K. L. Johar and Company v Deputy Commercial Tax Officer
AIR 1965 SC 1082
The appellant was the financier which paid to the dealer the whole amount of the vehicle and entered into an agreement with the customers (who wanted to purchase the vehicle) whereby latter were required to pay the amount along with interest in monthly installments. Some covenants of the agreement were thus:
1) appellant was described in the agreement as the owner of the vehicle and customer as the hirer: until the vehicle becomes the property of the hirer under the provisions of the agreement it was to remain the absolute property of the owner, and the hirer had no right or interest in the same other than as the hirer under the agreement.
2) the hirer had to keep the vehicle in good and serviceable condition to the satisfaction of the owner
3) The hirer has further to pay all taxes, licence fees, duties, fines, registration charges and other charges payable in respect of the vehicle
4) Hirer cannot sell, charge, pledge, assign or part with possession of the vehicle
5) In the event of accident or otherwise causing total loss of the vehicle, the hirer was compellable to pay full amount of vehicle to the appellant.
The agreement further stipulated that if the hirer would perform aforementioned conditions properly, he can after having paid all the installments duly, ‘PURCHASE’ the vehicle @Re.1 from the owner.
Under the S.2(h), Madras Sales Tax Act, the HP transactions were deemed to be ‘sale’ such that they were subject to sales tax. Therefore, appellant filed present suit contending unconstitutionality of S.2(h).
1) Since the HP agreements don’t fall within the ambit of sale transactions, the word sale as understood in Indian Sale of Goods Act, hence, it was incompetent (under entry “sale” in List II Sch.7 of Constitution) to enact Exp. to S.2(h) making HP agreements deemed sales.
2) There was only one sale from dealer to the ‘hirer’ and the appellant was the mere financing agent, such that only dealer was compellable to pay the sales tax.
3) The nature of the HP agreement is that of bailment and not of sale; wherein the hirer is obliged with all the rights and obligations as that of bailee and appellant invested with the reversionary interest in the vehicle.
4) Sales Tax, if any, could be levied against the appellant only when the hirer had exercised the option to purchase the vehicle, and not against the installments paid as part of hire. Therefore, the sales tax could be levied only w.r.t. Re.1 sale price of the vehicle.
1) In these HP agreements, the hirer is given an option to purchase the vehicle at a nominal price after having paid all the installments. But, in some cases, when the hirer is unable to pay up the installments, the title remains with the financier, such that the bailment remains the only element of HP which doesn’t fructify into sale. For these cases, the sales tax could not be levied by the State and it was only for earlier cases when the HP fructified into SALE could the Exp. to S.2(h) stipulating HP agreements to be deemed sales be termed valid.
2) There are two sale transactions in these cases: one from dealer to financier and the other from financier to the person who wanted to purchase the vehicle (now, hirer). Therefore, sales tax was to be levied both from the dealer and the financier.
3) The HP agreements are composite transactions involving elements of both bailment and sale
4) The Court held that for the purpose of computing the sale turnover of the appellant, the total of the hire stipulated to be paid in installments should be treated as price or consideration for the sale; but only for those cases where hirer could ‘purchase’ the vehicles.
HELD (SUPREME COURT):
1) It was outside the competency of the State to enact Exp. to S.2(h) making HP agreements ‘deemed to be sale’. As the essence of ‘sale’ in SGA is that property should pass from the seller to the buyer when a contract of sale is made except in a case of conditional sale, therefore, any legislation by the State legislature making HP agreements (in which the property does not pass from the seller to the buyer) a deemed sale would be beyond its legislative competence. HP agreements are neither conditional nor non-conditional sales, rather they are mere agreements to sell which fructify into sale only when such option is exercised by hirer after having paid all due installments. Therefore, Exp. to S.2(h) unconstitutional.
2) The whole agreement of HP make it evidently clear that the financier, after paying full amount of the vehicle, becomes its owner and the intended purchaser becomes the hirer; such that there was no sale between the dealer and the intended purchaser, rather there were 2 sales: one from dealer to financier and the other from financier to the intended purchaser (on latter’s having fulfilled all the obligations under the HP agreement). Therefore, the State was entitled to levy sales tax from both dealer and appellant—HC’s view was upheld
3) “A HP agreement has two aspects: first is that of ‘bailment’ of the goods subjected to the HP agreement, and the other ‘sale’ which fructifies when the option to purchase, which is usually a term of HP agreements, is exercised by the intending purchaser…The distinguishing feature of a typical HP agreement therefore is that the property does not pass when the agreement is made but only passes when the option is finally exercised after complying with all the terms of the agreement.”
Therefore, the element of sale fructified in HP agreements when the option is exercised by the intending purchaser after fulfilling the terms of the agreement. 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, and until such taxable event happens, no sales tax could be levied (therefore, tax is not eligible at the time when the hire purchase agreement is made, for at that time the taxable event has not taken place).
4) The SC held that the respective contentions, that of the appellant (that only Re.1 should be charged with sales tax) and that of respondent (that whole amount of installments along with Re.1 should be charged), are both misconceived: “The contention of the appellant overlooks the essence of hire purchase agreements 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. Further 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.”
Therefore, the Court held that since part of the amount of installments was towards hire and part towards price of vehicle, it is upon the Tax authorities to determine the sale price in the event HP agreements fructify into sales, albeit they must take into consideration two factors:
a) The sale price must always be less than the original price of the vehicle, because of,
b) The factor of depreciation, which contributed to such decrease in the sale price.
Author: Vishrut Kansal (NUJS, Kolkata)
- SALE PRICE= ORIGINAL PRICE –DEPRECIATION
- HIRE AMOUNT= (INSTALLMENTS + Re.1) –SALE PRICE