1964 (11) TMI 58 - SC - VAT and Sales Tax

Whether tax liability could be fastened on the appellant immediately it entered into the agreement of hire-purchase? Whether the tax could only be constitutionally and legally levied after the intending purchaser had exercised the option which resulted in the transfer of property in the vehicle to such person? Held that - Allow the appeals in part and set aside the order of the High Court and the assessments made, and direct that the Sales Tax Authorities will determine the price in accordance with what we have said above that The first part may be determined after finding out the proper amount to be paid as hire in the market for a vehicle of the type concerned, or in such other way as may be available to the Sales Tax Authorities. The second method may be to take the original price fixed in the hire- purchase agreement and to calculate the depreciation and all other factors that may be relevant in arriving at the price when the second sale takes place to the hirer including the condition of the vehicle at the time of the second sale. It is therefore for the Sales Tax Authorities to find out the price of the vehicle on which tax has to be paid in either of the ways indicated by us above or such other way as may be just and reasonable and thereafter proceed to levy sales tax according to law.

Issues Involved:
1. Whether there were two sales or one sale in the hire-purchase transactions.
2. The nature of hire-purchase agreements and their taxability.
3. The validity of Explanation 1 to Section 2(h) of the Madras General Sales Tax Act.
4. The timing of tax liability in hire-purchase agreements.
5. The quantum of the sale price for taxation purposes.

Issue-wise Detailed Analysis:

1. Whether there were two sales or one sale in the hire-purchase transactions:

The Court affirmed the High Court's view that there were two sales involved in the hire-purchase transactions. The first sale was by the motor dealer to the financing company (the appellant), and the second sale was by the financing company to the person who wanted to purchase the motor vehicle. The Court emphasized that the appellant was the owner of the vehicle during the hire period, and the intending purchaser was merely a hirer. The vehicle was registered in the appellant's name, and the hire-purchase agreement contained clauses allowing the appellant to retake possession of the vehicle if the hirer defaulted. These provisions indicated that the property in the vehicle did not pass to the intending purchaser at the time of the hire-purchase agreement.

2. The nature of hire-purchase agreements and their taxability:

The Court distinguished between a sale where the price is paid in installments and a hire-purchase agreement. In a sale with installment payments, the property passes to the buyer at the time of the sale, even if the price is paid later. In contrast, a hire-purchase agreement involves bailment and an option to purchase. The property does not pass to the hirer until the option is exercised and all terms of the agreement are fulfilled. The Court held that the hire-purchase agreement includes both elements of bailment and sale, and the sale element fructifies only when the option is exercised.

3. The validity of Explanation 1 to Section 2(h) of the Madras General Sales Tax Act:

The Court examined the legislative competence of the State Legislature to enact Explanation 1, which deemed a hire-purchase agreement to be a sale even though the property did not pass at the time of the agreement. The Court referred to previous judgments, including Sales Tax Officer v. Messrs Budh Prakash Jai Prakash and State of Madras v. Gannon Dunkerley Co., which established that the State Legislature could only tax completed sales and not agreements to sell. The Court concluded that Explanation 1 was beyond the legislative competence of the State Legislature because it expanded the meaning of "sale" to include transactions where the property did not pass at the time of the agreement. Therefore, Explanation 1 was declared invalid.

4. The timing of tax liability in hire-purchase agreements:

The Court held that the taxable event under the Act is the sale of goods, which occurs only when the option to purchase is exercised and all terms of the hire-purchase agreement are fulfilled. Tax cannot be levied at the time of the hire-purchase agreement because, at that point, the taxable event (sale) has not occurred. The Court disagreed with the High Court's view that tax could be levied immediately upon entering into the hire-purchase agreement, subject to adjustments for transactions that did not result in sales.

5. The quantum of the sale price for taxation purposes:

The Court rejected both the appellant's contention that the sale price was only Re. 1 (the nominal amount paid for the option) and the respondent's contention that the entire amount paid as hire constituted the sale price. The Court noted that the hire payments included both consideration for the use of the vehicle and payments towards the eventual purchase price. The Court directed the Sales Tax Authorities to determine the price of the vehicle at the time the option is exercised, taking into account depreciation and other relevant factors. The price must be less than the original price of the vehicle. The Court suggested two methods for determining the price: splitting the hire payments into hire and purchase components or calculating the depreciation from the original price.

Conclusion:

The Court allowed the appeals in part, set aside the High Court's order and the assessments made, and directed the Sales Tax Authorities to determine the price in accordance with the Court's guidelines. The appellant was awarded costs from the respondent.

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