SUNDARAM FINANCE LTD. V. STATE OF KERALA

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Citation	1966 AIR 1178, 1966 SCR (2) 828
Date of Judgement	30^th November 1965
Court	Supreme Court of India
Case type	Civil Appeal
Case no	Civil Appeals Nos. 673 and 677 of 1964
Appellant	Sundaram finance ltd
Respondent	State of kerala and another
Bench	K Subbarao
Referred	Travancore-Cochin General Sales Tax Act, Indian Sale of Goods Act .

FACT OF THE CASE

Appeals from the judgment dated December 5, 1963 of the Kerala High Court in Original Petition.
The object of the hire-purchase system was to help to finance the customer in order that he might purchase the property. The main feature of the agreement, apart from small variations, was that the dealer or the financier continued to be the owner till the terms of the agreement were fully complied with by the customer and the option to purchase the same was exercised by him. If the terms were not complied with, the dealer or the financier, as the case may be, could terminate the agreement and take back the goods. Both ‘the financier and the customers with open eyes entered into the transactions of hire-purchase. Their intention was expressed in clear terms. They were, therefore, bound by the terms of the agreements.
In the present case the transactions were admittedly hire- purchase agreements. The financier purchased the cars for the amounts required to be paid to the dealer and entered into specific hire-purchase agreements with the customers. They contained all the usual terms that are found in a hire- purchase agreement. The fact that the customer executed a promissory note for the money advanced by the financier does not affect the question, for that was merged in the hire-purchase transaction. If the said terms were not carried out, the customers could not claim any rights under the agreements and the financier continued to be the owner freed from any obligation created under the agreements.

ISSUE

The question is whether the hire-purchase agreements which is entered by the appellant with its customers are transactions of sale of goods or only documents securing the return of the loans advanced by it to its customers?

RELATED CASE LAW

It is common case that explains about the hire-purchase agreements in the judgment of this Court in Messrs. K. L. Johar & Co. v. The Deputy Commercial Tax Officer, Coimbatore , when all the terms of the agreements were satisfied and the option was exercised, sales take place in the goods which till then had been hired

