# K. L. JOHAR AND COMPANY v. DEPUTY COMMERCIAL TAX OFFICER

- **Citation:** [1965] 2 S.C.R. 112
- **Court:** Supreme Court of India
- **Decided:** 1964-11-10
- **Case number:** Civil Appeal No. 245, 246 G H of 1963
- **Bench:** P. B. Gajendragadkar, K. N. Wanchoo, M. Hidayatullah, Raghubar Dayal, J. R. Mudholkar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/k-l-johar-and-company-v-deputy-commercial-tax-officer-3295
- **Pages:** 17

## Headnote

Madras General Sales Tax Act IX of 1939, Explanation I to s. 2(h)-
Hlre-purchase transactions included in term 'sale'-Validity of Explanatlon--Prlce of vehicles for purposes of tax how . to be fixed-Sale when
completed.
·
The appellant carried on hire-purchase business in Motor vehicles.
The
course
of
business
was
that
the
price
of
the
vehicle
would be paid by the appellant to the motor dealer and the
vehicle
would
be hired out to the
intending
purchaser.
The
latter had to pay the hire money in instalments and when all the instalments according to the agreement had been paid, he would exercise the
option of purchasing the vehicle by a final payment of Re. II-. It was
clearly laid down in the hire-purchase agreement that for the duration
of the hire the vehicle would remain under the ownership of the appellant.
The sales tax authorities in Madras imposed sales tax on the appellant
for the assessment year 1955-56 and 1956-57. The hire-purchase tran-
•actions were treated as sale transactions under Explanation I to s. 2(h)
of the Madras General Sales Tax Act, 1939 .• The a.J>pellant's writ petition before the Madras High Court challenging the said assessment failed
but a certificate of fitness to appeal to the Supreme Court was granted.
A
B
c
D
The main contentions of the appellant were : ( i) there was really
E
>ne sale in the present case by the motor dealer to the intending purchaser
>f the vehicle, the appellant being a mere financing agent. There was no
transaction of sale between the appellant and the intending purchaser (ii)
Explanation I to s. 2(h) of the Act which included hire-purchase agreement within the term 'sale' was ultra vires and (iii) in any case sale
took place only when the option to purchase was exercised by the hirer
by the payment of Re. I/ - which should therefore be taken as the sale
F
price.
HELD: (i) The various terms of the hire purchase agreement showed
that the appellant remained the owner of th~ vehicle for the duration of
the agreement.
Therefore it could not be said that the appellant was a
mere financier while the real transaction was between the motor dealer
and the intending purchaser. There were in fact two sales one by the
dealer to the appellant, and the other by the appellant to the pe1"0D
who wanted to purchase the vehicle.
As the Act. levied a multi-point
F
sales tax at the relevant time, it was open to the State to tax both the
sales.
[121 B-Cl
(ii)
The State Legislature when it proceeds to legislate either under
Entry 48 of List I of the Seventh Schedule to the Government of India
Act, 1935 or under Entry 54 of List II of the Seventh Schedule to the
Constitution, can only tax a 'sale' within the meaning of that word as
defined in the Sale of Goods Act.
[123 HJ
H
Sales Tax Officer v. Mis. Budh Prakash Jal Prakash [1955]1 S.C.R.
243 and Stare of Madras v. Gannon Dunkerley & Co. [1959] S.C.R. 379,
'
~1ffirmed.
........,
JOHAR & co. v. c. T. o. (Wanchoo, /.)
113
A
The essence of sale under the sale of Goods Act is that property shall
B
c
D
pass from the seller to the buyer when the contract of sale is made
except in a case of conditional sale.
Hire-purchase agreements are not
conditional sales. [124 A-Bl
Therefore any legislation by the State Legislature making an agreement
or transaction, in which property does not pass from the seller to the
buyer, a sale, would be beyond its legislative competence. [124 BJ
What Explanation I does is to lay down that a hire-purchase agrooment
shall be deemed to be a sale in spite of fact that the property dees not
pass at the time of such agreement from the seller to the buyer.
Therefore Explanation I as it stands is beyond the legislative competence of the
State Legislature. It must therefore be held to be invalid. [124 B.C]
(iii) A hire purchase agreement has two elements : (I) element of
bailment and (2) ·element of sale in the sense that it contemplates an
eventual sale. The element of sale fructifies when the option is exercised
by the intending pu

## Text

_Characters 0–39,918 of 47,790. This is a partial read: ask again with offset=39918 for what follows._

112
K. L. JOHAR AND COMPANY
v.
DEPUTY COMMERCIAL TAX OFFICER
November 10, 1964
[P. B. GAJENDRAGADKAR, C.J., K. N. WANCHOO,
M. HIDAYATULLAH, RAGHUBAR DAYAL AND
J. R. MUDHOLKAR, JJ.]
Madras General Sales Tax Act IX of 1939, Explanation I to s. 2(h)-
Hlre-purchase transactions included in term 'sale'-Validity of Explanatlon--Prlce of vehicles for purposes of tax how . to be fixed-Sale when
completed.
