. NO. 3234 OF 2000. DISMISSED. 8.1.2008. SD/- H.L. DATTU, CHIEF JUSTICE. SD/- K.M. JOSEPH, JUDGE. APPENDIX PETITIONER'S EXTS: EXT. P1 : TRUE COPY OF LETTER ISSUED BY THE 1ST RESPONDENT TO THE PETITIONER. H.L. DATTU, CJ. & K.M. JOSEPH, J. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - O.P. No.3234/2000 & W.A. 2073/2007 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 8th day of January, 2008. JUDGMENT K.M. JOSEPH, J, Since common questions arise in the Original Petition and Writ Appeal, they are clubbed together and disposed of by this judgment. 2. Petitioner in O.P.3234 of 2000 is a statutory banking corporation. It is constituted by the State Bank of India (Subsidiary Banks) Act, 1959. The said enactment is traced to Entries 43 and 45 of of List I of the VII Schedule of the Constitution of India. According to the petitioner, the Banking Regulation Act, 1949 covers the entire field of Banking Corporations. Petitioner challenges the constitutional validity of the amendment to the definition of the word 'dealer' in the Kerala General Sales Tax Act (hereinafter referred to as 'the Act'), whereunder a Bank is treated as the dealer. Section 2(viii) of the Act contains the definition of the word 'dealer'. By the impugned amendment Clause (g) was added. It reads as follows: “(g) a bank or a financing institution which, whether in the course of its business or not, sells any gold or other valuable article pledged with it to secure any loan, for the realisation of such loan amount;” O.P.3234/2000 & W.A.2073/07. 2 For the purpose of this clause, Explanation I includes a Nationalised Bank or a Scheduled Bank or a Co-operative Bank. It is the case of the petitioner that it is beyond the legislative competence of the State of Kerala to encompass a bank, which disposed of gold or valuable articles pledged as security to secure the loan amount, for realisation of the loan amount. Petitioner also calls in question Ext.P1 issued by the Commercial Tax Officer to the petitioner on the strength of the impugned amendment requesting the petitioner to instruct all the branches in Trivandrum District to remit any amount of tax collected and deposited in the suspense account within seven days of the receipt of the communication. Ext.P1 would show that the officer directed that the branches may be instructed to remit the tax collected on the sales of gold ornaments or other valuables during each month, on or before the 15th of the succeeding month. 3. The appellant in W.A. 2073 of 2007 impugns the judgment of the learned Single Judge, by which the learned Single Judge dismissed the writ petition filed by the petitioner. The appellant had also sought to declare the amendment aforesaid as ultra vires the constitution. It also sought to quash Exts.P1 to P3 proceedings issued in the light of the impugned amendment. A writ of mandamus is also sought seeking to restrain proceedings for the levy O.P.3234/2000 & W.A.2073/07. 3 of tax on the sale of gold ornaments. 4. The learned Single Judge followed the Bench decision of this court in Federal Bank Ltd. v. State of Kerala (2003 (2) K.L.T. 347) and dismissed the writ petition. In fact the appellant had challenged the judgment by way of a Special Leave Petition before the Apex Court as the matter was engaging the attention of the Apex Court. The Apex Court had by Annexure A2 order dismissed the petition noting that the appellant had not exhausted the statutory remedy. Annexure A1 produced along with the appeal would show that the writ petition filed by the petitioner before the Apex Court came to be dismissed on the ground that an appeal lies before the Division Bench. 5. We heard learned Senior Counsel appearing for the petitioner Sri.M.Pathrose Mathai and S.Easwaran appearing on behalf of the appellant in the appeal besides Sri. Vinod Chandran, Special Government Pleader for Taxes. Contentions: 6. Sri. M. Pathrose Mathai, learned senior counsel contended that when a loan is given by a Bank on the strength of the pledge of gold ornaments and then sold, it could not be said that there was sale of movable property as contemplated under the Sale O.P.3234/2000 & W.A.2073/07. 4 of Goods Act, 1930. According to him, what is involved in pledge is only the transfer of special property. He would contend that Sale of Goods Act contemplates transfer of general property in goods, in order that there be a sale within the contemplation of the Act. In this connection he drew our attention to the following passage in Mulla on Sale of Goods Act. “Thus, special property or interest exists so that the pawnee can compel payment of the debt, or can sell the goods when the right to do so arises. A pawnee's special property in the pledge may be assigned to a third person by an assignment of the pawnee's interest or by a sub-pledge made by him. The term 'special property' has, however, been criticised and the use of the word 'special interest' preferred, on the ground that when the pawnee's right to sell is examined, the so-called 'special property' which that right is said to create, is in truth no property at all.” He would contend that unless there is a sale as contemplated in the Sale of Goods Act, it is not competent for the State legislature to impose tax on the footing that there was a sale of goods as understood in Entry 54 of List II of the Seventh Schedule of the Constitution. In this connection, he drew our attention to Entry 45 of List I of the Constitution. Entry 45 of List I of the Constitution reads as follows: O.P.3234/2000 & W.A.2073/07. 