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PETITIONER:

INSTALMENT SUPPLY LTD.

Vs.

RESPONDENT:

THE SALES TAX OFFICER, AHMEDABAD-I & ORS.

DATE OF JUDGMENT01/05/1974

BENCH:

CHANDRACHUD, Y.V.

BENCH:

CHANDRACHUD, Y.V.

ACT:

Gujarat Sales Tax Act-S. 2(28) whether state could goods

inside the State, but agreement entered into outside the

State.

Constitution of India, 1950-Art. 32-When a petition will

lie.

HEADNOTE:

The petitioner, a limited company with its registered office

in New Delhi, carries on business of financing purchase of

motor vehicles. The intending buyer of a motor vehicle

enters into a hire purchase agreement with the petitioner

company. Under the terms of the agreement the hirer makes

an initial deposit by way of premium as consideration for

granting the lease of the vehicle, which deposit becomes the

absolute property of the company. The hirer undertakes to

pay instalments and when all the instalments are paid the

vehicle becomes the property of the hirer at his option, on

payment of rupee one to the company. Till the completion of

the instalments the vehicle remains the property of the

company as owners but the hirer is responsible for any

damage or destruction or loss of the vehicle. Until the

option is exercised the hirer is at liberty to return the

vehicle and to put an end to the hiring agreement. The

contract of hire purchase was entered into in Delhi,

instalments were paid in Delhi, the option was exercised in

Delhi but the goods were inside the State of Gujarat which

taxed the sale.

Section 2(28) of the Gujarat Sales Tax Act which defines

sale enacts sale means the sale of goods made within the

State for cash or deferred payment or other valuable

consideration and includes any supply by a society or club

or an association to its members on Payment of a price or of

fees or subscription but does not include a mortgage,

hypothecation, charge or pledge..... " The explanation to

the definition states "For the purposes of this clause the

sale within the State includes a sale determined to be

inside the State in accordance with the Principles

formulated in sub-section (2) of section 4 of the Central

Sales Tax Act, 1956." Sub-section (2) of Section 4 of the

Central Sales Tax Act, 1956 enacts "A sale or purchase of

goods shall be deemed to take place inside a State if the

goods are within the State (a) in the case of specific or

ascertained goods at the time the contract of sale is

made.......

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On the question whether (1) the State of Gujarat could tax

the sales and (2) whether a petition under Article 32 lies

in this case

Dismissing the petitions,

HELD :-(a) In the present case the sale itself took place

only when the hirer exercised his option to purchase

and that was when the goods were inside the State of Gujarat

and therefore, the State of Gujarat was entitled to levy tax

on that transaction of sale. [392H-393A]

There can be no objection to the incorporation in s. 2(28)

of the Gujarat Act of the definition of sale inside the

State contained in s. 4(2) of the Central Sales Tax Act.

The Gujarat legislation could as well have incorporated the

very words of s. 4(2) of the Central Sales Tax Act in the

explanation to s. 2(28) and in either case it makes no

difference. [392E]

(b) There can be no objection to the State of Gujarat

taxing what according to the Central State Tax Act is a sale

inside the State of Gujarat. There can be no objection to a

State making a sale of goods which are inside the State at

the time the sale takes place liable to sales tax under its

legislation. The fact that the contract of hire purchase

was entered into in Delhi that the instalments were paid in

Delhi and the option itself was exercised in Delhi does not

make any difference to this result. All that it means is

that the

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agreement of sale was concluded in Delhi whereas the sale

itself was completed by the property in the goods passing in

Gujarat State and the sale therefore,. took place in Gujarat

State. [392F-G]

(c) There can be no objection the State of Gujarat levying

a tax in respect of the same goods even though those goods

may have been subject to tax earlier by the Delhi State.

There is no rule that any goods can be subjected to tax only

once. Even in respect of the same goods sales tax can: be

levied as often as there are sales. [392G-H]

Instalments Supply (p) Ltd. v. Union of India [1962] 2 SCR

644 referred to.

