2003 (4) TMI 538 - HC - VAT and Sales Tax

Issues Involved:
1. Whether the sale of pledged gold ornaments by banks is liable to tax under the Kerala General Sales Tax Act.
2. The constitutional validity of the amendment to the definition of "dealer" in section 2(viii) of the Kerala General Sales Tax Act.
3. Whether banks can be considered as "dealers" under the amended Act.
4. The applicability of the Banking Regulation Act in determining the tax liability of banks for the sale of pledged gold ornaments.

Detailed Analysis:

1. Tax Liability on Sale of Pledged Gold Ornaments by Banks:
The appellants, scheduled banks engaged in banking business, advanced loans against the pledge of gold ornaments. Upon default by customers, the banks sold the pledged gold ornaments through public auctions to realize the loan amounts. The respondents, the State of Kerala and sales tax authorities, contended that such transactions were liable to tax under the Kerala General Sales Tax Act. The initial judgment by a single Judge held banks liable as dealers under section 2(viii) of the Act. However, a division Bench in Lord Krishna Bank Limited v. Assistant Commissioner (Assessment) overturned this, stating that banking business does not involve trading in goods and that banks sell pledged goods not as owners but to realize debts, which does not constitute a business activity under the Act.

2. Constitutional Validity of the Amendment to Section 2(viii):
Subsequently, the definition of "dealer" in section 2(viii) was amended by the Finance Act 14 of 1998 to include banks selling pledged gold ornaments. The appellants challenged this amendment, arguing it was ultra vires and unconstitutional. The respondents defended the amendment, asserting it was within the legislative competence of the State. The court examined the legislative entry 54 of List II of the Seventh Schedule and article 366(29A) of the Constitution, concluding that the amendment was constitutionally valid. The court noted that the legislative entry does not require sales to be in the course of business, thus supporting the amendment's validity.

3. Banks as "Dealers" Under the Amended Act:
The appellants argued that the sale of pledged gold ornaments was not part of their main business and thus should not be taxed. However, the court referred to the amended definition of "dealer" which explicitly includes banks selling pledged goods, regardless of whether it is in the course of their business. The court also noted that the definition of "business" under section 2(vi) of the Act includes transactions incidental or ancillary to the main business. The court concluded that the sale of pledged gold ornaments by banks falls within this definition, making them liable as dealers under the Act.

4. Applicability of the Banking Regulation Act:
The court examined sections 6 and 8 of the Banking Regulation Act, 1949, which allow banks to manage, sell, and realize properties that come into their possession in satisfaction of claims. Section 8 prohibits banks from trading in goods except in connection with the realization of security. The court held that these provisions do not exempt banks from being considered as dealers under the Sales Tax Act. The court distinguished the present case from previous judgments by noting the specific inclusion of banks in the amended definition of "dealer."

Conclusion:
The court upheld the constitutional validity of the amendment to section 2(viii) of the Kerala General Sales Tax Act, which includes banks selling pledged gold ornaments within the definition of "dealer." The court dismissed the appeal, affirming that banks are liable to pay tax on such transactions under the Act. The judgment clarified that the sale of pledged gold ornaments by banks is incidental to their main business and falls within the scope of taxable activities under the amended Act.

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