5 “45. Banking.” He would contend that being a bank, its activities are regulated by the provisions of the Banking Regulation Act, 1949, which is a central enactment providing for the regulation of the activities of the Bank. According to him, under Section 8 of the Act, there is an embargo against the banks selling goods. Section 8 being pertinent to the issue is extracted: “8. Prohibition of trading.- Notwithstanding anything contained in Section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in clause (i) of sub- section (1) of Section 6. [Provided that this section shall not apply to any such business as is specified in pursuance of clause (o) of sub-section (1) of section 6] Explanation.- For the purposes of this section, “goods' means every mind of movable property, other than actionable claims, stocks, shares, money, bullion and specie, and all instructions referred to in clause (a) of sub- section (1) of section 6.” O.P.3234/2000 & W.A.2073/07. 6 He also referred to Section 6 of the Banking Regulation Act. 7. He drew our attention to the definition of the word 'banking'. It reads as follows: “5(b) ”banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;” According to him, having regard to the definition of the word 'banking' as contained in the Banking Regulation Act, the acceptance of gold items as part of a pledge would not fall within the concept of banking. It is pointed out that the definition of the word 'sale or purchase of goods' in Article 366 (29A) of the Constitution does not include pledge or realisation of security of pledged goods against loan given by the bank as part of its banking business. It is submitted that when a sale takes place on default being committed by the borrower, who has pledged the gold items, it amounts only to the realisation of the security of the loan and it cannot be treated as sale of goods. The definition of the word 'sale' in the Act is contained in Section 2(xxi). We extract below the definition without explanations appended to the same. O.P.3234/2000 & W.A.2073/07. 7 “(xxi) “sale” with all its grammatical variations and cognate expressions means every transfer whether in pursuance of a contract or not 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, but does not include a mortgage, hypothecation, charge or pledge.” It is therefore contended that the definition of the word 'sale' itself would reflect an intention to exclude a pledge. It is contended by the petitioner/appellant that though this court had occasion to consider the question in the decision reported in Federal Bank Ltd.'s Case (2003(2) K.L.T. 347), the question relating to the legislative competence was not in issue. The decision of this court as confirmed by the Apex Court in Federal Bank Ltd. v. State of Kerala (2007(3) K.L.T. 106) will not preclude the present litigation and adjudication sought herein, it is pointed out. In paragraph 8 of the judgment of the Apex Court, the court has held as follows: “We do not find any merit in the above contention. As stated above, we are not concerned in the present civil appeals with the question of legislative competence of the State Legislature to insert clause (g) in S.2(viii) of the 1963 Act. In the present case, we are O.P.3234/2000 & W.A.2073/07. 8 concerned only with the limited question argued before us, namely, whether auction sale of pledged goods by scheduled banks is a 'transaction' which takes place in the course of banking business in terms of the 1949 Act.” According to him, as no sale takes place within the meaning of Entry 54 of List II of Seventh Schedule, it is the central legislature alone, which is possessed of legislative power having regard to Entry 45 as also Entry 97 of List I of the Constitution. 8. Sri. S. Easwaran, learned counsel for the appellant, in addition to the contentions addressed by the learned Senior Counsel for the petitioner, would submit as follows: He would point out that Section 8 of the Banking Regulation Act excludes bullion from the definition of goods as is discernible from the Explanation to Section 8. He would point out that sale in realisation of security in a pledge is done by way of public auction. He would submit that having regard to the position obtaining at law, there is no sale within the meaning of Sale of Goods Act, 1930. As per the definition of 'sale' under Section 2(xxi), sale should be in the course of the business and pledge is specifically excluded, he contends. It is his contention that the sale of pledged gold or gold ornaments to realise the loan amount by the Bank is not a sale in the course of banking. O.P.3234/2000 & W.A.2073/07. 