2007 (3) TMI 364 - SC - VAT and Sales Tax

Whether banks are dealers under section 2(viii) read with Explanation I of the Kerala General Sales Tax Act, 1963? Held that - Appeal dismissed. Even if the sale of pledged ornaments takes place outside the banking business, the 1963 Act would cover even such transactions. Therefore, once such transactions fall under section 2(viii)(g) of the 1963 Act, banks become dealers and they are liable to pay sales tax under the said 1963 Act. It is true that the definition of the word sale under section 2(xxi) of the 1963 Act does not include mortgage, hypothecation, charge or pledge, however, the important point to be noted is that the definition of the word sale under the 1963 Act is not the same as under section 4 of the Sale of Goods Act, 1930. The definition of the word sale in section 2(xxi) in the 1963 Act is very similar to section 2(g) of the Central Sales Tax Act, 1956 which is held to be having a very wide meaning as compared to the definition of the word sale in section 4 of the Sale of Goods Act, 1930. Further, when charge or pledge is enforced that enforcement is by way of sale of the pledged or hypothecated goods; that sale is for consideration and, therefore, it falls within the ambit of section 2(xxi) of the 1963 Act. In the circumstances, there is no infirmity in the impugned judgments of the division Bench of the Kerala High Court.

Issues Involved:
1. Whether banks are "dealers" under section 2(viii) read with Explanation I of the Kerala General Sales Tax Act, 1963.
2. Validity of the notices issued by the department pursuant to the Kerala Finance Act, 1998.
3. Legislative competence of the State Legislature to insert clause (g) in section 2(viii) of the 1963 Act.
4. Whether the auction sale of pledged ornaments falls within the course of banking business under the 1949 Act.

Issue-wise Detailed Analysis:

1. Whether banks are "dealers" under section 2(viii) read with Explanation I of the Kerala General Sales Tax Act, 1963:

The primary issue was to determine if banks qualify as "dealers" under the amended section 2(viii) of the Kerala General Sales Tax Act, 1963, which includes a bank or financial institution selling pledged valuables for loan realization. The court noted that the Kerala Finance Act, 1998 expanded the definition of "dealer" to include banks, even if the sale of pledged articles was not in the course of business. The court emphasized that the amendment aimed to cover auction sales of pledged ornaments by banks, making them liable to pay sales tax under the 1963 Act.

2. Validity of the notices issued by the department pursuant to the Kerala Finance Act, 1998:

Following the amendment, the Sales Tax Officer issued notices to Federal Bank to furnish details of gold auctions and pay tax. Federal Bank challenged these notices, arguing that they were not dealers and thus not liable for sales tax. However, the court upheld the validity of these notices, affirming that the amended definition of "dealer" in section 2(viii) covered banks and their auction sales of pledged goods.

3. Legislative competence of the State Legislature to insert clause (g) in section 2(viii) of the 1963 Act:

The court noted that the constitutional validity of section 2(viii)(g) was not argued before them. The focus was on whether the auction sale of pledged goods by banks is a transaction in the course of banking business. The court did not find any merit in the contention that the State Legislature lacked the competence to insert clause (g) in section 2(viii).

4. Whether the auction sale of pledged ornaments falls within the course of banking business under the 1949 Act:

The court examined whether the auction sale of pledged ornaments by banks constituted a transaction within the course of banking business under the Banking Regulation Act, 1949. It was argued that such sales did not fall within the definition of "banking" and were thus not taxable. However, the court held that the sale of pledged goods by banks is part of the banking business, as banks act under statutory power and not as agents of the borrower. The court referenced the balance sheet requirements under the 1949 Act, which include non-banking assets and income from their sale, indicating that such transactions are part of banking business. The court concluded that the sale of pledged ornaments falls within the course of banking business and is taxable under section 2(viii)(g) read with section 5 of the 1963 Act.

Conclusion:

The court dismissed the civil appeals, affirming the Kerala High Court's judgment that banks are "dealers" under the amended section 2(viii) of the 1963 Act and are liable to pay sales tax on the auction sale of pledged ornaments. The court found no infirmity in the impugned judgments and upheld the validity of the notices issued by the department.

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