SUNDARAM FINANCE LTD. v. STATE OP KERALA AND ANOTHER
Citation: [1966] 2 S.C.R. 828; 1965 INSC 272
Court: Supreme Court of India
Bench: K. SUBBA RAO , J.C. SHAH , S.M. SIKRI
Judgment date:
Case summary
1965 INSC 272. Supreme Court of India judgment dated 1965-11-30. SUNDARAM FINANCE LTD. v. STATE OP KERALA AND ANOTHER. Read the judgment and case details on...
Judgment text
S32 SUPREME COURT REPORTS SUNDARAM FINANCE LTD. v. STATE OP KERALA AND ANOTHER November 30, 1965 [K. SUBBA R. Ao, J. C. SHAH AND S. M. S! KRI, JJ. ) Sales-tax-Ilire-purchase agreements-Motor vehicles purchased with loans taken from financiers-Financier whether liable ta sales-tax as having effected 'sale' through hire-purchase agreement-Travancate- Cochin General Sales-tax Act 11 of 1125 M. E. , s. 2(i), Explanation ( 1). The appellants \vere a limited company with their registered office a: - Madras. The O:>mpany carried on the business of financing purchases of motor vehicles on the security of those vehicles. A customer desirous ' of purchasing a motor vehicle but unable to pay the price to the dealer ' would make part payment to the dealer and then approach the appellants for a loan.
The appellants would advance the loan to the customer on the strength of nine documents executed by the customer one of which was a 'sale letter' purporting to sell the vehicle to the appellants on the date of the loan; another was a promissory-note agreeing to pay the difference between the price of the vehicle and the amount paid by the customer to the dealer and interest thereon at the stipulated rate. Another of these documents was the hire-purchase agreement itself; in cl. 6 1 it reci ed that on the custon1er paying the entire amount due under the second schedule to the agreement the vehicle would become the sole and absolute property of the customer. On September 28, 1958 the Sales-tax Officer, Ernakulam, issued a notice calling upon the appellants to file returns of their turnover from sales in the course of business and to secure regis! ration as dealerSi under the Travancore-Cochin Generai Sales-tax Act 11 of 1125 M. E.
and to furnish details of the transactions of sale with parties in the S cssion, and on condition of performing .. the convenants had a right to continue to remain in possession. The right of the appellants may be extinguished by payment of the amount due to them under the terms of the hire-purchase agreement even before the date fixed for payment. The agreements undoubtedly contained several onerous covenants but they were all intended to secure to the appellants recovery of the an1ounts advanced. The intention of the appellants jn obtaining hire-purchase and allied agreements \Vas to secure the return of loans advanced to their custor11ers. The transactions were merely finan-cial transactions. [844 C-HJ As there was no sale no sales-tax could be levied on the transactions JJ dccid~d by this Court in Gannon Dunkerley & Co. State of Madras v. Gannon Dunkerlev & Co. , [19591 S. C. R. 379, Re lVatscn Ex Parte Official Receiver in Baiikruptcy, (1890). 25 Q. B. D. 27. Mass v.
Pepper, (1905) A. C. 102 and Polsky v. S. And A. Service_\. , fl951] I All E. R. 185, referred to. K. L. Johar & Co. v. Deputy Commercial Tax Officer, A. I. R. (1965) S. C. 1082, distinguished. Per Subba Rao, J. (i) There was no question in the present case of going behind the documents executed by the parties to determine their true intentions. The transactions in question were in accordance with mercantile usage. Both the financiers and the customers entered with 830 SJJPREME COURT REPORTS [1966] 2 S. C. R. eyes o~n into transactions. of hire-purchase. Their intention was expressed in clear terms. They could have executed hypothecation bonds but they did not, and entered instead into hire-purchase transactions. There was no reason to camouflage the real nature of the transactions. None was suggested. They were therefore bound by the terms of the agreement.
[833 A-BJ (ii) Neither the fact that the agreemen1' were entered into because the customers had no funds to purchase the motor car nor the circumstance B-that part of the consideration was already paid to the dealer affects the nature of the transaction. The fact that the customer executed a promissory note for the money advanced by the financier does not affect the question for that was merged in the hirc-purcha:-ie transaction. If the said terms were not carried out the customers could not claim any rights under the agreements and the financier continued to be the owner frcel) fron1 any obligation created under the agreements. Could the financier thereafter return the promissory note ? He could not. The transactions purported to be hire-purchase agreements and they must be treated as such as the common intention of the parties was to enter into such transactions.
