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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 ..... re-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 as part of the social service in the commercial world. It enables persons of ordinary means to buy the necessities of life which the modern scientific advancement offers. Under that system one can buy a car, a refrigerator, furniture, cooking apparatus, and as a matter for that any article of utility. It enables the hirer to own the article of his choice by paying on easy instalments, and the dealer to provide it for him for profit without any risk to himself. It has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exercised by him. If the terms were not complied with, the dealer or the financier, as the case may be, could terminate the agreement and take back the goods. In such a transaction, the common intention of the dealer, the financier and the customer was that the transaction should take the form of a hire-purchase agreement which would become a sale on the compliance of the terms of that agreement. No doubt the financing operation could have taken the form of a mortgage or pledge, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 promissory note? I think he cannot. As I have stated earlier, the transactions purported to be hire-purchase agreements and they must be treated as such, as the common intention of the parties was to enter into such transactions. A deeper scrutiny of the transactions shows that the dealer and the financier were closely connected companies and for their own reasons they have split up the business of hire-purchase between them. In effect and in substance, the dealer without receiving the who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficate 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 loan, the customer executes nine documents- (1) an application requesting the appellants to grant a loan of a stated amount on the security of the motor vehicle; (2) a "sale letter" reciting that the customer had on the date of the application for loan sold to the appellants the motor vehicle; (3) a bill which recites that for the amount mentioned in the "sale letter" and received in full, the customer has sold to the appellants the vehicle belonging to the customer; (4) a receipt for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 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; not to cause, permit, allow or suffer any person to acquire any lien on the vehicle; not to cause, permit or allow or suffer the vehicle to become liable to distress, execution or any other process levied or issued against the customer; and not to assign, sell, pledge, charge, underlet, lend or otherwise part with the possession, custody or beneficial interest in the vehicle of the customer therein under the agreement without the consent of the owners. By clause 3 all monies pay- able to the cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the hire-purchase agreement. The appellants submit that execution of a "sale letter" by the customer acknowledging sale of the vehicle to them does not create in them any right of ownership, the "sale letter" being merely one of a set of documents under which arrangement for granting a loan and for ensuring repayment of the money advanced by the appellants is made. The appellants say that they do not become owners of the vehicle under the "sale letter", that the true effect of the transaction on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 which the customer requests the appellants to pay the balance of the price remaining to be paid by him to the dealer, the promissory note executed by him for that amount, the undertaking to insure the vehicle, and intimation to the Motor Vehicles Authorities to make note of the hire-purchase agreement. The hire-purchase agreement executed by the customer undoubtedly contains several onerous covenants. The customer was to pay all rents, rates, taxes and other outgoings regularly, to take proper care of the vehicle, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 consideration of executing a hire-purchase agreement and allied documents remains in possession of the goods, subject to liability to pay the amount paid by the financier on his behalf to the owner or dealer, and the financier obtains a hire-purchase agreement which gives him a licence to seize the goods in the event of failure by the customer to abide by the conditions of the hire-purchase agreement. The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, 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 certain amount was paid, when the chattels were to become again the property of the vendor, and power was given to the purchaser to take possession of the chattels on default of payment, the form of the transaction cannot be given undue importance. The court held that no sale or hiring of the chattel was intended, the object in truth being to create a security for a loan of money to the supposed vendor from the supposed pur- chaser. The transaction was therefore one of loan. Lord Esher, M.R., observed at page 37: "........ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 determine whether the transaction in question is a genuine sale by the original owner of the chattel to the person who is finding the money and a genuine re-letting by the latter to the original owner on hire-purchase terms, or whether the transaction, though taking that form, is nothing more than a loan of money on the security of the goods..................The court is, not to look merely at the documents. It must discover what the real transaction was. As Lord Esher, M. R., said in Madell v. Thomas & Co.: '.. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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