1996 (2) TMI 508 - HC - VAT and Sales Tax

Issues Involved:
1. Whether a banking company under the Banking Regulation Act, 1949, can be treated as a "dealer" under section 2(1)(k) of the Karnataka Sales Tax Act, 1957, while realizing the security.
2. Applicability of section 8 of the Banking Regulation Act, 1949, in prohibiting banks from trading.
3. Comparison with the Karnataka Pawn Brokers' Association case.
4. Interpretation of the term "business" under section 2(1)(f-2) of the Karnataka Sales Tax Act, 1957.
5. Relevance of Supreme Court decisions regarding the activities of the Railways.
6. Validity of notices issued by the Commercial Tax Officer to the appellant-bank.

Issue-wise Detailed Analysis:

1. Whether a banking company under the Banking Regulation Act, 1949, can be treated as a "dealer" under section 2(1)(k) of the Karnataka Sales Tax Act, 1957, while realizing the security:
The court examined whether a nationalized bank can be considered a "dealer" under section 2(1)(k) of the Karnataka Sales Tax Act, 1957. The bank argued that it does not engage in the business of buying or selling goods, and its activities of selling securities to realize loans do not constitute "business" or "trade." The court agreed with the bank, stating that the sale of securities for loan realization does not make the bank a "dealer," as the bank is not engaged in the business of buying or selling goods.

2. Applicability of section 8 of the Banking Regulation Act, 1949, in prohibiting banks from trading:
Section 8 of the Banking Regulation Act prohibits banks from trading, except in connection with the realization of security, buying or selling goods for others, and administering estates as executors or trustees. The court emphasized that these exceptions enable banks to function smoothly and achieve public service objectives. The court concluded that the sale of securities for loan realization is not considered "trading" or "business" under the Act, and thus, banks are not "dealers."

3. Comparison with the Karnataka Pawn Brokers' Association case:
The court noted that the learned single judge dismissed the bank's petition by relying on the Karnataka Pawn Brokers' Association case, which held pawn brokers as "dealers" under the Sales Tax Act. However, the court distinguished the bank's case from pawn brokers, stating that pawn brokers are engaged in trade or commerce with a profit motive, while banks are not. The court concluded that the decision in the pawn brokers' case does not apply to banks.

4. Interpretation of the term "business" under section 2(1)(f-2) of the Karnataka Sales Tax Act, 1957:
The court analyzed the definition of "business" under section 2(1)(f-2) of the Karnataka Sales Tax Act, which includes trade, commerce, and transactions incidental or ancillary to such activities. The court held that the sale of securities by banks for loan realization is not incidental or ancillary to trade or commerce, as banks are prohibited from trading under section 8 of the Banking Regulation Act. Therefore, banks cannot be considered as engaging in "business" under the Sales Tax Act.

5. Relevance of Supreme Court decisions regarding the activities of the Railways:
The respondents cited Supreme Court decisions involving the Railways, where the sale of unserviceable materials and scrap was considered "business." The court distinguished these cases, noting that the Indian Railways Act did not contain a provision similar to section 8 of the Banking Regulation Act, which prohibits banks from trading. The court concluded that the Supreme Court decisions on Railways do not apply to banks, as banks are explicitly prohibited from trading.

6. Validity of notices issued by the Commercial Tax Officer to the appellant-bank:
The court found that the Commercial Tax Officer's assumption that the bank was a "dealer" under the Sales Tax Act was erroneous. The court held that the notices issued to the bank were without jurisdiction and quashed them. The court emphasized that the bank's activities of selling securities for loan realization do not constitute "business" or "trade," and thus, the bank cannot be considered a "dealer" under the Sales Tax Act.

Conclusion:
The appeal was allowed, and the impugned order dated July 24, 1992, delivered by the learned single judge was set aside. The notice issued by the respondent-1 was quashed. The court concluded that banking companies cannot be treated as "dealers" under section 2(1)(k) of the Karnataka Sales Tax Act while disposing of securities for loan realization. The court emphasized that banks are prohibited from trading under section 8 of the Banking Regulation Act, and their activities of selling securities do not constitute "business" or "trade."

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