·
The appellant carried on hire-purchase business in Motor vehicles.
The
course
of
business
was
that
the
price
of
the
vehicle
would be paid by the appellant to the motor dealer and the
vehicle
would
be hired out to the
intending
purchaser.
The
latter had to pay the hire money in instalments and when all the instalments according to the agreement had been paid, he would exercise the
option of purchasing the vehicle by a final payment of Re. II-. It was
clearly laid down in the hire-purchase agreement that for the duration
of the hire the vehicle would remain under the ownership of the appellant.
The sales tax authorities in Madras imposed sales tax on the appellant
for the assessment year 1955-56 and 1956-57. The hire-purchase tran-
•actions were treated as sale transactions under Explanation I to s. 2(h)
of the Madras General Sales Tax Act, 1939 .• The a.J>pellant's writ petition before the Madras High Court challenging the said assessment failed
but a certificate of fitness to appeal to the Supreme Court was granted.
A
B
c
D
The main contentions of the appellant were : ( i) there was really
E
>ne sale in the present case by the motor dealer to the intending purchaser
>f the vehicle, the appellant being a mere financing agent. There was no
transaction of sale between the appellant and the intending purchaser (ii)
Explanation I to s. 2(h) of the Act which included hire-purchase agreement within the term 'sale' was ultra vires and (iii) in any case sale
took place only when the option to purchase was exercised by the hirer
by the payment of Re. I/ - which should therefore be taken as the sale
F
price.
HELD: (i) The various terms of the hire purchase agreement showed
that the appellant remained the owner of th~ vehicle for the duration of
the agreement.
Therefore it could not be said that the appellant was a
mere financier while the real transaction was between the motor dealer
and the intending purchaser. There were in fact two sales one by the
dealer to the appellant, and the other by the appellant to the pe1"0D
who wanted to purchase the vehicle.
As the Act. levied a multi-point
F
sales tax at the relevant time, it was open to the State to tax both the
sales.
[121 B-Cl
(ii)
The State Legislature when it proceeds to legislate either under
Entry 48 of List I of the Seventh Schedule to the Government of India
Act, 1935 or under Entry 54 of List II of the Seventh Schedule to the
Constitution, can only tax a 'sale' within the meaning of that word as
defined in the Sale of Goods Act.
[123 HJ
H
Sales Tax Officer v. Mis. Budh Prakash Jal Prakash [1955]1 S.C.R.
243 and Stare of Madras v. Gannon Dunkerley & Co. [1959] S.C.R. 379,
'
~1ffirmed.
........,
JOHAR & co. v. c. T. o. (Wanchoo, /.)
113
A
The essence of sale under the sale of Goods Act is that property shall
B
c
D
pass from the seller to the buyer when the contract of sale is made
except in a case of conditional sale.
Hire-purchase agreements are not
conditional sales. [124 A-Bl
Therefore any legislation by the State Legislature making an agreement
or transaction, in which property does not pass from the seller to the
buyer, a sale, would be beyond its legislative competence. [124 BJ
What Explanation I does is to lay down that a hire-purchase agrooment
shall be deemed to be a sale in spite of fact that the property dees not
pass at the time of such agreement from the seller to the buyer.
Therefore Explanation I as it stands is beyond the legislative competence of the
State Legislature. It must therefore be held to be invalid. [124 B.C]
(iii) A hire purchase agreement has two elements : (I) element of
bailment and (2) ·element of sale in the sense that it contemplates an
eventual sale. The element of sale fructifies when the option is exercised
by the intending purchaser after fulfilling the terms of the agreement.
When all the terms of the agreement are satisfied and the option is exercised a sale takes place of the goods which till then bad been hired. When
this sale takes place it will be liable to sales tax under the Act for the
1'1Xable event under Lhc Act is the taking place of the sale, the Act
providing for a multipoint sales tax at the relevant time. As the taxable
event is the sale of goods the tax can only be levied when the option is
c<ercised after fulfilling all the terms of the hire-purchase agreement. Tax
is not exigible at the time when the hire-purchase agreement is made for
at that time the taxable event has not taken place. [125 H-124 El
(iv)
Although accorcjjng to the terms of the agreement the
Yehiclc was purchased by the payment of Re. 1/- it would be absurd
to say that that was the price at which the vehicle must be· taken to
have been sold. It would be equally wrong to say that the total amount
of hire paid in instalments including the final payment of Re. II - constiluted the sale price.
The price had to be worked out by the sales
tax authorities in a fair and reasonable manner taking into account the
depreciation of the vehicle between the date of hire-purchase agreement
and the exercise of the final option to purcha... [126 G-H; 128 B-G)
Darngcril ('oa! Co. v. Francis. (1913)7 T;,tx Ca.scs, Part I p.:tgc 1.
referred to.
