9911796707
TMI Blog1958 (1) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of hire", and that transactions of this type could not on a proper construction of the provisions of the Madras General Sales Tax Act be brought within its charging provisions. The point was also raised that if the Madras General Sales Tax Act levied sales tax on such transactions of "hire-purchase", the same was ultra vires of the State Legislature, as not being comprehended within the entry "tax on the sale of goods", on which entry alone the legislative power to levy the tax imposed by the Madras General Sales Tax Act could be sustained. Though the points raised in these several petitions are to some extent common, there are slight differences in the terms of the contract entered into between the petitioners in each case and their customers, and it is necessary to examine the principal terms of each agreement so as to appreciate the real nature of the transaction involved and its legal results. Before doing so however it would be convenient to set out the relevant provisions of the enactment which bear upon the questions raised. The Madras General Sales Tax Act is a pre-Constitution statute, the legislative power to enact it being that contained in Entry 48 of the Prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercial Credit Corporation (1943) Private Ltd., are the petitioners in the W.P. No. 493 of 1956. The nature of the transactions between themselves and their customers is thus set out in the affidavit in support of the petition: A person desirous of acquiring a motor bicycle (or other vehicle) makes his selection of the make and type and fixes the price therefor with the motor dealer concerned. He then approaches the petitioners for financial assistance on hire-purchase basis. He pays the petitioners a deposit of Rs. 100 and signs a proposal form and executes a hire-purchase agreement. The agreement will provide for the value of the vehicle and other charges incurred by the petitioners being recoverable from the customer in 11 or other number of equal monthly instalments. On the customer signing the hire-purchase agreement the petitioners would authorise the dealer to deliver the vehicle to the customer. The customer proceeds to the dealer, pays him a part of the purchase price and obtains the delivery of the vehicle. The balance of the purchase money due to the dealer is paid by the petitioners, and it is this sum that is collected by the petitioners from the customer in instalment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oners and the customer. The petitioners were designated in the agreement as "owners" and the customer as the "hirer". Clause I stipulated: "Clause I: The owners being the owners of the motor vehicle with fittings, tools.......agree to let and the hirer agrees to hire the vehicle from the date hereof subject to the terms and conditions herein contained and hereto annexed....... Clause II: On the execution of this agreement the hirer shall pay to the owners in Madras a sum of Re. 1 in consideration of the option to purchase given to the hirer by clause IV hereof and the said sum shall become the absolute property of the owners. Clause III: The hirer shall pay to the owners on the execution of this agreement the sum of Rs. 762 as an initial payment by way of hire, which shall become the absolute property of the owners and will punctually pay to the owners at their address.......the sums mentioned in the margin hereof by way of rents for the hire of vehicle. (In the margin was specified the 23 instalments and the monthly rental of Rs. 65). Clause IV: If the hirer shall duly perform and observe all the terms and conditions in this agreement contained on his part to be performed and ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok delivery of the vehicle. He thereafter signed a receipt and handed it over to the dealers, and in this he stated that he had acknowledged the receipt of the motor cycle from the dealers, having hired the said vehicle from the petitioners. The dealers thereafter sent in their bill to the petitioners on 6th September, 1957, intimating the registration of the cycle in the manner advised, and enclosing the receipt signed by the customer along with their bill for Rs. 1,210, this amount being arrived at by deducting Rs. 680 from the price of Rs. 1,890. Of course this Rs. 1,210 was paid by the petitioners. The question for our consideration is whether the petitioners put through any transaction of sale of the vehicle to the customer. Before referring to and dealing with the principles of law and the decisions relied on by Mr. Chengalvarayan, learned counsel for the petitioners, it would be convenient to analyse the transactions and localise the precise point in controversy. The first matter to be noticed is that the dealers, to take the example we have given earlier, the Madras Motors (Private) Ltd., did effect a sale of the vehicle. There could be no dispute that the purchaser in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut goods or other species of property other than money; (3) where the transfer is for a consideration and this in the form of money. It was not contended by learned counsel for the petitioners that the transfer of the title in the vehicle to the customer was by way of