A deeper study of the transactions showed that the deale-r and the financier were closely connected Companies and for their own reasons they had split up the business of hire-purchase between them. In effect and in substance, the dealer without receiving the whole money put the customers in possession of the cars. under the hire-purchase agreements. [833 H; 834 CJ I> (iii) If the transactions were hire-purchase agreements in terms of the judgment of this Court in Ml s. K. L. Johar & Co. when all the terms of the agreements were satisfied and the option was exercised~. sales took place in the goods which till then had been hired. Having thus fructified into sales the transactions were liable to sales-tax. [331 B; 834 Bl Mis. K. L. Johar & Co. v. The Deputy Commerica/ Tax Officer, Coimbatore Ill, [1965] 2 S. C. R. , 112 relied on. • CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 673 and 677 of 1964.
Appeals from the judgment dated December 5, 1963 of the "1 Kerala High Court in Original Petition Nos. 1153, 1012, 1880, 1885 and 1886 of 1962. A. V. Viswanatha Sastri and R. Ganapathy Iyer, for appellant. P. Govinda Menon and M. R. K. Pillai, for respondent No. 1. SuBBA RAo, J. delivered a dissenting Opinion. The Judgment of SHAH and SIKRJ, JJ. was delivered by Shah, J. Subba Rao, J. I regret my inability to agree. The facts of the case and the arguments of learned counsel have been fully stated by my learned brother, Shah, J. , and I need not recapitulate • ' -"'' .. them here. \ The short question is whether the hire-purchase agreements entered into by the appellant with its customers are transactions SUNDARAM FINANCE v. KERALA (Subba Rao, !. ) 831 A of sale of goods or are only documents securing the return of the •• loans advanced by it to its customers.
It is common case that the said documents ex facie purported to be hire-purchase agreements and if that was their real character, in terms of the judgment of this Court in Messrs. K. L. Johar& (1959! s. c. R. 379. SUNDARAM FINANCE V. KERALA (Shah, J. ) 839 Explanation (2). - " It is in the light of this definition that the liability to tax of the transactions resulting from cl. 6 of the agreemen~ falls to be determined. If, by the operation of cl. 6, title to the vehicle is, under an existing contract to sell, transferred to the customer for a price, the transaction is a sale, and is taxable. The appellants are financiers and their business is to advance k>ans on favourable terms on the security of vehicles. This is effected by obtaining a promissory-note for repayment of the amount advanced, and a hire-purchase agreement which provides -a mechanism for recovery of the amount.
It is true that a "sale letter" is obtained from the customer, but the consideration for the sale letter is only the balance remaining payable to the dealer, after giving credit against the price of the vehicle the amount paid by the customer. The application for a loan, and the Tetter addressed to the appellants undertaking to insure the vehicle e;x-pressly mention that a loan is asked for and granted on the secufity of the motor-vehicle under the hire-purchase agreement. It is the customer who insures the vehicle, and in the books of the Motor Vehicle Authorities he remains, with the consent of the appellants, owner of the vehicle. Undue importance to the acknowledgment of sale in the "sale letter" and the recital of sale in the bill and in the receipt cannot therefore be attached.
These documents-"sale letter", bill and receipt-must be read with the application for granting a loan on the security of the vehicle, the letter in which the customer requests the appellants to pay the balance of the price remaining to be paid by him to the dealer, -the promissory-note executed by him for that amount, the undertaking to insure the vehicle, and intimation to the Motor Vehicles Authorities to make note of the hire-purchase agreement. The hire-purchase agreement executed by the customer undoubtedly contains several onerous covenants. The customer has to pay all rents, rates, taxes and other outgoings regularly, to take proper care of the vehicle, to get it insured, to keep it fully repaired, and not to assign, sell, pledge, charge, underlet, lend or otherwise to create any lien thereon. The hire-purchase agreement is liable to be determined if any of the eventualities mentioned in cl. 4 of the agreement happens and the appellants have A\ the right to seize the vehicle.
These covenants are only material _, in considering the true intention of the parties entering into the hire-purchase agreement, it is irrelevant that in a given case these covenants may not be enforced by a Court in a dispute arising between the appellants and the customer, or relief may be granted L8SupCl. /66-7 [1966] 2 S. C. R. on the ground that they contain penal clauses. In considering the true intention of the parties, the terms of cl. 6 of the hire-purchase agreement are important : it is stipulated thereby that "Upon the Hirer (customer) paying the entire amount due under -r Second Schedule herein, the said vehicle shall become the sole and absolute property of the Hirer. " The intention clearly dis-closed thereby is that on payment of the amount due at any tirne after the hire-purchase agreement, the vehicle would be free from encumbrance.