9 9. Sri. Vinod Chandran, learned Government Pleader for Tax contended that the matter is squarely concluded by the decision of the Apex Court in Federal Bank Ltd.'s Case (2007 (3) KLT 106). He would further contend that there is absolutely no warrant in the contention of the petitioner and the appellant that the State is bereft of the legislative power to enact the impugned amendment. He would point out that the scheme of the distribution of legislative power as discernible from a perusal of the Lists to the Seventh schedule would show that the legislative powers as contained in the lists are broadly of two types. On the one hand the Lists contain legislative entries conferring general power on the legislatures in regard to various aspects. This is followed by an enumeration of powers conferred to impose taxes on various taxing events. A specific entry is found in List II, namely, Entry 54. It reads as follows: “Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I.” Thus the fact that Entry 45 confers legislative power in the central legislature to make laws relating to banking would not mean that the State legislature is deprived of its legislative power to impose tax when a sale of goods is effected by a bank. When a sale of goods is O.P.3234/2000 & W.A.2073/07. 10 effected, as is comprehended in Entry 54 of List II of the Seventh Schedule, the State becomes endowed with authority to tax the sale. He would point out that when there is a pledge, what is transferred may be the special right in favour of the pledgee to cause the pledged articles to be sold in the event of default by a borrower, who has pledged the items. But, in the event of default, the creditor/pledgee is clothed with a power to sell the said items, no doubt for realisation of the loan. When the sale takes place, it is not a special property which is transferred. On the contrary, what is transferred is indeed the general property in the goods as contemplated in the Sale of Goods Act. In other words, a sale in enforcement of the pledge, according to the learned Government Pleader, would result in vesting of the full title to the goods as would have been transferred by the owner of the goods. He would point out Section 176 of the Indian Contract Act in this connection and he would also take us through the decision reported in Federal Bank Ltd. v. State of Kerala (2007(3) K.L.T. 106 (SC)) in this regard. He would contend that the Apex Court has categorically held that when a sale takes place in enforcement of a pledge, it is being done in the course of the business of banking. 10. In order to resolve the dispute raised, it is important to notice the matters which are concluded by the decision of the Apex O.P.3234/2000 & W.A.2073/07. 11 Court in Federal Bank Ltd.'s case (supra). The Apex Court has held as follows: “The banks, in selling the goods pledged to them, did not act as agents of the borrowers/pledgers and that their sale was in exercise of statutory power under the 1949 Act.” Further, the court held “We are of the view that sale of pledged ornaments falls within the course of banking business under the 1949 Act. In the circumstances, such transactions are taxable under S.2(viii)(g) read with S.5 of the 1963 Act.” It is further held “We also find merit in the contention advanced on behalf of the Department (respondents herein) that the very object of the Kerala Finance Act, 1998 was to introduce clause (g) in S.2(viii) in order to get over the judgments of the High Court which took the view that sale of pledged goods did not fall in the course of banking business. We have quoted clause (g). That clause makes it very clear that even if the sale of pledged ornaments takes place outside the banking business, the 1963 Act would cover even such transactions. Therefore, once such transactions fall under /s.2(viii)(g) of the 1963 Act, banks become “dealers” and they are liable to pay sales tax under the said 1963 Act. O.P.3234/2000 & W.A.2073/07. 12 It is important also to notice the following statement of the law by the Apex Court : “It is true that the definition of the word “sale” under S.2(xxi) of the 1963 Act does not include mortgage, hypothecation charge or pledge, however, the important point to be noted is that the definition of the word “sale” under 1963 Act is not the same as under S.4 of the Sale of Goods Act, 1930. The definition of the word “sale” in S.2 (xxi) in the 1949 is very similar to S.2(g) of the Central Sales Tax Act, 1956 which is held to be having a very wide meaning as compared to the definition of the word “sale” in S.4 of the Sale of Goods Act, 1930 (see: State of Maharashtra v. Embee Corporation, Bombay ((1997) 7 SCC 190). Further when charge or pledge is enforced that enforcement is by way of sale of the pledged or hypothecated goods; that sale is for consideration and, therefore, it falls within the ambit of S.2(xxi) of the 1963 Act.” 10. It is therefore not open to the petitioner/appellant to contend that when the pledged articles are sold by the banks, it is not in the course of banking business. It is also not open to them to contend that Section 8 of the Banking Regulation Act read with Section 5(b) of the said Act and Section 6 of the Act prohibit the bank from effecting sale of goods and therefore the sale in public auction by the banks of pledged articles cannot be subjected to tax. It is clear O.P.3234/2000 & W.A.2073/07. 