(2) The constitutionality of s. 2(28) of the Gujarat Act

has been, questioned and, therefore, the petition is

'maintainable. An application under Article 32 will lie (1)

where action is taken under a statute which is ultra vires

of the Constitution (2) where the statute is intra vires but

the action taken is without jurisdiction and (3) where the

action taken is procedurally ultra vires as where a quasi-

judicial authority under an obligation to act judicially

passes an order in violation of principles of natural

justice. [1393F-H]

[393 F-H]

Ujjambai v. State of U.P., [1963] 1 S.C.R. 778 followed.

JUDGMENT:

ORIGINAL JURISDICTION : Writ petition Nos. 129, 131 of

1969.

(Petition Under Article 32 of the Constitution of India).

Ved Vyas, Bishamber Lal, H. K. Puri, P. V. Kapur and S. C.

Patel, for the petitioner.

M. C. Bhandare, G. L. Sanghi, M. N. Siroff and R. N.

Sachthey, for the respondents.

The Judgment of the Court was delivered by-

ALAGIRISWAMI, J. The very same question that arises in these

three petitions, though from a different angle, was

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considered by this Court in an earlier litigation to which

the Petitioner was a party (Instalment Supply (P) Ltd. v.

Union of India, [1962] 2 SCR 644.) The question is when does

sale liable to sales tax take place under a hire purchase

agreement. On the earlier occasion it was the Delhi State

that sought to tax certain transactions under hire-purchase

agreements In the present case it is the Gujarat State that

has sought to tax certain transactions under certain hire-

purchase agreements.

The, petitioner is a limited company with its registered

office in New Delhi. It carries on the business of

financing the purchase of motor vehicles. The person

desiring to purchase a motor vehicle enters into a hire-

purchase agreement with the petitioner company. It may be

useful to give within a short compass the terms of the

agreement: The company charges the hirer an initial deposit

by way of premium as a consideration for granting the lease

of the vehicle, which deposit becomes the absolute property

of the company, the premium charged as aforesaid is a

substantial amount, being usually 25% of the prices in

respect of new vehicles. The hirer undertakes to pay

instalments and when all the instalments are paid, the

vehicle becomes the property of the hirer at his option, on

payment of rupee one to the company, as a consideration for

the option; until all the stipulated instalments have been

paid and the option exercised as aforesaid, the

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vehicle remains the property of the company as owners. The

hirer is delivered possession of the vehicle and he remains

responsible to the company for damage or destruction or

loss. The hirer has to pay interest at the rate of one per

cent per mensem on all sums overdue. Until the option of

purchase is exercised by the hirer he is at liberty to

return the vehicle and to put an end to the hiring

agreement, on certain terms. Thus, under the agreement the

hirer has the use of the vehicle which is entrusted to him

as the property of the company, and it is open to the hirer

to become the purchaser of the vehicle as aforesaid, but he

is not bound to do so.

The liability to sales tax on the earlier occasion arose

under the Bengal Finance (Sales Tax) Act, 1941, which was

extended to the State of Delhi. Under section 2(g) of that

Act 'Sale' means any transfer of property in goods for cash

or deferred payment or other valuable consideration,

including a transfer of property in goods involved in the

execution of a contract, but does not include a mortgage,

hypothecation, charge or pledge. There was an explanation

thereto as follows :

"Explanation I.. A transfer of goods on hire-

purchase or other instalment system of payment

shall, notwithstanding that the seller retains

a title to any goods as security for payment

of the price, be deemed to be a sale."

This Court pointed out that "the definition includes not

only what may be compendiously described as a sale under the

Sale of Goods Act, but also transactions, which, strictly

speaking, are not sales, not even contracts of sale, but

only contain an element of sale, that is the option to

purchase, and that is the reason why the explanation ends

with the words "be deemed to be a sale", thereby indicating

that a legal fiction has been introduced into the concept of

'sale' as ordinarily understood, and that the explanation

has included within its amplitude a mere transfer of goods

without the transfer of title to the goods."

