1974 (5) TMI 94 - SC - VAT and Sales Tax

When does a sale liable to sales tax take place under a hire-purchase agreement? Held that - Appeal dismissed. The definition of sale in the Bengal Finance (Sales Tax) Act applicable to the State of Delhi has been amended in 1959 by Act 20 of 1959 and reads as 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 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.

Issues Involved:
1. Liability to sales tax under a hire-purchase agreement.
2. Constitutionality of extending the concept of "sale" to hire-purchase agreements.
3. Jurisdiction of the Gujarat State to tax transactions under hire-purchase agreements.
4. Maintainability of the petition under Article 32 of the Constitution.

Issue-wise Detailed Analysis:

1. Liability to Sales Tax Under a Hire-Purchase Agreement:
The core question was when a sale liable to sales tax occurs under a hire-purchase agreement. The court reiterated its previous stance from the Instalment Supply case, explaining that under a hire-purchase agreement, the hirer has the option to purchase the vehicle but is not obligated to do so. The vehicle remains the property of the company until all instalments are paid and the option to purchase is exercised. The court emphasized that a hire-purchase agreement contains elements of both bailment and sale, but a sale only occurs when the option to purchase is exercised after fulfilling all terms of the agreement. Therefore, sales tax liability arises only at the point when the hirer exercises the option to purchase, not at the time of entering into the hire-purchase agreement.

2. Constitutionality of Extending the Concept of "Sale" to Hire-Purchase Agreements:
The court addressed the petitioner's challenge to the constitutionality of extending the concept of "sale" to hire-purchase agreements. It referenced its decision in Mithan Lal's case, which upheld Parliament's right to impose a tax on transactions that are not sales under the Sale of Goods Act but contain an element of sale. The court clarified that Parliament has the plenary power to legislate on this topic under entry 97 of List I of the 7th Schedule, even if such transactions are not considered sales in the traditional sense. However, it emphasized that no State Legislature has the competency to enact legislation that would deem a hire-purchase agreement a sale.

3. Jurisdiction of the Gujarat State to Tax Transactions Under Hire-Purchase Agreements:
The court examined the jurisdiction of the Gujarat State to tax transactions under hire-purchase agreements. It noted that section 2(28) of the Gujarat Act defines "sale" in a manner that includes transactions determined to be inside the State according to section 4(2) of the Central Sales Tax Act, 1956. The court found no objection to Gujarat incorporating this definition and taxing sales that occur within its territory. It concluded that the actual sale in this case occurred when the hirer exercised the option to purchase while the goods were inside Gujarat. Therefore, the Gujarat State was entitled to levy a tax on this transaction. The court also dismissed concerns about multiple taxation, stating that sales tax can be levied as often as there are sales.

4. Maintainability of the Petition Under Article 32 of the Constitution:
The court addressed the objection regarding the maintainability of the petition under Article 32 of the Constitution. It referred to the decision in Smt. Ujjam Bai v. State of Uttar Pradesh, which held that an application under Article 32 is maintainable in cases where the statute is ultra vires of the Constitution, the action taken is without jurisdiction, or the action is procedurally ultra vires. Since the constitutionality of section 2(28) of the Gujarat Act was questioned, the court found the petition maintainable.

Conclusion:
The court dismissed the petitions, upholding the Gujarat State's right to tax the sale that occurred when the hirer exercised the option to purchase the vehicle. It reaffirmed that sales tax liability arises only at the point of sale under a hire-purchase agreement, not at the time of entering into the agreement. The constitutionality of extending the concept of "sale" to hire-purchase agreements was upheld, and the petition under Article 32 was found to be maintainable. No order as to costs was made.

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