It is also to be noted that the agreement does not contemplate exercise of an option on payment of a nominal sum of money as is to be found in other hire-purchase agreements. Execution of the promissory-note, the hire-purchase agreement and the other documents, in our judgment, indicate that it was the intention of the parties not to transfer any interest in the vehicle by the customer to the appellants : it was intended to give security by hypothecating the vehicle in favour of the appellants and for ensuring repaymeu~ of the loau advanced that the customer submitted to the various onerous conditions of the hire-purchase agreement. A hire-purchase agreement is normally one under which an owner hires goods to another party called the hirer and further agrees that the hirer shall have an option to purchase the chattel when he has paid a certain sum, or when the hire-rental payments have reached the hire-purchase price stipulated in the agreement.
But there are variations when a financier is interposed between the owner of the goods and the customer. The agreement, ignor-ing variations of detail, broadly takes one or the other of two forms : ( 1) when the owner is unwilling to look to the purchaser of goods to recover the balance of the price, and the financier who pays the balance undertakes the recovery. In this form, goods are purchased by the financier from the dealer, and the financier obtains a hire-purchase agreement from the customer , under which the latter becomes the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The decision of this Court in K. L. Johar & Company v. Deputy 1 Commercial Tax Officer( ) dealt with a transaction of this character.
(2) In the other form of transactions, goods are purchased by the customer, who in consideration of executing a' hire-purchase agreement and allied documents remains in possession of , . the goods, subject to liability to pay the amount paid by the financier on his behalf to the owner or dealer, and the financier (1) {196S] 2 S. C. R. 112. SUNDARAM FINANCE v. KERALA (Shah, J. ) 841 ,_ " ' y obtains a hire-purchase agreement which gives him a licence. to seize the goods in the event . of failure by the customer to abide by the conditions of the hire-purchase agreement. The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents.
An owner of goods who purports absolutely to convey or - acknowledges to have conveyed goods and subsequently purports to hire them under a hire-purchase agreement is not estopped from proving that the real bargain was a loan on the security of the goods. If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subse-quent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into was to raise money. If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostensibly passes under the documents em-bodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer's title, and confer a licence to seize.
When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unques- ... tionably be a loan transaction. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due a&iJ. inst delivery of goods. But a hire-purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exercisable by the customer on payment of all the instalments of hire arises when the instalments are paid and not before.
In such a hire-purchase agreement there is no agreement to buy goods; the hirer b~ing under no legal obligation to buy, has an option either to return the goods or to become its . owner ,by payment in full of the stipulated hire and the price for exer- - cising the option. This class of hire-purchase agreements must be distinguished from transactions in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire-purchase [1966] 2 S. C. R. .. -· y agreement with the financier, but in substance evidences a loan transaction, subject to a hiring agreement under which the lender is given the licence to seize the goods. • A few illustrative cases decided by the courts in England, which do not import complications arising froIP the Bills of Sale Act, 1878 and the Hire Purchase Act, 1938, may be briefly noticed.
In Re Watson, Ex Parte Official Receiver in Bank-ruptcy (1) it was held that in adjudging the true nature of a transaction purporting to be a sale of personal chattels, followed by a hiring and purchase agreements, whereby the vendor agreed to hire the chattels from the purchaser and to pay quarterly sums -' for such hire, until a certain amount was paid, when the chattels were to become again the property of the vendor, and power was given ·to the purchaser to take possession of the chattels on de-fault of payment, the form of the transaction cannot be given undue importance. The Court held that no sale or hiring of the chattel was intended, the object in truth being to create a security for a loan of money to the supposed vendor from the supposed purchaser. The transaction was therefore one of loan. Lord Esher, M. R. , observed at p. 37 : " . . . . . . . .
when the transaction is in truth merely a loan transaction, and the lender is to be repaid his loan and to have a security upon the goods, it will be unavailing to cloak the reality of the transaction by a sham purchase and hiring. It will be a question of fact in each case whether there is a real purchase and sale il complete before the hiring agreement. If there be such a purchase and sale in fact and afterwards the goods -are hired, the case is not within the Bills of Sale Act. The docu~ent itself must be locked at as part of the evidence; but it is only part, and the Court must look at the other facts, and ascertain the actual truth of the case. " In Mass v. Pepper(') one M entered into a contract with a wine merchant under which the latter was to pro\'. ide £2,000 for purchasing the furniture of a hotel which was agreed to be purchased by M. The wine merchant paid £2,000 to the vendor who gave a receipt for that sum as part of a purchase money of the furniture.