11'
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 245, 246
G
H
of 1963.
Appeals from the judgment and order dated January 17, 1958
of the Madras High Court in Writ Petitions Nos. 500 and 671 of
1957.
A. V. Viswanatha Sastri, B. R. L. Iyengar, B. D. Dhawan, S.
K. Mehta and K. L. Mehta, for the appellant~ (in both the appeals).
A. Ranganadham Chetty, V. Ramaswamy and A. V. Rangam.
for the respondent (in both the appeals) and intervener No. 6.
S. V. Gupte, Solicitor-General, and B. R. G. K. Achar, for
interverner No. l.
B. V. Subramaniam, Advocate-General, Andhra Pradesh and
B. R. G. K. Achar, for intervener No. 2.
114
SUPREME COURT REPORTS
[1965) 2 S.C.R.
Naunit Lal, for intervener No. 3.
A
V. P. Gopalan Nambiar, Advocate-General, Kerala, V. A.
Syied Muhammad, for intervener No. 4.
M. Adhikari, Advocate-General, Madhya Pradesh and /. N.
Shroff, for intervener No. 5.
·
R. N. Sachthey, for interveners No. 7.
B
C. B. Agarwala and 0. P. Rana, for intervener No. 8.
The Judgment of the Court was delivered by
Wanchoo, J. These two appeals on certificates granted by the
Madras High Court raise common questions and will be dealt with
C
together.
The appellant is a financing company consisting of a
number of partners. Its main business is to advance money to persons who purchase motor vehicles but are themselves not in a position to find ready money to pay the price. The course of business
followed by the appellant is to enter into hire-purchase agreements
with those who want to purchase motor vehicles. It is necessary D
to refer to the terms of hire-purchase agreements which are on a
set pattern in order to understand the points raised in these appeals.
Any person desirous of acquiring a motor vehicle makes the
selection of the make and type and fixes the price therefor with
the motor dealer. Such person then approaches the appellant for
E
financial assistance on a hire-purchase basis. Sometimes an initial
payment is made to the motor dealer which is taken into account
at the time of the hire-purchase agreement while at others the payment is made in a number of instalments to the appellant. In
either case the appellant pays the price or the balance thereof to the
dealer and thereafter the hire-purchase agreement is entered into F
between the appellant and the person who wants to purchase the
motor vehicle. The appellant is described in the agreement as the
owner of the vehicle and the person who wants to purchase it as
the hirer.
The material terms of the agreement may be summarised here.
The agreement provides that the owner (namely, the appellant) will
G
let and the hirer (namely, the person who wants to purchase the
vehicle) will take on hire the vehicle in question for such period as
may be fixed in each case, (cl. 1 ) . The hirer has to pay a certain
amount per month to the owner and where an initial deposit is made
this amount is larger for the first month and other monthly payments are smaller. The hirer has to pay during the period of hire H
the monthly instalment, the vehicle is registered in the name of the
owner and the hirer is forbidden to represent himself as the owner
JOHAR & co. v. c. T. o. (Wanchoo, I.)
115
A thereof or to do anything to suggest that he is the ?wner there~f;
the hirer has to keep the vehicle in good and serviceable repair,
order and condition to the satisfaction of the owner, and he is also
to insure and keep insured the vehicle against loss or damage by
fire, accident and third party risks and punctually pay premia and
all moneys payable in respect of such insurance : (see cl. 3). The
B hirer has further to pay all taxes, licence fees, duties, fines, registration charges and other charges payable in respect of the vehicle
and all rents <J.nd outgoings payable .by the hirer in respect of the
premises where the vehicle is kept or garaged when the same respeetively become due : [see cl. 3 (e)].
He has also to satisfy the
owner about all the above things having been duly done. He cane not sell, charge, pledge, assign or part with possession of the vehicle
[cl. 3 (g)].
The hirer has also to make good all damages to the
vehicle (fair wear and tear excepted) and pay the owner the full
value of the vehicle in the event of total loss, whether the damage
or loss be caused accidentally or otherwise and to keep the vehicle
D
at the sole risk of the hirer until the hirer purchases the vehicle or
returns it to the owner : (cl. 5). If the hirer makes default in the
payment of any rent for seven days, the hiring immediately determines and the owner may without notice retake possession of the
vehicle, and it shall be at the option of the owner to reinstate the
contract on such conditions as it deems fit after the determination
E of the hiring as aforesaid : (cl. 14) . Upon the determination of the
hiring as above, all arrears of rents upto the date of determination
and all costs and expenses incurred by the owner in the exercise of
the powers conferred by the agreement shall be paid by the hirer,
'and the hirer shall not be entitled to any repayment of any sum
previously paid and all such rents and sums shall belong to the
F owner absolutely : (cl. 15). The hirer may determine the hire at
any time by delivering the vehicle to the owner and by paying him
any part of the current rent due upto the date of such delivery and
all other sums, if any, which upto such date, the hirer may have
become liable to pay the owner under the agreement : (cl. 18). Cl.