13 that sale of pledged goods is not prohibited under Section 8 of the Banking Regulation Act. 11. We also think that there is no merit in the contention that when the pledgee disposes off the pledged articles on default being committed by the borrower/pledger, it only amounts to realisation of security and it cannot be treated as the sale of goods. In our view, while it amounts to realisation of the security, it is nonetheless a sale of goods. Under the Sale of Goods Act, seller is defined as follows: “2(13) “”seller” means a person who sells or agrees to sell goods;” Goods are defined as in Section 2(7) as follows: “”goods” means every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;” Property is defined in Section 2(11) as follows: “”property” means the general property in goods, and not merely a special property; It is important to notice what exactly is a pledge. A pledge is essentially a bailment of goods. By the pledge itself what is O.P.3234/2000 & W.A.2073/07. 14 transferred by the pledger to the pledgee is only a special right in the property to cause the goods to be sold in the event of there being a default. It is true that a pledge does not involve a transfer of general property by the pledger to the pledgee. The definition of sale under the Act also excludes a pledge from the scope of the expression sale. But we are not concerned with a question as to whether the transaction of pledge itself is exigible to tax. On the one hand we are here concerned with a situation arising out of the sale by the pledgee acting under the terms of the pledge as also the provisions of Section 176 of the Contract Act and Section 8 of the Banking Regulation Act. Section 176 of the Contract Act reads as follows: “Pawnee's right where pawnor makes default.- If the pawnor makes default in payment of the debt, or performance, at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.” O.P.3234/2000 & W.A.2073/07. 15 When the pledgee sells the goods upon conditions arising giving it the legal right to sell the goods, there cannot be any doubt in that there is a transfer of general property in the goods by the Bank to the buyer. In ((1998) 7 SCC 707 the Apex Court after referring to Contract Act and more pointedly the Karnataka Pawnbrokers Act, 1961 and Rules made thereunder held as follows: “It cannot be and it is not disputed that the pawnbroker has special property rights in the goods pledged, a right higher than a mere right of detention of goods but a right lesser than general property right in the goods. To put it differently, the pawnor at the time of the pledge not only transfers to the pawnee, the special right in the pledge in the event of the pledge remaining unredeemed resulting in the sale of the pledge by public auction through an approved auctioneer. The position being what is stated above, the natural consequence will be that it is the pawnee who holds not only the absolute special property right in the pledge but also the conditional general property interest in the pledge, the condition being that he can pass on that general property only in the event of the pledge being brought to sale by public auction in accordance with the Act and the Rules framed thereunder.” A contract can be express or implied. When goods are sold in public auction by the bank of pledged articles, it cannot be said that there is O.P.3234/2000 & W.A.2073/07. 16 no contract between the bank and the buyer. As already noticed, the definition of the word 'seller' in the Sale of Goods Act only means the person who actually sells the property. When the Bank as pledgee sells the property, the Bank would be a seller within the meaning of the Sale of Goods Act, as it is the Bank which sells the goods. We are therefore not at all impressed by the contention that there is no sale of goods within the meaning of the Sale of Goods Act for the reason that what is transferred is only a special right and no general property of goods is transferred. We are therefore not impressed by the argument that there is no sale for the reason that there is no contract between the parties. 12. The further question to be considered would be whether the State has legislative competence to enact the amendment, which is called in question. By the amendment, a Bank effecting sale in exercise of the rights as a pledgee is brought within the scope of the word 'dealer'. It is true that banking per se is a subject assigned to the central legislature. Thus, it is apparently in exercise of the said power that various enactments, including the Banking Regulation Act, 1949 have come to be enacted by the central legislature. Banking Regulation Act is intended to regulate various aspects relating to banking. Apparently, the reason must have been O.P.3234/2000 & W.A.2073/07. 17 that the founding fathers thought that as a matter