K. L. JOHAR AND COMPANY versus DEPUTY COMMERCIAL TAX OFFICER

Citation: [1965] 2 S.C.R. 112 · Decided: 10-11-1964 · Supreme Court of India · Bench: P.B. GAJENDRAGADKAR · Disposal: Case Partly allowed

Cited by 4 judgment(s) · cites 1 · see the full citation network in Lexace

Judgment (excerpt)

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 Explana-
tlon--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 instal-
ments 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 peti-
tion 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 agree-
ment 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. 
There-
fore 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 exer-
cised a sale takes place of the goods which till then bad been hired. When 
this s

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