20 of the agreement, which is important for our purposes reads
G thus:-
H
. "If the hirer shall duly observe and perform all the conditions and stipulations herein contained and on his part to be
observed and performed and shall duly pay to the owner all
rents hereby reserved during the term of hiring together with
all other sums, if any payable by him 10 the owner under the
provisions of this agreement, then and at the termination of
the hiring, the hirer may purchase the vehicle from the owner
for a sum of Re. 1/-."
116
SUPREME COURT REPORTS
(1965] 2 S.C.R.
Clause 21 provides that the hirer may at any time determine the
A
hiring and become purchaser of the vehicle by paying to the owner
such sum as together with the sums previously paid will amount
t9 the total sum payable by way of rent thereunder t~gether with
all sums (if any) payable to the owner and in addition a sum of
Re. I I-. Clause 22 provides that "if the hirer fails to observe and
perform the conditions and stipulation herein contained and fails
to exercise the option of purchasing the vehicle in accordance with
the provisions of the last preceding clause, and the vehicle is not
returned to the owner on the termination of the hiring, the hirer
shall pay the owner a certain sum every month until the vehicle is
handed over to the owner by the hirer." Clause 23 provides that
until the vehicle shall have become the property of the hirer under
the provisions of the agreement it shall remain the absolute property
of the owner, and the hirer shall have no right or interest in the
same other than as the hirer under the agreement. The agreement
B
c
is not assignable : (cl. 24).
It is unnecessary to refer to other
clauses of the agreement as they are immaterial for our purposes.
D
After such an agreement has been made, the hirer takes possession
of the vehicle and if all its terms are carried out, the hirer becomes
the owner of the vehicle when he exercises his option to purchase
the vehicle after paying the sum of Re. I/- including the instalments then outstanding, if any.
The appellant commenced business in February 1955 and in E
the course of such business entered into several hire-purchase agree·
ments relating to motor vehicles both new and second-hand. On
April 28, 1956, the appellant submitted a return to the Assistant
Commercial Tax Officer, Coimbatore, showing a turnover for the
purposes of sales tax for Rs. 2,37,993/- for the year 1955-56. The
appellant had also collected (though it now claims that it was done
F
erroneously) from the hirers of motor vehicles amounts equivalent
to sales tax on their transactions and those amounts were kept in
suspense account. The hirers however began to claim refund of
this amount on the ground that hire-purchase agreements were not
within the ambit of "sale" as defined in the Madras General Sales
Tax Act, No. IX of 1939, (hereinafter referred to as the Act).
G
But the Assistant Commercial Tax Officer made a provisional assessment on the basis of th<;: return submitted by the appellant and fixed
instalments for payment thereof. The appellant paid the instalments but preferred a revision to the Commercial Tax Officer objecting to the assessment mainly on the ground that hire-purchase
H
agreements were not transactions of sale liable to be taxed undec
the Act. The revision was however dismissed on the ground that
there was no necessity for interfering with the provi.~ional assess-
•
JOHAR&: co. v. c. T. o. (Wanchoo, /.)
117
A ment at that stage. Later, the Deputy Commercial Tax Officer
passed the final order of assessment relating to the year 1955-56
holding that the hire-purchase transactions were subject to sales
tax and overruled the objection that the transactions were only
a system of financing and not sales. The appellant preferred an
appeal to the Commercial Tax Officer against the order of assessB
ment for the year 1955-56. That appeal is said to have been
heard but no orders had been passed thereon, when the writ petition was filed in the High Court on June 29, 1957. In the meantime provisional assessment had been made for the year 1956-57
and the appellant was being pressed to pay that amount also. Consequently the appellant filed a writ petition on June 29, 1957 chalC Jenging the provisional assessment with respect to the year l 9S657. Later he filed another writ petiti9n on August 18, 1957 challenging the final assessment for the year 1955-56.
The main contention of the appellant in the two writ petitions
was that levy of sales tax in respect of hire purchase transactions
D
was illegal and unconstitutional as Explanation I to s. 2(h) of the
Act defining "sale" was beyond the competence of the State legislature. The Explanation is in these terms :-
E
"A transfer of goods on the hire-purchase or other instalment system of payment shall, notwithstanding the fact
that the seller retains the title in the goods as security
for payment of the price, be deemed to be- a sale."
The appellant contended that this amounted to an extension of
the meaning of the word "sale" as used in Entry 54, List II of the
F
Seventh Schedule to the Constitution and Entry 48 of List II of
the Seventh Schedule to the Government of India Act 1935 beyond
what it meant in the Indian Sale of Goods Act, No. 3 of 1930.