RATIO DECIDENDI

For the aforesaid reasons, I hold that if the agreements had fructified into sales, they were liable to sales-tax. The High Court, in my view, gave a correct answer to the question propounded for its opinion. In the result, the appeals fail and are dismissed with costs.
Shah, J. On September 29, 1958 the Sales Tax Officer, 1st Circle, Ernakulam and the Sales Tax Officer on March 3, 1962 in respect of the transactions within the State issued a notice calling upon the appellants to file returns of their turnover from sales in the course of business and to secure registration as dealers under the Travancore-Cochin General Sales Tax Act and to furnish details of the transactions of sale.
The appellants contended that they were not liable to be assessed under the Act. They contended that they were mere financiers and that they did not enter into any transactions of sale of goods with parties within the State of Kerala and that they were not “dealers” within the meaning of the Act.
The Sales Tax Officer by orders dated March 25, 1962 and July 6, 1962 held that the transactions between the appellants and certain parties within the State of Kerala were sales within the meaning of the Act and the appellants were dealers liable to be assessed under the Act. The Sales Tax Officer accordingly reiterated his demand upon the appellants to file returns of their turnover in respect of sales for the five years in question along with details of all transactions in the State and “to produce evidence to prove the correctness and completeness of their returns”.
The appellants then moved the High Court of Kerala under Article. 226 of the Constitution for writs of certiorari quashing the proceedings of the Sales Tax Officer and for writs of prohibition restraining that Officer from taking further proceedings against the appellants under his orders dated March 25, 1962 and July 6, 1962. The High Court of Kerala rejected these petitions upholding the view of the Sales Tax Officer that on the transactions between the appellants and their customers sales tax was payable under the Travancore-Cochin General Sales Tax Act. With certificate granted by the High Court under Article 133(1) (a) of the Constitution, these appeals are preferred.
The appellants are a company incorporated under the Indian Companies Act, 1913, and have their registered office in Madras. The Company carries on business of financing purchases of motor vehicles on the security of those vehicles. A customer desirous of purchasing a motor-vehicle, but unable to pay the price to the dealer, agrees to purchase the vehicle and makes part payment of the price to the dealer.
Purchase agreement between the customer “as owner” and the appellants, and requesting the Authorities to “make a note of the hire-purchase agreement” in the registration certificate standing in the name of the customer. The scheme for financing the purchase of the vehicle is therefore that the customer purchases the vehicle from the dealer directly and gets it registered in his name.
At his request the appellants agree to advance the balance of the price remaining to be paid, and pay it to the dealer on the customer’s executing a promissory-note for repayment of the amount, a hire-purchase agreement and other related documents. On repayment of the amount stipulated to be paid, the vehicle becomes the sole and absolute property of the customer.
In the preamble of the agreement, it is recited that the agreement is between the appellants to be described as “the owners” the customer to be described as “the Hirer” and “the Guarantor”, who guarantees due performance and observance by the customer of all the clauses and covenants of the agreement and agrees to pay on demand any money’s due or which may become payable to the owners under the agreement either by way of hire expenses or damages, repairs, replacements or other supplies.
We are in this case concerned with the eligibility to tax of what the State of Kerala contends is a sale resulting from the payment of all the instalments under the hire-purchase agreement.
The appellants submit that execution of a “sale letter” by the ,customer acknowledging sale of the vehicle to them does not create in them any right of ownership, the “sale letter” being merely one of a set of documents under which arrangement for granting a loan and for ensuring- repayment of the money advanced by the appellant’s is made.
The appellants say that they do not become owners of the vehicle under the “sale letter until they repay the due, that the vehicle continues to remain of the ownership of the customer, under the hire-purchase agreement there is extinction of encumbrance and not a transfer of title which may be called a sale taxable under the ‘Travancore-Cochin General Tax Act.
The State authorities had, it is conceded, no power to enact a statute for levying tax on a transaction which does not confirm to the definition of ‘sale’ within the meaning of the Indian Sale of Goods Act : State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.
The ‘Travancore-Cochin General Sales Tax Act by Section 2(j) defines ‘sale’ as the transfer of goods on the hire purchase or other instalment system of payment shall, notwithstanding the fact that the seller retains the title in the goods as security for payment of the price, be deemed to be a sale.
The appellants are financiers and their business is to advance loans on favorable terms on the security of vehicles. This is effected by obtaining a promissory-note for repayment of the amount advanced, and a hire-purchase agreement which provides a mechanism for recovery of the amount.
The appellants are carrying on the business of financiers: they are not dealing in motor-vehicles. The motor-vehicle purchased by the customer is registered in the name of the customer and remains at all material times so registered in his name. In the letter taken from the customer under which the latter agrees to keep the vehicle insured, it is expressly recited that the vehicle has been given as security for the loan advanced by the appellants.
As a security for repayment of the loan, the customer executes a promissory-note for the amount paid by the appellants to the dealer of the vehicle. The so-called “sale letter” is a formal document which is not made effective by registering the vehicle in the name of the appellants and even the insurance of the vehicle has to be effected as if the ,customer is the owner. Their right to seize the vehicle is merely a license to ensure compliance with the terms- of the hire-purchase agreement.
The customer remains qua the world at large the owner and remains in possession, and on condition of performing the covenants has a right to continue to remain in possession. The right of the appellants may be extinguished by payment of the amount due to them under the terms of the hire-purchase agreement even before the dates fixed for payment.
The agreement undoubtedly contains several onerous covenants, but they are all intended to secure to the appellants recovery of the amount advanced. We are accordingly of the view that the intention of the appellants in obtaining the hire-purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions. The appeals will therefore be allowed with costs in this Court and the High Court.

ORDER

In accordance with the opinion of the majority the appeals are allowed with costs in this Court and the High Court. One hearing fee.

CONCLUSION

The Court while referring to this case said that to determine the distinction between the two transactions, the assessing officers were required to consider the issue on merits taking, inter alia, into account
- The terms of the agreement
- The nature of the arrangement between the supplier of the asset, the hire-purchase company and the end user of the asset
- The intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of hire-purchase price etc.
However, when the hire-purchase company pays the price or a substantial part thereof on behalf of such hirer who is the real purchaser, but does not pay the full price, then such an agreement is in the nature of a security for re-payment of the loan and is essentially a loan Transaction.

REFERENCES

This Article is written by K. Dhanush of Vels Institute of Science Technology and Advanced studies, Intern at Legal Vidhiya.