Case: The Installment Supply Ltd Vs. S.T.O., Ahmedabad-I and Ors

2. The petitioner is a limited company with its registered office in New Delhi. It carries on the business of financing the purchase of motor vehicles. The person desiring to purchase a motor vehicle enters into a hire-purchase agreement with the petitioner company. It may be useful to give within a short compass the terms of the 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 as 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 purchase is exercised by the hirer he is at liberty to return the vehicle and to put an end to the 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.3. The liability to sales tax on the earlier occasion arose under the Bengal Finance (Sales Tax) Act, 1941, which was extended to the State of Delhi. Under Section 2 (g) of that Act 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. There was an Explanation thereto as followsI. 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 aCourt pointed out that the definition 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, and that the explanation has included within its amplitude a mere transfer of goods without the transfer of title to the goods.

Reasoning: 7. A contract of sale should be distinguished from a contract of hire-purchase. A contract of hire-purchase is properly speaking a contract of hire by which the hirer is granted an option to buy but is not, as under a contract of sale, under a legal obligation to do so. 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 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 applied only to contracts of hire conferring an option to purchase, but it is often used to described 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 pledgee 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 pledgee can obtain no better title than the hirer had.The main point to notice is that in a hire-purchase agreement there is only an option to purchase and there is no sale till that option is exercised. It is, however, this option that was described, based on the statement of law in Halsbury already referred to, as an element of sale in this courts decision in Instalment Supply case (1962) 2 SCR 644   = (AIR 1962 SC 53  ) and the Parliament was held competent to levy a sales tax even though it was not a sale within the meaning of the term in the Sale of Goods Act nor a sale as commonly understood. In (1965) 2 SCR 112   = (AIR 1965 Sc 1082  ) this Court again had to consider the incidents of a hire-purchaseactual sale in this case fructified only when the hirer exercised his option to purchase under the hire-purchase agreement and at the time the goods were inside the State of Gujarat. We see no objection to the incorporation in Section 2 (28) of the Gujarat Act of the definition of a sale inside a State contained in Section 4 (2) of the Central Sales Tax Act. The Gujarat legislation could as well have incorporated the very words of Section 4 (2) of the Central Sales Tax Act in the explanation to Section 2 (28) and in either case it makes no difference. We also see no objection to the Gujarat State taxing what according to the Central Sales Tax Act is a sale inside the State of Gujarat. There can be no objection to a State making a sale of goods which are inside the State at the time the sale takes place liable to sales tax under its own legislation. The fact that in this case the contract of hire purchase was entered into in Delhi, that the instalments were paid in Delhi and the option itself was exercised in Delhi does not make any difference to this result. All that it means is that the agreement of sale was concluded in Delhi whereas the sale itself was, if we may say so, completed by the property in the goods passing in Gujarat State, and the sale, therefore, took place in Gujarat State. Nor do we see any objection to Gujarat levying a tax in respect of same goods even though those goods may have been subjected to tax earlier by the Delhi State. There is no rule that any goods can be subjected to tax only once. Even in respect of the same goods sales tax can be levied as often as there are sales. In the present case there was really no sale when the hire-purchase agreement was entered into though that transaction was made liable to tax as a result of a legal fiction which the Parliament was entitled to create. The sale itself took place only when the hirer exercised his option to purchase and that was when the goods were inside the State of Gujarat and therefore the State of Gujarat was entitled to levy a tax on that transaction of sale.Finally we may refer to an objection taken by Mr. Bhandare on behalf of the State of Gujarat that no petition under Article 32 of the Constitution lies in this case. he relied on the decision in Ramjilal v. Income-tax Officer, Mohindergarh, (1951) SCR 127 = (AIR 1951 SC 97  ) for this contention. But in view of the decision of this Court in Smt. Ujjam Bai v. State of Uttar Pradesh, (1963) 1 SCR 778   = (AIR 1962 SC 1621  ) we are of opinion that there is no substance in this contention. It was there held that an application under Article 32 will lie (1) where action is taken under a statute which is ultra vires of the Constitution, (2) where the statute is intra vires but the action taken is without jurisdiction, and (3) where the action taken is procedurally ultra vires as where a quasi-judicial authority under an obligation to act judicially passes an order in violation of the principles of natural justice. The constitutionality of Section 2 (28) of the Gujarat Act has been questioned, and therefore the petition is maintainable.