gift. Nor was it suggested that the consideration which moved from the customer took the form of exchange or barter. We are therefore left with this, namely, that a transfer of title has taken place, and through the medium of a transaction, which is a sale. With this background we shall proceed to consider the contention urged by learned counsel for the petitioners. The first point sought to be made was that the transaction between the petitioners and the customer, which was the subject of the impugned assessment was one of hire-purchase and not a sale and therefore could not constitutionally give rise to a liability to sales tax. In this connection learned counsel urged that hire-purchase transactions were brought within the definition of "sale" only by reason of explanation (1) to section 2(h), and that the expansion effected by the explanation was ultra vires the State Legislature. Learned counsel sought support fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urts and held that there was no "sale" involved in the hire-purchase contract so as to bring the "hirer" within the charging provision of the sales tax enactment. The entire discussion of the cases and of the principles by the learned Judge related to the nature of the transaction before the property in the vehicle stood transferred to the customer. The learned Judge held that at that stage, the customer was merely a bailee of the vehicle, and that the Legislature could not treat a bailee as a vendee and levy sales tax on the transaction of bailment. What the position would be when as a result of the completion of the hire-purchase agreement, the title to the goods passed to the hirepurchaser raises different problems in regard to which the decision of the Punjab High Court affords no assistance. Though a considerable number of English decisions have been cited to us touching the incidents of hire-purchase agreements, the difficulty in applying them arises out of the fact that they are mostly concerned with whether the agreement required to be registered on a proper construction of the Bills of Sales Act or whether the hire-purchaser was a mercantile agent within the Factors Act or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as purchaser until he exercises his option to purchase the vehicle. It is now common ground that in most if not the entire number of transactions entered into by the petitioners, the hirers pay their instalments and exercise the option. What the effect of default on the part of the hirers and their failure to exercise the option would be we shall consider later. But we shall first examine those cases where the option is exercised. There cannot be a dispute that in that event a sale results. This "sale-element" which started with the grant of "the option to purchase" at the inception of the agreement of hirepurchase was an integral part of the hire-purchase transaction, as integral and as important as the bailment element in the shape of the "hire". It cannot therefore be said that there was no sale at all involved in the hire-purchase so as to preclude the State Legislature from taxing the transactions. Pausing here, it is necessary to advert to a submission of the learned Advocate-General that the entries in the Legislative List should be given the widest possible construction of which they are reasonably capable, and that their import or content should not be cut down by any ped ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to recover the price, but this does not detract from that element being real, for its reality was essential to ensure full protection to the rights of the petitioners as owners of the vehicle who had conferred an option on the customer to purchase it subject to stated conditions. If this element of bailment is real, and so is the element of sale, the next question that arises for consideration is whether a tax liability could be fastened on the petitioners immediately they entered into an agreement of hire-purchase or could the tax be constitutionally and legally be levied only after the customer exercised his option which effected a transfer of property in the vehicle to himself. As already stated, in most of these transactions the customer-the hirer-pays up the (1)[1935] A.C. 500, at p. 518. (2) [1954] 5 S.T.C. 193; 1954 S.C.J. 573. instalments and thus acquires title to the vehicle. In fact the very large advance payable (large in relation to the price of the vehicle as between the petitioners and the customer) that is insisted on from the hirer renders it uneconomic for the hirer to discontinue the payment. An analysis of the sums payable on each instalment would show that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re there is an agreement for sale, pure and simple, the price being payable in instalments with a stipulation that the property shall not pass until the last instalment is paid. In such cases if the sale does not go through, because of the failure on the part of the intending purchaser to pay the instalments of the price, there can be no transaction attracting the sales tax. But if the instalments are paid and the sale is completed, there could be no constitutional inhibition against the State Legislature levying the tax, even when the contract is entered into, subject of course to adjustment