2008 (1) TMI 842 - HC - VAT and Sales Tax

Prohibition against a banking company to buy, sell or barter in bullion - Held that - In our view, the fact that the sale of goods is by a bank would not rob the State Legislature of the legitimate power it possesses under the Constitution to levy tax on sale of goods. Merely by posing the question as to who effected sale of goods, when such a question is unwarranted by the specific terms of the entries in Lists I to III in the Seventh Schedule, the invocation of entry 97 is totally misplaced as entry 97 would be applicable only if no other specific entry is found to premise the legislation upon. When there is a specific entry empowering the State to enact law relating to sale of goods, we would think that entry 97 of List I is totally inapplicable. Having thus provided that the banking company may deal in buying, selling and dealing in bullion, it is only logical that when there is a prohibition against trading of goods declared in section 8 that an exception be engrafted upon the word goods for the purpose of section 8 in favour of bullion and specie. It is only for that purpose that bullion and specie are excluded from the purview of the word goods in section 8. Thus the result is that in fact there is absolutely no prohibition against a banking company to buy, sell or barter in bullion. Thus when the Bank buys, sells or trades in bullion, the result is inevitable that it is only engaging in a form of business, which is perfectly permissible under section 6 of the Act. There is no merit, therefore, in the said contention of the appellant and we reject it. W.P. dismissed.

Issues Involved:
1. Constitutional validity of the amendment to the definition of "dealer" in the Kerala General Sales Tax Act, 1963.
2. Legislative competence of the State of Kerala to tax banks on the sale of pledged gold or valuable articles.
3. Whether the sale of pledged goods by banks constitutes a "sale" under the Sale of Goods Act, 1930.
4. Applicability of the Banking Regulation Act, 1949 concerning the sale of pledged goods by banks.
5. Interpretation of the term "sale" under the Kerala General Sales Tax Act, 1963.

Issue-wise Detailed Analysis:

1. Constitutional Validity of the Amendment:
The petitioner, a statutory banking corporation, challenged the constitutional validity of the amendment to the definition of "dealer" in the Kerala General Sales Tax Act, 1963, which included banks selling pledged gold or valuable articles to secure loans. The court examined whether this inclusion was within the legislative competence of the State.

2. Legislative Competence of the State:
The petitioner argued that the State of Kerala lacked the legislative competence to tax banks on the sale of pledged goods, asserting that banking activities are regulated by central legislation under Entry 45 of List I of the Seventh Schedule to the Constitution. The court, however, held that Entry 54 of List II empowers the State to tax the sale of goods, including sales by banks. The court emphasized that the legislative power to tax sales is distinct from the power to regulate banking activities.

3. Sale of Pledged Goods:
The petitioner contended that the sale of pledged goods by banks does not constitute a "sale" under the Sale of Goods Act, 1930, as it involves only the transfer of special property, not general property. The court disagreed, stating that when banks sell pledged goods, they transfer the general property in the goods, thereby constituting a sale under the Act. The court also referenced the apex court's decision in Federal Bank Ltd. v. State of Kerala, which held that such sales fall within the course of banking business and are taxable.

4. Applicability of the Banking Regulation Act:
The petitioner argued that Section 8 of the Banking Regulation Act, 1949, prohibits banks from trading in goods, thus precluding the sale of pledged goods from being taxable. The court clarified that Section 8 allows banks to sell goods in connection with the realization of security. Therefore, the sale of pledged goods by banks is not prohibited and can be subjected to sales tax.

5. Interpretation of "Sale":
The court analyzed the definition of "sale" under the Kerala General Sales Tax Act, 1963, which excludes mortgages, hypothecations, charges, or pledges. However, the court noted that the definition of "sale" in the Act is broader than in the Sale of Goods Act, 1930, and includes sales for the realization of security. The court concluded that the sale of pledged goods by banks falls within this definition and is taxable.

Conclusion:
The court upheld the constitutional validity of the amendment to the Kerala General Sales Tax Act, 1963, and confirmed the legislative competence of the State of Kerala to tax the sale of pledged goods by banks. The court dismissed the original petition and the writ appeal, affirming that the sale of pledged goods constitutes a taxable sale under the relevant legislative framework.

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