Case: M/s. K.L. Johar &amp; Co Vs. Deputy Commercial Tax Officer

Re. 1 which is the nominal amount to be paid for the option nor the entire amount which is paid as hire including Re. 1. The value must be something less than the original price, which in the example mentioned by us above was Rs. 5,000. In order to arrive at the value at the time of the second sale to the hirer, the sale tax authorities should take into consideration the depreciation of the vehicle and such other matters as may be relevant in arriving at such price on which the sale can be said to have taken place when the option is exercised, but that price must always be less than the original price (which was Rs. 5,000 in the example given above by us). 23. We may in this connection refer to Darnghvil Coal Co. v. Francis, (1913) 7 Tax Cas 1. That was a case under the (English) Income-tax Act, and the question that directly arose for consideration was with respect to deductions to be allowed from profits in the circumstances of that case. The facts were these : the appellant, a coal company, in order to obtain railway wagons for the conveyance of coal from its collieries to its customers from time to time entered into agreements with a wagon company under which a certain annual sum was paid for a period of years for a certain number of wagons. By the terms of the agreements the coal company during the periods of the payments used the wagons at its own risk and was bound to keep them in repair, and the end of the period it had the option of purchasing the wagons at the nominal price of one shilling for each wagon. It will be seen that the agreement was in the nature of a hire purchase agreement of wagons. The question has arose whether any deductions from profits could be allowed to the coal company in the circumstances. It was held that the annual payments under the agreements were divisible into two, namely, (1) consideration paid for the use of the wagons, and (ii) payments for an option at a future date to purchase the wagons at a nominal price. It was also held that in so far as the payments represented the consideration for the use of the wagons during the period of agreement they were admissible as deduction in the computation of the coal companys profits for the purpose of assessment to income-tax. It was observed that it was perfectly clear that during the course of the period. of years the wagon still was the property of the wagon company and not of the coal company; but the coal company wished to use it and accordingly an extra payment was made in respect of that. No discrimination was made between the two kinds of payment; it was a lump sum that was paid. In such cases two things were going on concurrently - there was a sale and purchase, agreement under certain terms - not a sale at that moment, but an option on certain terms on a future date to have a sale - and on the other hand there was also concurrent with that a hiring agreement. The Court then went on to observe that it had no materials for splitting up that payment showing what was truly hire and what was truly payment towards eventual purchase. Finally the case was remitted to the Commissioners with instructions that they were bound to allow as deduction such portion of the yearly payment made in respect of the wagon agreements as presented the consideration paid for being allowed to use wagons which under the contract were not yet the property of the coal company and that the Commissioners must decide that question for themselves if parties did not agree. 24. This case in our opinion brings out the true nature of the payment made as hire in hire purchase agreement. Part of the amount is towards the hire and part towards the payment of price, and it would be for the sales tax authorities to determine in an appropriate way the price of the vehicle on the date the hirer exercises his option and becomes the owner of the vehicle after fulfilling the terms of the agreement. There is no legislative guidance available as to how this should be done and perhaps it would be better if the legislature gives guidance in such matters. But even in the absence of legislative guidance it would be for the sales tax authorities to decide as best they can the value of the vehicle on the date the option is exercised and the property passes to the hirer. There may be two ways of doing it. The sales tax authorities may split up the hire into two pans, namely, the amount paid as consideration for the use of the vehicle so long as it was the property of the owner, and the payment for the option on a future date to purchase the vehicle at a nominal price. If the first part is determined the rest would be towards the payment of price. The first part may be determined after finding out the proper amount to be paid as hire in the market for a vehicle of the type concerned, or in such other way as may be available to the sales tax authorities. The second method may be to take the original price fixed in the hire purchase agreement and to calculate the depreciation and all other factors that may be relevant in arriving at the price when the second sale takes place to the hirer including the condition of the vehicle at the time of the second sale. It is therefore for the sales tax authorities to find out the price of the vehicle on which tax has to be paid in either of the ways indicated by us above or such other way as may be just and reasonable. 