The State legislature therefore could not arrogate to itself the power
to levy a tax in respect of transactions which in form and in substance did not constitute sales as understood in the Indian Sale of
G Goods Act by merely adopting a wide definition. It was therefore
incompetent for the State legislature to enact Explanation I. If
the Explanation falls on account of the incompetence of the legislature, no sales tax could be levied on hire-purchase transactions
in view of Art. 265 of the Constitution which lays down that "no
tax shall be levied or collected, except by authority of law".
H
•
These two writ petition~ along with a number of others df the
same kind dealing with hire-purchase agreements were .-heard by
118
SUPREME COURT REPORTS
[l965] 2 S.C. R.
the High Court together.
The first question to which the High
A
Court addressed itself was whether there were two sales in this
case or only one sale, for the contention on behalf of the appellant,
apparently was that there was only one sale by the dealer to the
person who wanted to purchase the motor vehicle and that the
appellant was merely a financing agent of such person. The High
Court however held that there were two sales in these cases, first
B
sale by the motor dealer to the appellant and the second by the
appellant to the person who wanted to purchase the motor vehicle.
Thus there were two distinct sales of the vehicle involved in the
process by which the property in the vehicle passed from the dealer
to the person who wanted to purchase it. It appears that sales tax
was paid on the sale by the dealer and the contention of the appelC
!ant was that that was all the tax to which the transaction could
be subjected.
The High Court however held that as there were
two sales involved in the transaction and the Act levied a multipoint tax on sales, tax could be levied again when the appellant sold
the vehicle to the intending purchaser.
The High Court then considered the nature of hire-purchase
agreements, with particular reference to the agreement in the present case and held that a hire-purchase agreement of this kind had
two elements, one of bailment and the other of sale, and rejected
D
the contention of the appellant that such hire-purchase agreements
were nothing more than hiring agreements involving bailment.
E
Having held that the hire-purchase agreement of this type involved
two elements which were both real (i.e. element of bailment and
element of sale), the next question to which the High Court addressed itself was whether tax liability could be fastened on the appellant immediately it entered into the agreement of hire-purchase or
whether the tax could only be constitutionally and legally levied
F
after the intending purchaser had exercised the option which resulted in the transfer of property in the vehicle to such person. The
High Court held that in most of the transactions of this nature the
intending purchaser pays up the instalments and exercises the
option and thus acquires title to the vehicle.
But there might be
cases where such a person might be· unable to become the owner,
G
in the sense of obtaining the title to the vehicle by paying the instalments. In such a case the property would remain with the appellant and bailment element would be the only element, the option
to purchase having not been exercised. In this latter class of cases,
there would be no sale, though there was an agreement granting
an option to purchase which by itself would not amount to a
H
sale. Such transactions could not in the view of the High Court
be brought within the charging provisions of the section.
The
JOHAR & co. v. c. T. o. (Wanchoc, !.)
119
A
High Court therefore held that Explanation I to s. 2(h) of the Act
referred to those hire-purchase agreements only which fructify into
sale and not to these which did not, and in this view of the matter
upheld the validity of the Explanation.
The High Court 4Jen considered when the tax should be levied
B even in those cases which fructify into sales. It held that where a
b ire-purchase a:;reement fructifies and results in a sale there could
be no impediment in the way of the tax being levied even when the
h:re-purchase agreement is entered into.
The High Court then
considered the qucstioa as to what would be the quantum of consideration for the sale th:it is ultimate'iy effected, and held that the
C
total of all the instalments paid made up the sale price, though
they were designated as instalments of hire.
D
E
F
The High Court summed up its conclusion thus :
(I) That the transaction of hire-purchase entered into
by the appellant constitute sales, rendering it liable to
sales tax on its turnover, excepting in cases w.here owing
to the default on the part of the hirer in the payment of
instalments of hire, the vehicle is seized by the appellant
and therefore no title passes to the intending purchaser.
( 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 elimination of such portion of
the turnover where no sale resulted;
(3) That for the purpose of computing the turnover
of the appeliant, the total of t!1e hire stipulated to be paid
in instalments should be treated as price or consideration
for the sale.
On this view the High Court dismissed the writ petitions.
The
appellant then applied for certificates which were granted; and that
G is how the matter has come up before us.
The matter first came up for hearing before us on August 31,
1964. It was then represented that there were provisions similar
to Explanation I to s. 2(h) of the Act, in the sales tax statutes of
other States. We therefore decided to give notice to the Advocates
H
General of all States. It was also decided to give notice to the
Attorney-General of India, particularly as the view taken by this
Court in two earlier cases, namely, the Sales Tax Officer v. Messrs
120
SUPRBMB COURT REPORTS
[1965] 2 S.C.R.
