SUNDARAM FINANCE LTD. versus STATE OP KERALA AND ANOTHER

Citation: [1966] 2 S.C.R. 828 · Decided: 30-11-1965 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Appeal(s) allowed

Cited by 3 judgment(s) · cites 1 · see the full citation network in Lexace

Judgment (excerpt)

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. 
An-
other of these documents was the hire-purchase agreement itself; in cl. 6 
it reci 1ed 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<ate of Kerala in the year 1955-56, 1956-57 
and 1957-58. 
Later another notice 
was issued for the years 1958-59 
and 1959-60. The appellants contended that they were not liable to pay 
Sales-tax on their financing transactions as they mere :financiers and 
did not enter into any transactions of sale of goods with parties \Vithin 
the State of Kerala and that they were not 'dealers' under the Act. The 
Sales-tax Officer however held that they were dealers and that the hire-
purchase transactions entered into by them resulted in sales which were 
liable to sa!es-tax. 
According to the Sales-tax authorities between the 
date on which the customer agreed to purchase a vehicle and the date 
on which he became full owner \Vithout any 
encumbrance three 
sale 
transactions were interposed-a sale by the dealer of the vehicle to the 
customer; a sale by the customer to the appellants under the 'sale letter'~ 
and a sale by virtue of cl. 6 of the hire-purchase agreement-\vhile the 
second transaction was not liable to tax, the first and third were. 
The 
appeUants filed petition in the High Court praying for writ of certiorari 
and prohibition against the Sales-tax Officer. 
The High Court rejected 
these petitions. With certificate under Art. 133 (1) (a) of the Constitu-
tion the appellants came to this Court. 
HELD : Per Shah and Sikri, JJ. (i) 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, whateve·r 
may be the form of 
the documents. 
An owner of good' who purports to convey 
absolutely 
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SUNDARAM FINANCE V. KERALA 
829 
or ackno\vledges to have conveyed goods and subsequently purports to 
hire them under a hire-purchase agreement is not estopped from proving 
that the r..::al bargain was intended to be a J·uan on the security of the 
goods. [841 CJ 
(ii) A hire-purchase agreement 
is a complex 
transaction. 
The 
owner under a hire-purchase agreement enter5: 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 tbe 
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 being 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 stipu-
lated hire and the price for

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