M then executed a hire-purchase agreement in favour of the wine merchant and the wine merchant le~ the furniture to M to be paid for by instalments and the furniture not to become property of M till all the instalments were paid. It was . (I} [189\Jl 25 Q. B. D. 27. (2) [1905] A. C. 102. SUNDARAM FINANCE V. KERALA (Shah, J. ) 843 held by the House of Lords that the circumstances showed that the transaction was merely colourable and was a loan on the security of the hire 7purchase agreement. In Polsky v. S. and A. Services(') the plaintiff purchased a motor-car and gave a cheque for the price. Being unable to make arrangement for the cheque, he entered into a transaction with the defendants who carried on the business of financing the purchase of motor-cars.
Though the plaintiff had purchased the motor-car, and merely sought a loan, the transaction between him and the defendants was carried out by means of documents used by the defendants when financing purchase of motor-cars, and they purported to buy the motor-car from the plaintiff and to let it out to him under a hire-purchase agreement. The plaintiff then brought an action for a declaration claiming that hire-purchase agreement was void under the Bills of Sale Act, 1882. Lord Goddard, C. J. , in upholding the claim of the plaintiff observed at p. 188: . "A considerable number of cases were cited ..... . on the point which may, I think, be conveniently divided into two lines of authority. There is on the one hand, the class of cases, of which Yorkshire Railway Wagon Co. v. Mac/ure-(1882) Ch. D. 309-and British Railway Traffic & Electric Co. v. Kahn-(1921) W. N.
52-are good examples, where the transaction in question has been held to be a genuine sale followed by a hire-purchase agreement, and, therefore, unaffected by the Bills of Sale Acts, and, on the other hand, there is the class, which includes Re Watson, Ex p. Official Receiver in Bankruptc,v-(1890) 25 Q. B. D. 27-and Madell v. Thomas & Co. -(1891) 1 Q. B. 230-where the court has held, on facts not very dissimilar from those in the present case, that the real transaction was one of loan, and, therefore, it was avoided by reason of the Acts. There is no doubt, I think, as to the deciding principle. The Court has to determine whether the transaction in question is a genuine sale by the original owner of the chattel to the person who is finding the money and a genuine re-letting by the latter to the original owner on hire-purchase terms, or whether the transaction, though taking that form, is nothing more than a loan of money on the security of the goods. . . . . . . . . . .
The Court is not to look merely at the (I) [1951] I All E. R. 185. documents. It must discover what the real transaction was. As Lord Esher, M. R. , said [(1891) 1 Q. B. 234] in Made/Iv. Thomas & Co. : ". . . . . . the court is to look through or behind the documents, and to get at the reality; and, if in reality the documents are only given as a security for money, then they are bills of sale. " " In the light of these principles the true nature of the transactions of the appellants may now be stated. The appellants are carrying on the business of financiers : they are not dealing in -motor-vehicles. The motor-vehicle purchased by the customer is "' registered in the name of the customer and remains at all material times so registered in his name. In the letter taken from the customer under which the latter agrees to keep the vehicle insured, it is expressly recited that the vehicle has been given as security for the loan advanced by the appellants.
As a security for repayment of the loan, the customer executes a promissory-note for the 0 amount paid by the appellants to the dealer of the vehicle. The so-called "sale letter" is a formal document which is not made effective by registering the vehicle in the name of the appellants and even the insurance of the vehicle has to be effected as if the customer is the owner. Their right to seize the vehicle is merely a licence to ensure compliance with the terms of the hire-purchase agreement. The customer remains qua the· world at large the owner and remains in possession, and on condition of performing the covenants has a right to continue to remain in possession. The right of the appellants may be extinguished by payment of the -amount due to them under the terms of the hire-purchase agreement even before the dates fixed for payment. The agreement undoubtedly contains several onerous covenants, but they are all intended to secure to the appellants recovery of the amount advanced.
We are accordingly of the view that the intention of the appellants in obtaining the hire-purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions. The appeals will therefore be allowed with costs in this Court and the High Court. One hearing fee. ORDER In accordance with the opinion of the majority the appeals are allowed wi~h costs in this Court and the High Court. One hearing fee.
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