Budh Prakash Jai Prakash(') and the State of Madras v. Gannon A
Dunkerley & Co. (2 ) was being assailed as incorrect. The appeals
were then finally heard on September 29, 1964 and subsequent
dates after such notice had been served.
The first question that has been urged before us is that there
was really one sale in the present case by the motor dealer to the B
intending purchaser of the vehicle and that the appellant was a
mere financing agent of such person !Ind that the High Court was
in error in holding that there were two sales one by the dealer to
t
the appellant and the other by the appellant to the person who
intended to purchase the vehicle. We are of opinion that the view
taken by the High Court in this behalf is correct. This will be C
clear from a consideration of the various terms of the hire purchase
agreement which we have already summarised above. That agreement shows that the whole of the price of the vehicle is paid by
the appellant to the dealer.
Even where a part of the price is
paid by the intending purchaser, the payment is shown as hire for
the first month and is made to the appellant. So far as the dealer D
is concerned the whole price is paid by the appellant. The agreement also shows that the appellant is the owner of the vehicle
and the intending purchaser is merely a hirer thereunder. The
vehicle has to be registered in the name of the appellant, though
the fact of registration by itself in one name or another may not
be determinative of the ownership of the vehicle. Clauses 14 and
E
15 of the agreement clearly show that there was no sale by the
dealer to the intending purchaser of the vehicle at the time of the
hire-purchase agreement. These clauses give power to the appellant to retake possession of the vehicle and determine the agreement. Now if the property in the vehicle had passed to the intend-
)ng purchaser at the time of the hire-purchase agreement it would
F
not have been open to the appellant to take possession of the
vehicle or to insist on payment of arrears or to become entitled to
everything that had been paid upto that day. Under the Jaw all
that the appellant would have been entitled to was to realise the
loan he had given by filing a suit and then attaching and selling G
the vehicle. These two clauses are therefore clear indication of the
fact that there was no sale by the dealer to the person who wanted
to pu•chase the vehicle at the time of the hire-purchase agreement,
and that at that time the sale was by the dealer to the appellant.
Then clauses 20 and 21 enforce this conclusion inasmuch as they
give an option to the person who wanted to purchase the vehicle
H
to do so by exercising his option under the conditions mentioned
(1) (195511 S.C.R. 243.
(2) (1959] S.C.R. 379.
.JOHAR&: co. v. c. T. o. (Wanchoo, J.)
121
A therein. If he had already become the owner when the agreement
had been entered into, these two clauses could not have been included in the agreement.
Then again cl. 23 makes it clear that
till the option is exercised the vehicle remains the absolute property
of the appellant and the 'intending purchaser has no right in it
except that of a hirer.
We therefore agree with the High Court
B that in cases of this kind there are two sales, one by the dealer to
the financier (namely, the appellant in this case) and the other by
the financier (namely, the appdlant) to the person who wanted to
purchase the vehicle. As the Act levied a multi-point sales tax at
the relevant time it was open to the State to tax both the sales and
the fact that the sale by the dealer to the appellant had been taxed
C will not affect the liability of the second sale by the financier to
the person who wanted to purchase the vehicle. What is the extent
of that liability and when is that tax to be levied will be considered
'by us in connection with the second contention urged on behalf of
the appellant.
D
This brings us to a consideration of the validity of Explanation
I, which we have already set out. It is necessary in this connection
to understand the nature of a typical hire purchase agreement as
distinct from a sale in which the price is to be paid later by instalments. In the case of a sale in which the price is to be paid by
E
instalments, the property passes as soon as the sale is made, even
though the price has not been fully paid and may later be paid in
instalments. This follows from the definition of sale in s. 4 of the
Indian Sale of Goods Act (as distinguished from an agreement to
sell) which requires that the seller transfers the property in the
goods to the buyer for a price. The essence of a sale is that the
f
property is transferred from the seller to the buyer for a price, whether paid at once or paid later in instalments, on the other hand, a
hire purchase agreement, as its very name implies, has two aspects.
There is first an aspect of bailment of the goods subjected to the
hire purchase agreement, and there is next an element of sale which
fructifies when the option to purchase, which is usually a term of
G hire purchase agreements is exercised by the intending purchaser.
Thus the intending purchaser is known as the hirer so long as the
option to purchase is not exercised, and the essence of a hire purchase agreement properly so called is that the property in the goods
does not pass at the time of the agreement but remains in the intending seller, and only passes later when the option is exercised
H
by the intending purchaser. The distinguishing feature of a typical
hire purchase agreement therefore is that the property does not
pass when the agreement is made but only passes when the option
L3Sup./6S--JJ
122
SUPREME COURT REPOR.TS
(1965) 2 S.C.R.
ia finally exercised after complying with all the terms of the agreeA
ment.