To the attack oil behalf of the petitioner that the

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explanation, in so far as it sought to extend the concept of

'sale' to what in law was not a real sale, was

unconstitutional, this Court pointed out that in view of its

decision in Mithan Lal's case (1959 SCR 445) this contention

had lost all its force. In Mithan Lal's case this Court

upheld the right of Parliament to impose a tax on the supply

of materials in building contracts even though in the State

of Madras v. Cammon Dunkerley, & Co. (Madras) Ltd. (1959 SCR

379) it had been held that 'it could not be done. This was

on the basis that the power of Parliament to legislate in

respect of Part C States is untremmalled by the limitation

prescribed by Art. 246, Cls. (2) and (3), and Entry 54 of

List II, and is plenary and absolute and there is no

restriction which is material to the competency of

Parliament to legislate on this topic. Though this Court

did not say so the reference is obviously to Entry 97 of

List I of the 7th Schedule under which only Parliament would

be competent to legislate in respect of matters which are,

not mentioned in any other entry in the 7th Schedule and

therefore could

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pass a law which makes a transaction which would not be, a

sale under the Sale of Goods Act a sale for taxation

purposes which a State Legislature would not be competent to

do.

Before we proceed to deal with this case further it would be

useful to clear the ground by bringing out the legal

incidents of a 'sale' and of hire-purchase agreements.

These have been set out in the decision in the Installment

Supply case (1962 2 SCR 644) as well as another decision of

this Court in Johar & Co. v. C.T.O. (1965 2 SCR 112). We

propose to discuss this question for facilitating the

decision in the present case.

Section 4 of the Sale of Goods Act reads as follows

"4.(1) A contract of sale of goods is a

contract whereby the seller transfers or

agrees to transfer the property in goods to

the buyer for a price. There may be a

contract of sale between one part-owner and

another.

(2) A contract of sale may be absolute or

conditional.

(3) Where under a contract of sale the

property in the goods is transferred from the

seller to the buyer, the contract called a

sale, but where the transfer of the property

in the goods is to take place at a future time

or subject to some condition thereafter to be

fulfilled, the contract is called an agreement

to sell.

(4) An agreement to sell becomes a sale when

the time elapses or the conditions are

fulfilled subject to which the property in the

goods is to be transferred."

The definition is the same as in the English Sale of Goods

Act, 1893. The points to be noticed are that the essence of

sale is the transfer of the property in a thing from one

person to another for a prim. The term "contract of sale"

includes an agreement to sell. An agreement to sell is

known as an executory contract of sale, while, a sale is

known as an executed contract of sale. The term "contract

of sale" thus includes both actual sales and agreements for

sale. It is important to distinguish clearly between the

two classes of contract. An agreement to sell is a contract

pure and simple whereas a sale is a contract plus a

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conveyance. By an agreement to sell a jus in personam is

created, by a sale a jus in rein also is transferred. Where

goods have been soId and the buyer makes default, the seller

may sue for the contract price on the count of "goods

bargained and sold", but where an agreement to buy is

broken, the seller's normal remedy is an action for

unliquidated damages. if an agreement to sell be broken by

the seller the buyer has only a personal remedy against the

seller. The goods are still the, property of the seller,

and he can dispose of them as he likes. But if there has

been a sale, and the seller breaks his engagement to deliver

the goods, the buyer has not only a personal remedy against

the seller, but also the usual proprietary remedies in

respect of the goods themselves. In many cases, too, he,

can follow the goods into the, hands of third parties.

Again, if there be an agreement for sale, and

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the goods are destroyed, the loss as a rule falls-on the

seller, while, if there has been a sale, the loss as a rule

falls upon the buyer though the goods have never come into

his possession. (Chalmers' Sale of Goods Act 14th Edn. pp. 4

& 12; Halsbury's Laws of England, 3rd Edn., Vol. 34, paras

29 to 31).

