Karnataka Pawn Brokers Association and Ors. v. State of Karnataka and Ors.

Karnataka Pawn Brokers Assn. & Ors. Etc. (KP) v. State of Karnataka & Ors. etc.

(constitutional validity of section 4-A and 4-B of Karnataka Pawn Brokers Act, 1961 and Sections 7-A and 7-B of Karnataka Moneylenders Act)


The Sales Tax Authorities of Karnataka and Tamil Nadu deemed the sale of unredeemed articles at the instance of the pawnbrokers by an auction and levied taxes on the pawnbrokers contending that auctioneer cannot be treated as seller of goods for the purpose of levying sales tax.


Whether a Pawn-broker is a dealer and carries on ‘business‘ within the meaning of the State General Sales Tax Act read with the State Pawnbrokers Act and Rules when he causes the sales of unredeemed articles/goods, occasioned by the default of the Pawner through (statutory) Auctioneer.  


Appellant (KP)

  1. The auctioneer must be treated as the seller and the liability to pay the sales tax will be only on the auctioneer.
  2. The pawnbrokers are not engaged in a business of buying &/or selling of goods; on pledge of articles, a relationship of bailor and bailee comes into existence  and the bailee has no right to sell the property contrary to the contract or other statutory provisions regulating their relationship. Also, as the pawnbroker has the right to bid at the sale, he cannot be seller of his own goods. They are not dealer as per the concerned acts[1].
  3. The right of the pawnbroker to dispose of the pawned articles by way of sale through an auctioneer does not in any way amount to transferring or passing on of the general property right in goods by the pawnbroker to the purchaser. If it is so, it would be contrary to the concept of sale as contained in the SOGA as the law does not recognise such a transaction as a sale.

Respondent (State)

  1. The right to bring the articles for sale through public auction in the event of default, vest with the pawnbroker and the same is incidental to the business of the pawnbroker.
  2. The concept of business includes the business of pawnbroker with the incidental right to redeem the goods.


Karnataka High Court (Favoured State)

  1. Pawnbroker has special property right in the pledge and that special property right is to be distinguished from the mere right of detention which the holder in Lien possesses. The pawnbroker has authority under the statute to bring the pawned articles for sale and the pawnor losses all his rights in the article sold through the auctioneer at the instance of the pawnbroker.
  2. The sale of unredeemable goods takes place at the instance of the pawnbroker & such sale held through the approved auctioneer results in the passing on the general right in the goods to the purchaser.
  3. Pawnbrokers” (As per the Pawnbrokers Act) are “Dealers” under the Karnataka General Sales Tax Act.
  4. Pawnbroker carried on “Business”,[2] since they had an implied authority to sell & such activity of sale which is incidental/ancillary to the business of pawnbroker.[3] The auctioneer cannot be made liable for Sales tax because he is not the agent of the pawnbroker but appointed under relevant statute.

Madras High Court (favoured State)

  1. The pawner along with possession of pledged goods also parts with the right to sell the good pledged in case of a default and the pawnbroker’s action and decision occasions the sale.
  2. The auctioneer cannot be made liable for the tax since the purpose of auctioneer is to prevent abuse of right to sell the unredeemed article to the detriment of the pawner and also his task is of a broker who brings about sale.
  3. The pawner cannot be made liable because he has no role in the actual sale.
  4. Pawnbroker satisfies the definition of “dealer” as well as the activities of his can be categorised as “business”.

SUPREME COURT (K.Vankataswami, S.P.Bharucha)

  1. The pawnbroker have the statutory right to sell the goods pledged in the instance the pawner defaults and the goods get unredeemable; and thereby transfer the possession permanently to the purchaser.
  2. The pawner cannot be subjected to sale tax, because he had played no role in the sale of the goods, the only thing he could have done was to redeem the goods.
  3. The auctioneer on the other hand cannot be subjected to tax on the sale proceeds because the auctioneer does not act under the control of the pawnbroker but acts under the control of the statutory authorities that had appointed him for that purpose. The definition given under the rules makes it necessary to transfer the property from one person to the other in return of some valuable consideration, cash or deferred payment. The auctioneer merely served the role of bringing the bidder and the pawnbroker and conduct the auction in the public but it’s the pawnbroker who ultimately delivers the possession.
  4. The contention that since the pawnbroker also acts as a bidder, he cannot be said to be the seller. This argument is misconceived because in such circumstances he plays a dual role, one as a pawn broker and the other as a buyer.
  5. The act incidental and ancillary to the main business will also come under the definition of ‘business’ under the sale tax Act. The contention of the appellant that the sale of pledged goods were incidental to the business and therefore will not be subjected to the sale tax cannot be accepted.



Pawn brokers are required to get a license and maintain account books registers and records. In case of failure to repay, the pawnbroker may redeem the amount by selling off the goods pledged to him in public through a registered auctioneer.

[1] Sales Tax Act and Pawnbrokers Act

[2] As per the Karnataka General Sales Tax Act)

[3] Lallan Prasad v. Rahmat Ali

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