·
Explanation I specifically brings out this characteristic· of hire
purchase agreements. It provides that a transfer of goods on hire
purchase or other instalment system of payment (which presumably
is of the same type as the hire purchase agreement) shall be deemed B
to be a sale, even though the property in the goods does not pass
to the intending purchaser and remains in the intending seller. The
Explanation recognises by using the words "deemed to be a sale"
that there is no passing of the property at the time of the hire purchase agreement, but provides by a fiction that the property shall
be deemed to have passed notwithstanding the terms of the agreec
ment.
This deeming takes place under the Explanation immediately on the hire purchase agreement being made.
The contention on behalf of the appellant is that the State
legislature was not competent thus to expand the meaning of the
words "sale of goods" used in Entry 54 of List II of the Seventh
Schedule to the Constitution, which corresponds to Entry 48 of D
the Provincial List of the Government of India Act, 1935, and
make something a sale which is not a sale under the law contained
in the Indian Sale of Goods Act. It is clear that if the Explanation is good, the second sale in the present case must be held to
have taken place at the time the hire purchase agreement" was
E
made. On the other hand, if the Explanation is beyond the competence of the State legislature and falls, the sale cannot be said to
have taken place when the hire purchase agreement was made and
can only take place when the option is exercised after all the terms
of the agreements have been satisfied.
This Court had occasion to deal with the interpretation of Entr"j I'
48 of List II of the Seventh Schedule to the Government of India
Act, 1935 in The Sales Tax Officer v. Messrs Budh Prakash Jai
Prakash('). It held that Entry 48 in question conferred power on
the Provincial legislature to impose a tax only when there had been
a completed sale and not when there was only an agreement to
sell.
It was pointed out that there was a well defined and well
G
established distinction between a sale and an agreement to sell.
Consequently, the definition in s. 2(h) of the U.P. Sales Tax Act,
No. XV of 1948, enlarging the meaning of the word "sale" so as to
include forward contracts was to that extent declared ultra vires.
That case dealt with forward contracts but it brings out the distinction between a sale and an agreement to sell and it was held H
that the State legislature had no power under the relevant Entry
I) [19SS) I S.C.R. 243.
JOHAR "' co. v. c, T. o. (Wanchao, /.)
123
A in the Government of India Act to extend the definition of sale
so as to include an agreement to sell.
The matter came up again before this Court in Gannon Dunke;/ey's(') case and it was held that the expression "sale of goods"
was at the time when the Government of India Act was enacted
a term of well recognised legal import in the general law relating
8
to sale of goods and in the legislative practice relating to that topic
and must be interpreted, in Entry 48 in List II of the Seventh
Schedule as having the same meaning as in the Sale of Goods Act.
Entry 54 of List II of the Seventh Schedule to the Constitution
uses the same words (namely, taxes on sale of goods) as in Entry
48 of List II of the Seventh Schedule to the Government of India
c Act and therefore the words must bear the same meaning as explained in these two cases.
Learned counsel for the respondent however urges that the
view taken by this Court in Gannon Dunkerley's(') case requires
reconsideration. We have given our earnest consideration to this
D argument and are of opinion that considering that that view has
stood for so many years and has been accepted in later cases, there
is no case made out for reconsideration thereof. In this connection our attention was drawn to Entry 92-A of List I of the Seventh
Schedule to the Constitution, which refers to taxes on sale of
goods where such sale takes place in the course of inter-State trade
E or commerce and to the provisions of the Central Sales Tax Act,
No. 74 of 1956, where "sale" has been defined as including "a
transfer of goods ~n the hire purchase or other system of payment
by instalments". It is urged that this definition of "sale" under
the Central Sales Tax Act shows that the words "sale of goods"
used in Entry 92-A have a wider meaning.
We are of opinion
F that there is no force in this argument, for the Central Sales Tax
Act was passed by Parliament and its validity has to be considered
not only with reference to Entry 92-A of List I of the Seventh
Schedule to the Constitution but also with reference to Art. 248(2)
of the Constitution read with Entry 97 of List I of the Seventh
Schedule to the Constitution. The fact that the definition of "sale"
G in the Central Sales Tax Act includes words contained in Explanation I therefore is of no help in construing the meaning of the
words "sale of goods", which have been authoritatively pronounced
upon by this Court in Gannon Dunkerely's(') case following Budh
Prakash's( 2) case. It is clear therefore that the State legislature
H when it proceeds to legislate either under Entry 48 of List II of
the Seventh Schedule to the Government of India Act 1935 or
under Entry 54 of List II of the Seventh Schedule to the
(I} [1959] S.C.R. 379.
(2) (1955] I S C.R. 243.
124
SUPREME COURT REPORTS
(1965] 2 S.C.:ll.
Con5titution, can-<>nly tax sale within the meaning of that word as
A
defined in the Sale of Goods Act. The essence of sale under the
Sale of Goods Act is that the property should pass from the seller
to the buyer when a contract of sale is made except in a case of
conditional sale.
