Judgment Case ID: 1283

Judgment:
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 and/or prohibition and/or 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 and/or 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 M/s. 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 2(g) 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) A.I.R. 1956 Puaj. (2) [1959] S.C.R 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 K.B. 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	 M.R.	 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 2(g) 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 I.R. 1956 Punj I77.

Summary:
Section 2(g) 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 2(g) of the Act. 645 Held	 that the language of Explanation 1 to section 2(g) 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	 i.e.	 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 2(g) 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	 A.I.R. 1956 Punj. 177	 considered.