A contract of sale should be distinguished from a contract

of hire-purchase. A contract of hire-purchase is properly

speaking a contract of hire by which the hirer is granted on

option to buy but is not, as under a contract of sale, under

a legal obligation to do so. The contract of hire purchase

is one of the variations of the contract of bailment, but it

is a modern development of commercial life, and the rules

with regard to bailments, which were laid down before any

contract of hire-purchase was contemplated, cannot be

applied simpliciter because such a contract has in it not

only the element of bailment but also the element of sale.

At common law the term "hire purchase" properly applied only

to contracts of hire conferring an option to purchase, but

it is often used to describe contracts which are in reality

agreements to purchase chattels by instalments, subject to a

condition that the property in them is not to pass until all

instalments have been paid. The distinction between these

two types of hire purchase contracts is, however, a most

important one, because under the latter type of contract

there is a binding obligation on the hirer to buy and the

hirer can therefore pass a good title to a purchaser or

pledge dealing with him in good faith and without notice of

the rights of the true owner, whereas in the case of a

contract which merely confers an option to purchase there is

no binding obligation on the hirer to buy, and a purchaser

or pledge can obtain no better title than the hirer had.

(Halsbury's Laws of England, 3rd Edn., Vol. 19,. para 823,

pp. 510-51 1). These propositions of law have been quoted

with approval by this Court in the two decisions earlier

referred to.

The main point to notice is that in a hire-purchase

agreement there is only an option to purchase and there is

no sale till that option is exercised. It is, however, this

option that was described, based on the statement of law in

Halsbury already referred to, as an element of sale in this

Court's decision in Instalment Supply case and the Parlia-

ment was held competent to levy a sales tax even though it

was riot a sale within the meaning of the term in the Sale

of Goods Act nor a sale as commonly understood. In Johar &

Co. v. C.T.0. (1965 2 SCR 112) this Court again had to

consider the incidents of a hire-purchase agreement. In

doing so it set out the nature of a typical hire-purchase

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agreement as distinct from a sale in which the price is to

be paid later by instalments in the following words :

"In the case of a sale in which the price is

to be paid by 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.

391

The essence of a sale is that the 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, and there is next an element of sale

which fructifies when the option to purchase,

which is usually a term of 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 by the intending

purchaser. The distinguishing feature of a

typical hire purchase agreement is that the

property does not pass when the agreement is

made but only passes when the option is

finally exercised after complying with all the

terms of the agreement

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 sat.--, 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 had 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 relevent time."

This Court thus pointed out that the taxable event is the

sale of goods. and the tax can only be levied when the

option is exercised after fulfilling all the terms of the

hire purchase agreement and that till the sale takes place

there can be no liability to sales tax under the Act.

In the earlier Instalment Supply case (1962 (2) SCR 644) La

which the petitioner was a party what was taxed was not in

reality a sale but only an agreement in which there was an

element of sale Even so, Parliament was entitled to

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legislate treating it as a sale and that is the reason why

this Court upheld the levy. But no State legislature is

competent to enact a legislation which would make a hire-

purchase agreement a deemed sale. It was so held in Johar's

case by this Court.

In the present case section 2(28) of the Gujarat Act defines

'sale' as follows :

"Sale" means a sale of goods made within the

State for cash or deferred payment or other

valuable consideration

L 177 Sup CI/75

392

and includes any supply by a Society or Club

or an association to its members on payment of

a price or of fees or subscription, but does

not include a mortgage, hypothecation, charge

or pledge; and the word "sell", "buy", and

"purchase" with all their grammatical

variations and cognate expressions shall be

construed accordingly.

Explanation : For the purposes of this clause,

a sale within the State includes a sale

determined to be inside the State in

accordance with the principles formulated in

subsection (2) of principles formulated in

sub-section (2) of Section 4 of the Central

Sales Tax Act,, 1955."

As according to the explanation a sale within the State

includes a sale determined to be inside the State in

accordance with the principles formulated in sub-s.(2) of

section 4 of the Central Sales Tax Act, 1956, it is

necessary to set out that sub-section here

"4.(2) A sale or purchase of goods shall be

deemed to take place inside a State if the

goods are within the State-

(a) in the case of specific or ascertained

goods, at the time the contract of sale is

made; and

(b).....................