25.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]We are of opinion that the view taken by the High Court in this behalf is correct. This will be clear from a consideration of the various terms of the hire-purchased agreement which we have already summarised above. That agreement shows that the whole of the price of the vehicle is paid by the appellant to the dealer. Even where a part of the price is paid by the intending purchaser, the payment is shown as hire for the first month and is made to the appellant. So far as the dealer is concerned the whole price is paid by the appellant. The agreement also shows that the appellant is the owner of the vehicle and the intending purchaser is merely a hirer thereunder. The vehicle has to be registered in the name of the appellant, though the fact of registration by itself in one name or another may not be determinative of the ownership of the vehicle. Clauses 14 and 15 of the agreement clearly show that there was no sale by the dealer to the intending purchaser of the vehicle at the time of the hire-purchase agreement. These clauses give power to the appellant to retake possession of the vehicle and determine the agreement. Now if the property in the vehicle had passed to the intending purchaser at the time of the hire-purchase agreement it would not have been open to the appellant to take possession of the vehicle or to insist on payment of arrears or to become entitled to everything that had been paid up to that day. Under the law all that the appellant would have been entitled to was to realise the loan he had given by filing a suit and then attaching and selling the vehicle. These two clauses are therefore clear indication of the fact that there was no sale by the dealer to the person who wanted to purchase the vehicle at the time of the hire-purchase agreement, and that at that time the sale was by the dealer to the appellant. Then clauses 20 and 31 enforce this conclusion inasmuch as they give an option to the person who wanted to purchase the vehicle to do so by exercising his option under the conditions mentioned therein. If he had already become the owner when the agreement had been entered into, these two clauses could not have been included in the agreement. Then again cl. 23 makes it clear that till the option is exercised the vehicle remains the absolute property of the appellant and the intending purchaser has no right in it except that of a hirer. We therefore agree with the High Court that in cases of this kind there are two sales, one by the dealer to the financier (namely, the appellant in this case) and the other by the financier(namely, the appellant) to the person who wanted to purchase the vehicle. As the Act levied a multipoint sales tax at the relevant time it was open to the State to tax both the sales and the fact that the sale by the dealer to the appellant had been taxed will not affect the liability of the second sale by the financier to the person who wanted to purchase the vehicle. What is the extent of that liability and when is that tax to be levied will be considered by us in connection with the second contention urged on behalf of the appellantIt is clear that if the Explanation is good, the second sale in the present case must be held to have taken place at the time the hire-purchase agreement was made . On the other hand, if the Explanation is beyond the competence of the State legislature and falls, the sale cannot be said to have taken place when the hire purchase agreement was made and can only take place when the option is exercised after all the terms of the agreements have been satisfiedWe have given our earnest consideration to this argument and are of opinion that considering that that view has stood for so many years and has been accepted in later cases, there is no case made out for reconsideration thereof. In this connection our attention was drawn to Entry 92-A of List I of the Seventh Schedule to the Constitution, which refers to taxes on sale of goods where such sale takes place in the course of inter-State trade or commerce and to the provisions of the Central Sales Tax Act No. 74 of 1956, where "sale" has been defined as including "a transfer of goods on the hire purchase or other system of payment by instalments". It is urged that this definition of "sale" under the Central Sales Tax Act shows that the words "sale of goods" used in Entry 92A have a wider meaning. We are of opinion that there is no force in this argument for the Central Sales Tax Act was passed by Parliament and its validity has to be considered not only with reference to Entry 92-A of List I of the Seventh Schedule to the Constitution but also with reference to Art. 248(2) of the Constitution read with Entry 97 of List I of the Seventh Schedule to the Constitution. The fact that the definition of "sale" in the Central Sales Tax Act includes words contained in Explanation I therefore is of no help in construing the meaning of the