INSTALMENT SUPPLY LTD v. THE SALES TAX OFFICER & Ors.

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 afore said, 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 trans fer of property in goods for cash or deforred payment or other valu able consideration, including a transfer of property in goods involved in the execution of a contract, but does not include a mortgage, hypo the cation, 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 pa; yment 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 'contract~ of sale' but only contain an element of sale, that 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 ordi narily understood, and that the explanation has included within its amplitude a mere transfer of goods without the transfer Of title to the goods. " To th~ attack on behalf of the petitioner that the explanation, in F so far as 1t sought to extend the concept of 'sale' to what in law was not a real sale, was unconstitutional, this Court pointed out that in vieV: of its decision .in Mithan Lat's case (1959 SCR 445) this con tenti'?n had lost .all its fore~. In Mithan Lal's case this Court upheld th~ r!ght of Parhament to impose a tax on the supply of materials in buildrng contracts even though in the State of Madras v.

Cannon Dun ~erley & Co. (Madras) Ltd. (1959 SCR 379) it had been held that G it could not. be do.ne. This was on the basis that the power of Parlia ment to 'egislate m respect of Part C States is untremmalled by the 1imit~tions presc~ibed by Art. 246, Cls. (2) and (3), and Entry 54 of Ltst II, and 1s plennary and absolute and there is no restriction whi.cb is material !O 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 H would be competent to legislate in respect of matters which are not mentioned in any other entry in the 7th Schedule and therefore could • " • -. G • H INSTALMENT SUPPLY LTD. v. S.T.O. (Alagiriswai;1i, J.) 389 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 Legis lature 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 Instalment 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). 'll'e 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. ( l) 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 con tract called a sale, but where the transfer of the property in the goods is to take place at a future tinie 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 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 price. 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 in It is important to cludes both •actual sales and agreements for sale. 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 conveyance. By an agreement to sell a jus in personam is created, by a sale a jus in rem also is transferred. Where goods have been sold 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 unliquidat ed 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 de liver the goods, the buyer has not only a personal remedy against the seller, but also the usual proprietary remedies in respect of the goods In many oases, too, . he can follow the goods into tbc themselves. hands of third parties. Again, if there be an agreement for sale, and :~ I !in ·t~' J ••• ' ,. ' f .. J ·-Ji, ~ the goods are destroyed, the loss as a rule falls on the seller, while if them 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 hirn 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 con tract of hire purchase is one of the variations of the contract of bali mcnt, but it is a modern development of commercial life, and the rules with regard to bailments, which were laid down before any contract of hir~-purchas-c was contemplated, cannot be applied simpliciter, because such a contract has in it not only the element of bailment but also th3 element of sale. At common law the term "hire purchase" properly applied only to contracts of hire conferring an option to pur chase, but it is often used to describe contracts which are in reality agrcemcnls 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 con tracts 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 pledgee 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 pledgce can obtain no better title than the hirer had. (Halsbury's Laws of England, 3rd Edn., Vol. 19, para 823, pp. 510·511). These propositions of law have been quored with approval by this Court in the t'\'o decisions earlier referred to. A Jl. c D E 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· meftt was held competent to levy a sales tax even though it was not 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.O. (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 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 tron5fers the property in the goods to the buyer for a price. • G H A B · i:NSTALMENT SUl'PLY LTD. v. S.T.O. (Alagiriswami, J.) .. 391 The essence o~ a sale is that the property· is transferred from the sell~r to t?1e buyer for _a price, whether paid at cnce or paid _later in -instalments, on the other hand, -a hire purchase agreement, as its v~ry name implies, bas 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 ,11 hire purchase agreement properly so .called is that the propeny in the goods does not. pass at the tim, of the agreement but remains in the intending seller, and only passes later wlien the option is exercised by the fatend ing purchaser. The distinguish_ing feature of a ·typical hire nurchase a~eement is that 'the prop:rty does not pass when the agreement is made but only._ passes when· the option is finaily. exercised after complying with all the. terms of agreement · The next. question that arises is· whether a hire purcha.e 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 sai.,, in _the sense that it contemplates ·an. eventual sale.· The ele- ment of sale fructifies when the option is exercised by the intending purchaser after fulfilling the terms of the a~eement. When· all the terms of the. agreement are satisfied and the option is exercised a sale takes plac' of the gocids which till . then had been hired. When this sale takes pl:ice it will be liable tn sales tax under· the Act for the taxable· event urui;r the A ct is the taking place of the sale, the Act provid- ing for a multi-P?int 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 ful~ filling all the . terms of the hire purchase agreement and that till t!;i sale takes place there can be nci liability to sales tax under the Act.

In the earlier Instalment Supply case (1962 (2) SCR 644) w which the petitioner was a party. what was taxed was .no.t in roolity · a sale but only an agreement in which there was an element· of sale. Even so,_ Parliament was entitled to· legislate treating it as a sale dml that is the·reason··why this Court upheld the levv .. _,But no State fegis lature· is competent to ·•nae! a le, Pslation which would m•ke a hire purchase agreement a deemed sale. It was so. held in Johar's case by thi~ Court. -.. In.the present.case s~ction 2(28) of _the Gujarat Act d-,fines 'sale' as follows : "Sale" means a sale of goods made within the State for cash: or deferred rayment or other valuable consideration 7-L In Sury Cl/75 a.nd includ.es any supply by a Society or Club or an associa- tio~ to tts members on payment of a price or of fees or sub- scnpt10n, but does not include a mortgage, h1ypothecation, "pur- charg·;, or. pledge; a~d the word "sell", "buy", and . with all their grammatical variations and cognate ·expressions shall be construed accordingly.

Explanation : For the purposes o(this dausc, a sale within the State includes a sale determined to be inside the State m accordance with the principles -formulated in sub-section (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 Staie 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 .defi· nition 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 s·ee 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 Iiabk to sales tax under its own legis lation. 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 agr·oement of sale was con· duded in Delhi whereas the sale itself was, if we may say so, com pleted by the property in the goods passing in Gujarat State. and the sale, therefore, took place in Gujarat State.

Nor do we see any object tion 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 only onc·e. Even in respect of the same goods sales tax can be levied as often as In the present case there was reaUy no sale when the there are sales. hire-purchase agreenient 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. Th~ sale itself took place only when the hir·er ,exersised his option to purchase and that was when th~ goods were A B c E t F G H INSTALMENT SUPPLY LTD. v. S.T.O. (Alagiiiswami, 1.) . . 39 3_ A inside th<: State of Gujarat.. and therefore the State of Gujarat was ·. entitled t.o 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 ancl cognate- expressions means any · tran5fer ·of property in goods by one person to ,another for cash or for deferred paymenl or for any 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.-. A, sale or pprchase of . goods shall . . be deemed !O take place inside the Uilion territory of Delni 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 cas;; of unascertained or future goods, at·the. time of their appropriation to the contracr of sale by the seller or hy the. buyer, whether assent of the other party is . prior or subsequ.ent to such appropriation.