2018 (7) TMI 145 - HC - VAT and Sales Tax

Liability of KVAT on the proceeds realized from the sale of hypothecated vehicles - hypothecation wherein the original owner is the borrower - Whether on the facts and in the circumstances of the case where (a) the Bank is not the owner of the vehicle at the time of sale and property in the vehicle was with the registered owner and (b) the Borrower executes irrevocable power of attorney to the Bank authorizing the bank to sell the vehicles and other documents necessary under the Motor Vehicles Act for transferring the vehicles and based on these documents the sold vehicles gets transferred from the registered owner to the purchaser; the Appellate Tribunal is right in holding that the petitioner Bank is liable to KVAT on the proceeds realized from the sale of hypothecated vehicles. Held that - The sale, in the present case, is of a second hand vehicle which is taxable under the KVAT Act at that point of time at the rate of 4%; on the consideration. The fact that the financier had merely facilitated the sale cannot be a cause for absolving itself from the liability to include the consideration received in the turnover of the financier; exigible to tax on sale of goods - the KVAT Act, takes within the definition of dealer, any person involved in transactions where there is a system of payment by installments and definition of sale and turnover includes a sale made by one on behalf of another where the latter is the owner; on which tax is payable as has been specified in the schedules. The Bank is not the owner of the vehicle at the time of sale. But however, after re-possession, sells the vehicles and effects transfer and delivery of the goods (vehicle) to the purchaser after receiving consideration, by effecting such transfer on delivery of the vehicle and handing over the sale letter executed by the registered owner which was received by the Bank as per the specific terms of the contract of finance; the right being recognised by the Motor Vehicles Act too. There is no distinction insofar as a pledge or hypothecation is concerned and sale effected on default of payment, especially in the context of the financier exercising the right to sell the goods, which belongs to another, either under a statute or on the specific terms of the contract, would be effecting sale of goods exigible to tax. Penalty - Held that - The fact that the amendment was brought in and there was a challenge to it indicates that there was a debatable issue even with respect to the pledge of ornaments. In the present case, the transaction was hypothecation and the possession was with the registered owner who is the loanee. The assessee bonafide claimed a distinction insofar as pledge and hypothecation which however is negatived by this Court - penalty not imposable. Appeal disposed off.

Issues Involved:
1. Liability of the Bank under KVAT for proceeds from the sale of hypothecated vehicles.
2. Whether the Bank qualifies as a dealer under Section 2(xv) of the Kerala Value Added Tax Act, 2003.
3. Justification of the Appellate Tribunal's finding that the Bank is a pledgee in possession of hypothecated vehicles.
4. Legitimacy of the penalty imposed under Section 67 of the Kerala Value Added Tax Act, 2003.

Detailed Analysis:

Issue 1: Liability of the Bank under KVAT for proceeds from the sale of hypothecated vehicles

The core question is whether the proceeds from the sale of hypothecated vehicles should be included in the turnover of the Bank, making it liable to KVAT. The Bank argued that it merely facilitated the sale and did not act as the owner. However, the court noted that the sale was conducted by the Bank on behalf of the registered owner, who had defaulted. The sale consideration received was adjusted against the loanee's liability, and the Bank's involvement was significant enough to include the proceeds in its turnover. The court referenced similar decisions by the High Courts of Madras and Calcutta and the Supreme Court's ruling in Federal Bank Limited v. State of Kerala, which found that sale proceeds from pledged goods are taxable.

Issue 2: Whether the Bank qualifies as a dealer under Section 2(xv) of the Kerala Value Added Tax Act, 2003

The court examined the definition of a "dealer" under the Kerala Value Added Tax Act, which includes entities involved in selling goods, including banks selling pledged or hypothecated goods. The court concluded that the Bank, by selling hypothecated vehicles, falls within this definition. The sale of the vehicles, even though facilitated by the Bank, constitutes a sale of goods, making the Bank liable for tax on the turnover generated from these sales.

Issue 3: Justification of the Appellate Tribunal's finding that the Bank is a pledgee in possession of hypothecated vehicles

The court addressed the distinction between "pledge" and "hypothecation." While a pledge involves the transfer of possession to the creditor, hypothecation does not. However, the court found that this distinction does not affect the tax liability. Both scenarios involve the creditor having a right to sell the goods to recover the debt. The court held that the sale of hypothecated vehicles by the Bank is akin to the sale of pledged goods and is subject to tax. The court thus upheld the Tribunal's finding that the Bank, in effect, acted as a dealer by selling the hypothecated vehicles.

Issue 4: Legitimacy of the penalty imposed under Section 67 of the Kerala Value Added Tax Act, 2003

The court considered whether the penalty imposed on the Bank for not including the sale proceeds in its turnover was justified. The Bank argued that the issue was debatable and there was no suppression of facts, as the turnover was evident from the books of accounts. The court acknowledged that the matter was indeed debatable, especially since the distinction between pledge and hypothecation was not clear-cut. The court cited precedents indicating that penalties should not be imposed in cases of genuine interpretative disputes. Consequently, the court set aside the penalty, ruling in favor of the Bank on this issue.

Conclusion:

The court affirmed the assessments made by the authorities, holding that the Bank is liable for KVAT on the proceeds from the sale of hypothecated vehicles. The Bank qualifies as a dealer under the KVAT Act, and the sale of hypothecated vehicles falls within the ambit of taxable turnover. However, the court set aside the penalty imposed under Section 67, recognizing the debatable nature of the issue and the absence of deliberate tax evasion by the Bank.

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