FEDERAL BANK LTD. AND ORS. versus STATE OF KERALA AND ORS.

Citation: [2007] 4 S.C.R. 313 · Decided: 21-03-2007 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Dismissed

Judgment (excerpt)

FEDERAL BANK LTD. AND ORS. 
v. 
STATE OF KERALA AND ORS. 
MARCH 21, 2007 
[S. H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] 
Kera/a General Sales Tax Act, 1963; Section 2(viii)(g) as amended by 
Kera/a Finance Act, 1998-Banking Regulation Act, 1949; Sections S(b), 6, 
A 
B 
8, & 29-Contract Act, 1872-Section 176-Central Sales Tax Act, 1956; 
Section 2(g)-Sale of Goods Act, 1930; Section 4-Sale of pledged goods by C 
banks for realisation of defaulted loan-Liability to Sales Tax-Held, sale of 
pledged goods fall within the course of banking business and hence, banks 
are liable to sales tax under the Sales Tax Act. 
By the Kerala Finance Act, 1998, the definition of the word 'dealer' in 
section 2(viii) of the Kerala General Sales Tax Act, 1963 was expanded by D 
inserting clause (g) to cover a bank or a financial institution which, whether 
in the course of its business or not, sells any gold or other valuable article 
pledged with it to secure any loan, for the realisation of such loan amount. 
After the amendment, Revenue issued notices to appellant-Bank to furnish 
details of turnover relating to pledged gold auction sale and payment of sales 
tax on the sales turnover. The appellant contended that it is not a 'dealer' 
under the 1963 Act before and after amendment. 
The Bank filed an Original Petition before High Court challenging the 
validity of section 2(viii) (g) of the 1963 Act and the notices issued by the 
Revenue. The High Court dismissed the petition holding that the sale of F 
pledged articles are 'goods' and hence the Bank, after the amendment in the 
1963 Act, are 'dealers' and thus liable to sales tax. 
In appeals to this Court, the appellant-Banks contended that the 'sale' 
of pledged ornaments for realisation of security will not fall in the course of 
banking business under section 2(xxi) of the 1963 Act and hence such G 
transactions are not eligible to tax under the 1963 Act; and that such sale of 
pledged goods does not come within the definition of 'banking' under section 
S(b) of the Banking Regulation Act, 1949 also. 
Dismissing the appeals, the Court 
313 
H 
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314 
SUPREME COURT REPORTS 
[2007] 4 S.C.R. 
A 
HELD: 1.1. Sale of pledged assets takes place in the course of banking 
business. The banks, in selling the goods pledged to them, do not act as agents 
of the borrowers/pledgors and that their sale was in exercise of statutory 
power under the Banking Regulation Act, 1949. If Section 8 is read along 
with Third Schedule to the t 949 Act, it is clear that dealing in non-banking 
assets is a banking business and the exception made in section 8 of the Act 
B which allows banks to realize security and which allows banks to engage in 
trade in order to realize security falls within the banking business whenever 
undertaken. When a pledged article is sold in an auction, the bank recovers 
not only its dues but also recovers interests and its other charges. This 
realization falls within the parameters of the Third Schedule to the 1949 Act. 
C In the circumstances, the sale of pledged ornaments falls within the course 
of banking business under the 1949 Act. Such transactions are taxable under 
Section 2(viii) (g) read with Section 5 of the 1963 Act. 
(Para 11) (330-B; G-H; 331-A) 
1.2 The very object of the Kerala Finance Act, 1998 was to introduce 
clause (g) in section 2(viii) in order to get over the judgments of the High 
D Court whieh took the view that sale of pledged goods did not fall in the course 
of banking business. Clause (g) makes it very clear that even if the sale of 
pledged ornaments takes place outside the banking business, the 1963 Act 
would cover even such transactions. Therefore, once such transaction fall 
under Section 2(viii) (g) of the 1963 Act, banks become "dealers" and they 
E are liable to pay>ales tax under the said 1963 Act. (Para 11) (331-B) 
1.3 It is true that the definition of the word "sale" under Section 2(xxi) 
of the 1963 Act does not include mortgage, hypothecation, charge or pledge, 
however, the important point to be noted is that the definition of the word "sale" 
under the 1963 Act is not the same as under Section 4 of the Sale of Goods 
Act, 1930. The definition of the word "sale" in Section 2 (xxi) in the 1949 
F Act is very similar to Section 2 (g) of the Central Sales Tax Act, 1956 which 
is held to be having a very wide meaning as compared to the definition of the 
word "sale" in Section 4 of the Sale of Goods Act, 1930. Further, when charge 
or

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