The actual sale in this case fructified only when the hirer

exercised his option to purchase under the hire: purchase

agreement and at that time goods were inside the State of

Gujarat. We see no objection to the incorporation in

section 2(28) of the Gujarat Act of the-definition of a sale

inside a State contained in s.4(2) of the Central Sales Tax

Act. The Gujarat legislation could as, well have

incorporated the very words of s.4(2) of the Central Sales

Tax Act in the explanation to s.2(28) and in either case it

makes no difference. We also see no objection to the

Gujarat State taxing what according to the Central Sales Tax

Act is a sale inside the State of Gujarat. There can be no

objection to a State making a sale of goods which are inside

the State at the time the sale takes place liable to sales

tax under its own legislation. The fact that in this case

the contract of hire purchase was entered into in Delhi,that

the instalments were paid in Delhi and the option itself was

exercised in Delhi does not make any difference to this

result. All that it means is that the agreement of, sale

was concluded in Delhi whereas the sale itself was, if we

may say so, completed by the property in the goods passing

in Gujarat, State', and the therefore, took place in Gujarat

State. Nor do we see any objection, to Gujarat levying a

tax in respect of same goods even though those, goods may

have been subjected, to tax earlier by the Delhi State.

There is no rule that any goods can be subjected to tax,

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only once even in respect of the same goods sales tax can be

levied as often as there are sales. In the present case

there was really no sale when the hire-purchase agreement

was entered into, though that transaction was made liable to

tax as a result of a legal fiction which the Parliament was

entitled to 'create. The sale itself took place only when

the hirer exercised his option to purchase and that was when

the goods were

393

inside the State. of Gujarat. and therefore the State of

Gujarat was entitled to levy a tax on that transaction of

sale.

We may however point out that the definition of "sale" in

the Bengal Finance (Sales Tax) Act applicable to the State

of Delhi has been amended in 1959 by Act 20 of 1959 and

reads as follows

"Sale", with its grammatical variations and

cognate expressions means any transfer of

property in goods by one person to another for

cash or for deferred payment. or for a

ny other

valuable consideration, and includes a

transfer of goods on hire-purchase or other

system of payment by instalments but does no

include a mortgage or hypothecation of or a

charge or pledge on goods.

Explanation.-Al sale or purchase of goods

shall be deemed to take place inside the Union

territory of Delhi if the goods are within

that territory--

(i) in the case of specific. or ascertained

goods, at the time the :contract of sale is

made; and

(ii) in the case of unascertained or future

goods, at the time of their appropriation to

the contract of sale by the seller or by the

buyer, whether assent of the other party is

prior or subsequent to such appropriation."

This definition is, in effect, the same as the one in the

Gujarat Act. Therefore, the type of transactions which were

subjected to tax in the earlier Instalment Supply case will

not be subject to taxation hereafter and the problem of the

same transaction being subjected to taxation at two

different stages will not arise.

Finally we may refer to an objection taken by Mr. Bhandare

on behalf of the State of Gujarat that no petition under

Art. 32 of the Constitution lies in this case. He relied on

the decision in Ramjilal v. Income-tax Officer,

Mohindergarh'(1951 SCR 127) for this conten But in view of

the decision of this Court in Smt. Ujjam Bai v. State of

Uttar Pradesh (1963 1 SCR 778) we are of opinion that there

is no substance in this contention. It was there held that

"an application under Art, 32 will lie (1) where action is

taken under a statute, which is ultra vires of the

Constitution, (2) where the statute is intra vires but the

action taken is Without jurisdiction, and (3) where the

action taken. is procedurally.ultra vires as Where a quasi-

judicial authority under an obligation to act

judicially passes an order in violation of the principles of

natural justice." The constitutionality of s.2(28) of the

Gujarat Act has been questioned, and therefore the petition

is maintainable.

The petitions are dismissed. There will, however, be no

order as to costs.

P.B.R. Petitions dismissed.

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