words "sale of goods", which have been authoritatively pronounced upon by this Court in Gannon Dunkerleys case, 1959 SCR 379   : (AIR 1958 SC 560  ) following Budh Prakashs case, (1955) 1 SCR 243   : (AIR 1954 SC 459  ). It is clear therefore that the State legislature when it proceeds to legislate either under Entry 48 of List II of the Seventh Schedule to the Government India Act1935or under Entry 54 of List II of the Seventh Schedule to the Constitution, can only tax sale within the meaning of that word as defined in the Sale of Goods Act. The essence of sale under the Sale of Goods Act is that the property should pass from the seller to the buyer when a contract of sale is made except in a case of conditional sale. Hire purchase agreements are not conditional sales. Therefore, any legislation by the State legislature making any agreement or transaction in which the property does not pass from the seller to the buyer a sale would be beyond its legislative competence. What Explanation I does is to lay down that a hire purchase agreement shall be deemed to be a sale in spite of the fact that the property does not pass at the time of such agreement from the seller to the buyer.Therefore,Explanation I as it stands is beyond the legislative competence of the State legislature. It is urged however that the property eventually does pass from the seller to the buyer when the option is exercised and other terms of the hire purchase agreement are fulfilled and therefore the Explanation should be read as confined to those cases only where property does eventually pass from the seller to the buyer. We are of opinion that this argument cannot be accepted, for the intention of the Explanation clearly is to provide that the hire purchase agreement shall be deemed to be a sale immediately on the date it is made, even though property has not passed from the seller to the buyer on that day. If this were not the real purpose and intention of Explanation I, its enactment would be entirely unnecessary for the main definition of "sale" under S. 2(h) will apply to a hire purchase agreement at the time when the property passes from the seller to the buyer on the option being exercised and on other terms of the agreement being fulfilled. We cannot therefore agree with the High Court that the Explanation should be confined only to those cases where the property does eventually pass for the obvious intention of the legislature in enacting the Explanation was to provide that the hire purchase agreement shall be deemed to be a sale on the very date on which it is made, even though on property passes from the seller to the buyer on that date. In this view of the matter it must be held taking into account the purpose, the intention and the interpretation of Explanation I that it is beyond the competence of the State legislature. It must therefore be held to be invalid and struck down accordinglyWe have already pointed out that a hire purchase agreement has two elements : (i) element of bailment, and (2) element of sale, in the sense that it contemplates an eventual sale. The element of sale fructifies when the option is exercised by the intending purchaser after fulfilling the terms of the agreement. When all the terms of the agreement are satisfied and the option is exercised a sale takes place of the goods which till then had been hired. When this sale takes place it will be liable to sales tax under the Act for the taxable event under the Act is the taking place of the sale, the Act providing for a multi-point sales tax at the relevant time. Where however option is not exercised or cannot be exercised because of the inability of the intending purchaser to fulfil the terms of the agreement, there is no sale at all. As the taxable event is the sale of goods, the tax can only be levied when the option is exercised after fulfilling all the terms of the hire-purchase agreement. We cannot agree with the view of the High Court that because in most of such cases the option is exercised, tax is leviable immediately on the making of the hire-purchase agreement and that in a few cases where there is failure to carry out the terms of the agreement or to exercise the option, there can be adjustment by elimination of such portion of the turnover. As we have pointed out that taxable event under the Act is the sale of goods and until that taxable event takes place there can be no liability to pay tax.Therefore,even though eventually most cases of hire-purchase may result in sales by the exercise of the option and the fulfilment of the terms of the agreement, tax is not exigible at the time when the hire-purchase agreement is made, for at that time the taxable event has not taken place; it can only be exigible when the option has been exercised and all the terms of agreement fulfilled and the sale actually takes place. When sale takes place in a particular case will depend upon the terms of the hire-purchase agreement but till the sale takes place there can be no liability to sales tax under the Act. The High Court therefore was in error in holding that transactions of hire-purchase of the kind with which we are dealing having regard to their main intent and purpose might