in the event of the sale not resulting. This is exactly what one of the limbs of explanation (1) to section 2(h) provides, and we have heard no argument impugning the validity of this provision. From this it would logically follow that the addition of an element of bailment operating during some stages of the transaction cannot materially affect the result. To hold otherwise would be to ignore the fact that hire-purchase is a modern development designed to serve the needs of credit buying, while at the same time protecting the "vendor". In cases therefore where the transaction ultimately resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being designated the instalments of "hire." The results of the foregoing discussion are: (1) that the transactions of hire-purchase entered into by the petitioners constituted sales rendering them liable to sales tax on their turnover excepting in cases where owing to the default on the part of the hirer in the payment of the instalments of hire the vehicle is seized by the petitioner and therefore no title passed to the customer; (2) that these transactions of "hire purchase" could, having regard to their main intent and purpose, be treated as sales at the moment the agreements were entered into, subject to adjustment by the elimination of such portion of the turnover where no sale resulted; and (3) that for the purpose of computing the turnover of the petitioners, the total of the "hire" stipulated to be paid in instalments should be treated as the price or consideration for the sale. There was no evidence that the taxing authorities had included in the turnover of the petitioners any transaction which remained a bailment without getting perfected into a sale. Mr. Chengalvarayan next urged that the petitioners' case would be covered by explanation (iv) to the definition of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age by fire, accident and third party risks.......in the name of the owners .......and punctually pay premia and all moneys payable in respect of such insurance; (e) pay all taxes, licence fees, duties etc.; (f)....... (g) not sell, charge, pledge, assign or part with possession of the vehicle. The hirer agrees to make good to the owner all damages to the vehicle.......and pay the owners the full value of the vehicle in the event of a total loss whether the damage or loss be caused accidentally or otherwise and....... The vehicle being the property of the owners shall not be subject to any lien charge or claim in respect of any rent due by the hirer to the landlord in respect of the premises where the hirer is residing or where he is carrying on business or in respect of the premises where the vehicle is garaged or placed at any time. If the hirer shall (a) make a default in payment of any rent specified in the B schedule hereto or (b) shall make a default in payment of the insurance premium or (c) shall become insolvent or (d) shall suffer any distress or execution or (e) shall fail to observed or perform any stipulation or condition in this agreement then and in any such cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the nature of the transactions involved in the two cases. In the hire-purchase agreements in these cases also, there is a transfer of title from the motor dealer to the petitioners. There is a subsequent sale or transfer of property in the vehicle from the petitioners to their customers. There is the same element of sale involved in the hire-purchase transactions in these petitions, so as to bring them within the liability to the charge of sales tax. The consideration for the transfer of property is not merely Re. 1 paid for the option but the payment of the earlier instalments of hire-purchase and hence the entire sum paid to or received by the petitioners constituted the consideration for the sale. The challenge to the validity of the assessment proceedings must therefore be rejected, and the petitions will stand dismissed, the rules nisi being discharged. W.P. No. 1273 of 1956: The nature of the transaction entered into by Messrs Sundaram Finance Private Ltd., petitioners in W.P. No. 1273 of 1956, is not the same as that of the petitioners in the petitions we have disposed of. Mr. Venkatasubramania Aiyar, who appeared for these petitioners placed before us the actual docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation as hereinafter mentioned. 2.. The hirer agrees with the owners as follows: (a) to pay to the owners punctually by way of rent during the hiring at the owners' address as aforesaid, the sums mentioned in the second schedule hereto on the dates therein mentioned whether previously demanded or not. (b) To take proper care of the vehicle (f) not to cause, permit, allow or suffer any person to acquire any lien on the said vehicle 4.. In case the hirer shall during the continuance of this agreement do or suffer any of the following acts or things namely, either (a) fail to pay any of the hiring instalments within the stipulated time whether legally demanded or not (b) become insolvent........... (c) pledge or sell or attempt to pledge or sell or otherwise alienate or transfer the vehicle. (e) break or fail to perform or observe any conditions on their part herein contained, then in such cases the rights of the hirer under this agreement