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TMI Blog1965 (11) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... y inability to agree. The facts of the case and the arguments of learned counsel have been fully stated by my learned brother, Shah, J., and I need not recapitulate them here. The short question is whether the hire-purchase agreements entered into by the appellant with its customers are transactions of sale of goods or are only documents securing the return of the loans advanced by it to its customers. It is common case that the said documents ex facie purported to be hire-purchase agreements and if that was their real character, in terms of the judgment of this Court in Messrs. K. L. Johar Co. v. The Deputy Commercial Tax Officer, Coimbatore 111 A.I.R. 1965 S.C. 1082; 16 S.T.C. 213., when all the terms of the agreements were satisfied and the option was exercised, sales take place in the goods which till then had been hired. The contention, therefore, was that in executing the documents the common intention of the parties was that they should be documents securing the loans and that the form of hire-purchase agreement was adopted to achieve that purpose. At the outset the nature of hire-purchase agreements may be briefly noticed. Hire-purchase agreements have come to stay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such time as he carried out the terms of the agreement. A further variation of the transaction was that the customer purchased the goods by paying the entire consideration to the dealer with the help of the financier; he then sold the goods to the financier and entered into an agreement of hire-purchase with him. In this type of transaction, the dealer went out of the picture altogether: the financier took the place of the dealer and the customer continued to be the hirer. Sometimes, as the present case illustrates, the customer might find some money but could not provide the whole consideration. In that event also, the transaction could be put through in the aforesaid manner either with the dealer or the financier, as the case may be. The object of the hire-purchase system was to help to finance the customer in order that he might purchase the property. Though that was the object, the transaction took the form of hire-purchase agreement. The main feature of the agreement, apart from small variations, was that the dealer or the financier continued to be the owner till the terms of the agreement were fully complied with by the customer and the option to purchase the same was exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . These decisions have no bearing in the context of a hire-purchase agreement entered into in the course of business. All the parties knew the nature of the transaction and accepted the terms embodied thereunder. In the present case the transactions were admittedly hire- purchase agreements. The financier purchased the cars for the amounts required to be paid to the dealer and entered into specific hire-purchase agreements with the customers. They contained all the usual terms that are found in a hire-purchase agreement. Neither the fact that the agreements were entered into because the customers had no funds to purchase the motor-cars nor the circumstance that part of the consideration was already paid to the dealer affects the nature of the transaction. The fact that the customer executed a promissory note for the money advanced by the financier does not affect the question, for that was merged in the hire-purchase transaction. If the said terms were not carried out, the customers could not claim any rights under the agreements and the financier continued to be the owner freed from any obligation created under the agreements. Can the financier thereafter enforce the promissor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for writs of certiorari quashing the proceedings of the Sales Tax Officer and for writs of prohibition restraining that officer from taking further proceedings against the appellants under his orders dated March 25, 1962, and July 6, 1962. The High Court of Kerala rejected these petitions upholding the view of the Sales Tax Officer that on the transactions between the appellants and their customers sales tax was payable under the Travancore-Cochin General Sales Tax Act. With certificate granted by the High Court under Article 133(1)(a) of the Constitution, these appeals are preferred. The appellants are a company incorporated under the Indian Companies Act, 1913, and have their registered office in Madras. The company carries on business of financing purchases of motor vehicles on the security of those vehicles. The manner in which these transactions were effected is briefly this. A customer desirous of purchasing a motor vehicle, but unable to pay the price to the dealer, agrees to purchase the vehicle, and makes part payment of the price to the dealer. He then approaches the appellants and requests that a loan be advanced to him. On the appellants' agreeing to grant a loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomer to be described as "the hirer" and "the guarantor", who guarantees due performance and observance by the customer of all the clauses and covenants of the agreement and agrees to pay on demand any monies due or which may become payable to the owners under the agreement either by way of hire, expenses or damages, repairs, replacements or other supplies. By the first clause it is recited that the owners (the appellants) will let and the hirer (the customer) will take on hire the motor vehicle for a specified number of calendar months subject to determination as mentioned in the agreement. Clause (2) sets out the conditions of hiring. Thereby the customer agrees to pay rent to the appellants punctually; to take proper care of the vehicle and keep it in good condition and to keep it insured for its full value; to pay all rents, rates, taxes payable by him in respect of the premises where the vehicle shall for the time being be garaged and all licence fees, insurance premium and other duties payable in respect of the said vehicle; to