Hire purchase agreements are not conditional
sales. Therefore, any legislation by the State legislature making any
agreement or transaction in which the property does not pass from
B
the seller to the buyer a sale would be beyond Its legislative competence. What Explpnation I does is to lay down that a hire purchase agreement shall be deemed to be a sale in spite of the fact
that the property does not pass at the time of such agreement from
the seller to the buyer. Therefore, Explanation I as it stands is
beyond the legislative competence of the State Legislature. It is
C
urged however that the property eventually does pass from the
seller to the buyer when the option is exercised and other terms of
the hire purchase agreement are fulfilled and therefore the Explarur
tion should be read as confined to those cases only where property
does eventually pass from the seller to the buyer.
We are of D
opinion that this argument cannot be accepted, for the intention
of the Explanation clearly is to provide that the hire purchase
agreement shall be deemed to be a sale immediately on the date
it is mad,e, even though property has not passed from the seller to
the buyer on that day. If this were not the real purpose and intention of Explanation I, its enactment would be entirely unnecessary I:
for the main definition of "sale" under s. 2 (h) will apply to a hire
purchase agreement at the time when the property passess from the
seller to the buyer on the option being exercised and on other
terms of the agreement being fulfilled. We cannot therefore agree
with the High Court that the Explanation should be confined only
to those cases where the property does eventually pass for the .,
obvious intention of the legislature in enacting the Explanation was
to provide that the hire purchase agreement shall be deemed to be
a sale on the very date on which it is made, even though no property
passes from the seller to the buyer on that date. In this view of
the matter it must be held taking into account the purpose, the
intention and the interpretation of Explanation I that it is beyond
G
the competence of the State legislature. It must therefore be held
tci be invalid and struck down accordingly.
The next question that arises is whether a hire purchase agreement ever ripens into a sale and if so when. We have already pointed out that a hire purchase agreement has two elements : (i) element of bailment, and (ii) element of sale, in the sense that it conH
templates an eventual sale.
The element of sale fructifies when
the option is exercised by the intending purchaser after fulfilling
JOHAR a: co. v. c. T. o. (Wanchoo, I.)
125
A the terms of the agreement. When all the terms of the agreement
arc satisfied and the option is exercised a sale takes place of the
goods which till then htid been hired. When this sale takes place
it will be liable to sales tax under the Act for the taxable event
under the Act is the taking place of the sale, the Act providing
for a multi-point sales tax at the relevant time. Where however
B option is not exercised or cannot be exercised because of the inabi·
lity of the intending purchaser to fulfil the terms of the agreement,
there is no sale at all. As the taxable event is the sale of goods,
the tax can only be levied when the option is exercised after fulfilling all the terms of the hire purchase agreement.
We cannot
agree with the view of the High Court that because in most of such
C cases the option is exercised, tax is leviable immediately on the
making of the hire purchase agreement ilnd that in a few cases
where there is failure to carry out the terms of the agreement or to
exercise the option, there can be adjustment by elimination of such
portion of the turnover. As we have pointed out the taxable event
D under the Act is the sale of goods and until that taxable event takes
place there can be no liability to pay tax. Therefore, even though
eventually most cases of hire purchase may result in sales by the
exercise of the option and the fulfilment of the terms of the agreement, tax is not exigible at the time when the hire purchase agreement is made, for at that time the taxable event has not taken place;
F it can only be exigible when the option has been exercised and all
the terms of the agreement fulfilled and the sale actually takes place.
When sale takes place in a particular case will depend upon the
terms of the hire purchase agreement but till the sale takes place
there can be no liability to sales tax under the Act.
The High
Court therefore was in error in holding that tramactions of" hire
F purchase <if the kind with which we are dealing having regard to
their main intent and purpose might be treated as sales at the
time the agreement is entered into; in all hire purchase agreements
of the type with which we are dealing sale only takes place when the
option is exercised after all the terms of the agreement are fulfilled
and it is at that time that the tax is exigible.
G
This brings us to the last question, namely, what is the quantum
of sale price which is to be the basis of taxation under the Act. The
argument on behalf of the appellant in this connection is that the
sale price in the particular cases with which we are concerned is
only Re. 1 / • which the hirer has to pay when he exercises his
option to purchase. On the other hand the.. contention on behalf
H
of the respondent is that the sale price is the entire amount paid by
the hirer to the financier and the tax is exigible on this entire
amount. We are of opinion that neither of these two contentions
126
SUPREME COURT REPORTS
[1965] 2 S.C.IL
is correct. It stands to reason that Re. 1 / - cannot be the price of A
a vehicle in these cases for even if the vehicle is treated as secondhand when the option is exercised the sum of Re. 1 / - would be an
absurd price for a second-hand vehicle of the kind with which we
are concerned.
The argument in this connection is that the entire
amount paid as hire is really for hire and the price is only the sum
of Re.