shall forthwith be determined ipso facto without any notice to the hirer and all the instalments previously paid by the hirer shall be absolutely forfeited to the owners, who shall thereupon be entitled to enter any house or place where the said veh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that sale and this was collected and paid over to the department. It is really the transaction of sale by the customer to the petitioners with the concurrent hire-purchase agreement that requires examination to find out whether in fact and in law there were two further sales of the vehicle one by the customer to the petitioners and the second a resale by the petitioners to the customer at the completion of the hire-purchase agreement. Learned counsel urged that the sale by the customer to the petitioners was not a real but only an ostensible sale, just as sales in the case of a mortgage by conditional sale of immovable property. For this purpose he relied on the tests usually adopted to distinguish sales with a covenant to repurchase from mortgages by conditional sale in transactions regarding immovable property; (1) the disproportion between the price of the vehicle and the price as stipulated for the sale to the petitioners. (2) The debtor and creditor relationship simultaneously created between the petitioners and the customer by the execution of the pronotes. (3) The manner in which the transaction was entered in the books of the petitioners. (4) The headings in the corresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As regards the first question, we do not consider it very useful to advert to the analogy of the distinction between sales with convenants for re-purchase and conditional sales which are treated as mortgages in the case of immovable property. The problem there is complicated by reference to the doctrines developed by the Chancery Courts as to the "equity" of redemption and the related rule "once a mortgage always a mortgage." We might however refer to Mass v. Pepper(1), where the House of Lords affirmed a decision of the Court of Appeal in Mellor v. Mass(2), which in its turn confirmed a judgment of Wright, J., in Mellor's Trustees v. Mass and Co.(3), as the one most favourable to the petitioners' contention. The headnote to the report sufficiently sets out the facts: "In 1899 A contracted with B, to purchase an hotel and the chattels in and about the same for a sum of 30,000. A, being short of money, went to C and asked for a loan of 2,000 on a fourth mortgage of the hotel. C declined the mortgage, and A refused to give a bill of sale. On the morning of the day for completion of A's contract C went to B, told him that A was short of money, and offered to buy the chattels for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, Mass v. Mellor(1): "The question that had to be determined was whether the transaction to which the defendants were parties was or was not a loan on the security of the hire-purchase agreement, though the transaction was carried out in a way that at first sight might appear not to bring it within the Bills of Sales Act. If in point of fact the real transaction was a loan upon security, and the defendants have to rely upon the agreement, they must fail, because the agreement would be a bill of sale, and not being registered, would be void." In the House of Lords, Halsbury, L.C., observed: "I do not think the sale to Mr. Mass (C) was a reality. I think the obvious purpose was that Mr. Mass was to lend 2,000 to get the security of the furniture and yet not to be within the Bills of Sales Act; that was the whole object so far as this transaction was concerned. Everything raises a very strong presumption that this was a colourable sale." Lord Lindley added: "I have not the slightest hesitation in saying that this was a loan on security, and that there was no sale at all." There is no doubt some analogy between the facts in Mass v. Pepper(2), and the nature of the transaction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt or bailee. In such a case, however, it would, to say the least, be a matter of grave doubt if a bona fide purchaser from the customer would not obtain a good title as against the pledgee (vide Babcock v. Lawson(1). A pledge would not therefore serve the needs of the parties. A real sale was necessary to ensure these objects. This inference is reinforced by some of the stipulations found in the agreement, which would appear to be not quite compatible with the transaction being one of pure bailment. For instance clause (3) of the agreement, "All moneys payable to the hirer by any insurer for loss or damage to the motor vehicle are hereby assigned to the owners, and the owners may notify the insurer of this condition" is more consistent with the ownership being a reality. Similarly the stipulation in clause (4) that on default being committed by the customer the vehicle would be forfeited to the petitioners with (1)5 Q.B.D. 284. the added right to the instalments still due, appears to emphasise the reality of the sale element. We do not think it necessary to refer to the other conditions embodied in the hire-purchase agreement which derive from the reality of the sale to the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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