keep the vehicle in his sole custody and possession; and to permit the appellants to inspect the vehicle at all reasonable times during the hiring; no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Sales Tax Authorities, between the date on which the customer agreed to purchase a vehicle and the date on which he became full owner of the vehicle without any encumbrance, three sale transactions were interposed: a sale by the dealer to the customer; a sale by the customer to the appellants under the "sale letter" referred to earlier; and a sale by virtue of clause 6 of the hire-purchase agreement. It is common ground that the first transaction is taxable under the appropriate Sales Tax Act. On behalf of the State of Kerala it is conceded that the second transaction is not taxable, but it is so because the customer is ordinarily not a dealer within the meaning of the Act, but they contend that inasmuch as under that transaction the appellants become transferees of the rights of the customer in the vehicle under the sale letter, when by the operation of clause 6 of the hire- purchase agreement the rights of the appellants are extinguished, there results a sale in favour of the customer which is taxable under the Act. We are in this case concerned with the exigibility to tax of what the State of Kerala contends is a sale resulting from the payment of all the instalments under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their business is to advance loans on favourable terms on the security of vehicles. This is effected by obtaining a promissory note for repayment of the amount advanced, and a hire-purchase agreement which provides a mechanism for recovery of the amount. It is true that a "sale letter" is obtained from the customer, but the consideration for the sale letter is only the balance remaining payable to the dealer, after giving credit against the price of the vehicle the amount paid by the customer. The application for a loan, and the letter addressed to the appellants undertaking to insure the vehicle expressly mention that a loan is asked for and granted on the security of the motor vehicle under the hire-purchase agreement. It is the customer who insures the vehicle, and in the books of the Motor Vehicles Authorities he remains, with the consent of the appellants, owner of the vehicle. Undue importance to the acknowledgement of sale in the "sale letter" and the recital of sale in the bill and in the receipt cannot therefore be attached. These documents-"sale letter", bill and receipt-must be read with the application for granting a loan on the security of the vehicle, the letter in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party called the hirer and further agrees that the hirer shall have an option to purchase the chattel when he has paid a certain sum, or when the hire-rental payments have reached the hire-purchase price stipulated in the agreement. But there are variations when a financier is interposed between the owner of the goods and the customer. The agreement, ignoring variations of detail, broadly takes one or the other of two forms: (1) when the owner is unwilling to look to the purchaser of goods to recover the balance of the price, and the financier who pays the balance of the price under- takes the recovery. In this form, goods are purchased by the financier from the dealer, and the financier obtains a hire-purchase agreement from the customer under which the latter becomes the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The decision of this Court in K. L. Johar Company v. Deputy A.I.R. 1965 S.C. 1082; 16 S.T.C. 213. Commercial Tax Officer' dealt with a transaction of this character. (2) In the other form of transactions, goods are purchased by the customer, who in consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a hire-purchase agreement there is no agreement to buy goods; the hirer being under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire-purchase agreements must be distinguished from transactions in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire-purchase agreement with the financier, but in substance evidences a loan transaction, subject to a hiring agreement under which the lender is given the licence to seize the goods. A few illustrative cases decided by the Courts in England, which do not import complications arising from the Bills of Sale Act, 1878, and the Hire Purchase Act, 1938, may be briefly noticed. In Re Watson, Ex parte Official Receiver in Bankruptcy', it was held that in adjudging the true nature of a transaction purporting to be a sale of personal chattels, followed by a hiring and purchase agreements, whereby the vendor agreed to hire the chattels from the purchaser and to pay quarterly sums for such hire, until a certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they purported to buy the motor-car from the plaintiff and to let it out to him under a hire-purchase agreement. The plaintiff then brought an action for a declaration claiming that hire-purchase agreement was void under the Bills of Sale Act, 1882. Lord Goddard, C.J., in upholding the claim of the plaintiff observed at page 188: "A considerable number of cases were cited......... on the point which may, I think, be conveniently divided into two lines of authority. There is, on the one hand, the class of case, of which Yorkshire Railway Wagon Co. v. Maclure and British Railway Traffic Electric Co. v. Kahn3 are good examples, where the transaction in question has been held to be a genuine sale followed by a hire-purchase agreement, and, therefore, unaffected by the Bills of Sale Acts, and, on the other hand, there is the class, which includes Re Watson, Ex parte Official Receiver in Bankruptcy and Madell v. Thomas Co., where the court has held, on facts not very dissimilar from those in the present case, that the real transaction was one of loan, and, therefore, it was avoided by reason of the Acts. There is no doubt, I think, as to the deciding principle. The court has to de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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