be treated as sales at the time the agreement is entered into; in all hire purchase agreements of the type with which we are dealing sale only takes place when the option is exercised after all the terms of the agreements are fulfilled and it is at that time that the tax is exigibleWe are of opinion that neither of these two contentions is correct. It stands to reason that Re. 1 cannot be the price of a vehicle in these cases for even if the vehicle is treated as secondhand when the option is exercised, the sum of Re. 1 would be an absurd price for a second-hand vehicle of the kind with which we are concerned. The argument in this connection is that the entire amount paid as hire is really for hire and the price is only the sum of Re. 1 which is paid for the option which finally results in sale. This contention overlooks the essence of hire purchase agreement which is that the hire includes not only what would be payable really as hire but also a part of it is towards the price. The contention that the price is only Re. 1 which is paid for the option therefore cannot be acceptedOn the other hand the contention on behalf of the respondent that the price is the entire amount paid as hire including Re. 1 paid for the option also does not seem to be correct. This ignores the fact that at any rate part of what is paid as hire is really towards the hire of the vehicle for the period when the hirer is only a hirer. This will also be clear from the fact that if the entire hire is treated as price, the result would he that the price of what is a second-hand vehicle when the sale eventually takes place would be more than the price of the new vehicle. This will be clear from an example of a hire purchase agreement, which was given to us on behalf of the appellant. In the particular example, the price of the vehicle was Rs. 5000. The hire purchase agreement however provided for payment of Rs. 6,487 / 6/ - by the hirer to the owner in seventeen instalments. The hirer would become the owner on the exercise of the option after he had paid all the instalments. But if all the instalments are to be treated as price the result would be that a vehicle which was priced at Rs. 5,000 when the agreement was made and must have depreciated during the seventeen months when it was on hire would be valued at Rs. 6487/6/- at the time when the option is exercised and the sale in favour of the hirer takes place. This is clearly impossible to accept and therefore the contention of the respondent must also be rejectedThe real position in our opinion as to price of the vehicle when the option is exercised would be this. Its value at that time is neither Re. 1 which is the nominal amount to be paid for the option nor the entire amount which is paid as hire including Re. 1. The value must be something less than the original price, which in the example mentioned by us above was Rs. 5,000. In order to arrive at the value at the time of the second sale to the hirer, the sale tax authorities should take into consideration the depreciation of the vehicle and such other matters as may be relevant in arriving at such price on which the sale can be said to have taken place when the option is exercised, but that price must always be less than the original price (which was Rs. 5,000 in the example given above by us)This case in our opinion brings out the true nature of the payment made as hire in hire purchase agreement. Part of the amount is towards the hire and part towards the payment of price, and it would be for the sales tax authorities to determine in an appropriate way the price of the vehicle on the date the hirer exercises his option and becomes the owner of the vehicle after fulfilling the terms of the agreement. There is no legislative guidance available as to how this should be done and perhaps it would be better if the legislature gives guidance in such matters. But even in the absence of legislative guidance it would be for the sales tax authorities to decide as best they can the value of the vehicle on the date the option is exercised and the property passes to the hirer. There may be two ways of doing it. The sales tax authorities may split up the hire into two pans, namely, the amount paid as consideration for the use of the vehicle so long as it was the property of the owner, and the payment for the option on a future date to purchase the vehicle at a nominal price. If the first part is determined the rest would be towards the payment of price. The first part may be determined after finding out the proper amount to be paid as hire in the market for a vehicle of the type concerned, or in such other way as may be available to the sales tax authorities. The second method may be to take the original price fixed in the hire purchase agreement and to calculate the depreciation and all other factors that may be relevant in arriving at the price when the second sale takes place to the hirer including the condition of the vehicle at the time of the second sale. It is therefore for the sales tax authorities to find out the price of the vehicle on which tax has to be paid in either of the ways indicated by us above or such other way as may be just and reasonable.