Sundaram Finance Ltd. Vs. State of
Kerala & ANR  INSC 269 (30 November 1965)
30/11/1965 SUBBARAO, K.
CITATION: 1966 AIR 1178 1966 SCR (2) 828
vehicles purchased with loans taken from financiers-Financier whether liable to
sales-tax as having effected 'sale' through hire-purchase agreement-Travancore
Cochin General Sales-tax Act 11 of 1125 M.E., s. 2(i), Explanation (1).
The appellants were a limited company with
their registered office at Madras. The Company 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
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 hirepurchase agreement itself; in cl. 6 it recited that
on the customer 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, Ernakulum, issued a
notice calling upon the appellants to file returns of their turnover from sales
in the course of business and to secure registration as dealers under the
Travancore-Cochin General Sales-tax Act 11 of 1125 M.E. and to furnish details
of the transactions ,of sale with parties in the State 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. 'Me appellants contended that they were not liable to pay
Salestax on their financing transactions as they mere financiers and did not
enter into any transactions of sale of goods with parties within '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 sales-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
without 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-while the second transaction was not liable to tax, the
first and third were. The appellants 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 Constitution the appellants came to
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, whatever may be the form of the
documents. An owner of goods who purports to convey absolutely 829 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
intended to be a loan on the security of the goods. [841 C] (ii) A
hire-purchase agreement is a complex transaction.
The owner under a 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 installments of hire arises when the installments 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 stipulated
hire and the price for exercising 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 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. [841
G-842 B] (iii)The appellants were financiers; they were not dealing in motor
vehicles. The motor vehicles purchased by 'the customer was registered in the
name of the customer and remained at all material times so registered in his
In the letter taken from the customer under
which he agreed to keep the vehicle insured, it was expressly recited that the
vehicle had been given on security for the loan advanced by the appellants. As
a security for repayment of the loan, the customers executed a promissory note
for the amount paid by the appellants to the dealer of the vehicle. The socalled
'sale-letter' was a formal document which was not made effective by registering
the vehicle in the name of the appellants and even the insurance of the vehicle
had to be effected as if the customer was the owner. The appellants' 'right to
seize the vehicle was merely a licence to ensure compliance with the terms of
the hire-purchase agreement.
The customer remained qua the world at large
the owner, and remained in possession, 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 hirepurchase
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 amounts advanced. The intention of the appellants in obtaining
hire-purchase and allied agreements was to secure the return of loans advanced
to their customers. The transactions were merely financial transactions. [844
C-H] As there was no sale no sales-tax could be levied on the transactions as
decided by this Court in Gannon Dunkerley & Co. State of Madras v. Gannon
Dunkerley & Co.,  S.C.R.
379, Re Watson Ex Parte Official Receiver in
Bankruptcy, (1890). 25 Q.B.D. 27. Mays v. Pepper, (1905) A.C. 102 and Polsky v.
S. And A. Services  1 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 eyes open into transactions of hire-purchase. Their intention was ex.
pressed 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-B] (ii)Neither the fact that the
agreements were entered into because the customers had no funds to purchase the
motor car nor the circumstance 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 hirepurchase 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 freed from any
obligation created under the agreements. Could the financier thereafter return
the promissory note ? He could not. The transactions purported to he
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 dealer 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
hirepurchase agreements. [833 H; 834 C] (iii) If the transactions were
hire-purchase agreements in terms of the judgment of this Court in M/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. [831 B; 834 B] M/s. K. L. Johar & Co. v. The Deputy Commerical
Tax Officer, Coimbatore III,  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 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 SIKRI, JJ. was delivered by Shah, J.
Subba Rao, J. I regret my inability to agree.
The facts of the case and the arguments of earned 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
831 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 &
Co. v. The Deputy Commercial Tax Officer, Coimbatore III(1), when all the terms
of the agreements were satisfied and the option was exercised, sales take place
in the goods which till then had been hired. The contention, therefore, was
that in executing the documents the common intention of the parties was that
they should be documents securing the loans and that the form of hire purchase
agreement was adopted to achieve that purpose.
At the outset the nature of hire-purchase
agreements may be briefly noticed. Hire-purchase agreements have come to stay
as part of the social service in the commercial world. It enables persons of
ordinary means to buy the necessities of life which the modern scientific
advancement offers. Under that system one can buy a car, a refrigerator,
furniture, cooking apparatus, and as a matter of fact any article of utility.
It enables the hirer to own the article of his choice by paying on easy installments,
and the dealer to provide it for him for profit without any risk to himself, It
has become a common and familiar instrument of mercantile social service.
Simonds, J., in Transport and General Credit Corporation Ltd. v. Morgan (2)
"It must be remembered that
hire-purchase agreements now play a very large part in the commercial and
social life of the community, and the financing of those hire-purchase
agreements is an enormous business, both in the city of London and elsewhere.
It appears to me that the financiers and the dealers cooperate in the common
venture of making feasible the whole business of hire-purchase agreements,
which is now, for good or for evil, a necessary part of our social life. To
regard one party to that common venture, which is now a recognized mercantile
service, as carrying on the business of a money-lender is, as I have said
before, an abuse of language." What is true of England is, to a lesser
degree, true of India, particularly in the big cities of India.
Now, let us see how this system was evolved.
At first the said transaction took place directly between a dealer and his, (1)
 2 S.C.R. 112.
(2)  2 All E.R 17, 28.
832 customer : the dealer wanted to sell his
goods and the buyer was not in a position to pay the entire sale price of the
goods in one lump sum. The parties, therefore, entered into hire-purchase
agreement where under the dealer continued to be the owner till the entire
consideration was paid by the customer in terms of the agreement and till he
had exercised his option to buy the goods covered by the said agreement.
But the dealer was not always financially
sound enough to wait till such time as all the installments would be paid.
The second stage in the evolution in the
hire-purchase system was when a financier intervened between the dealer and the
customer. The financier used to purchase goods from the dealer and then to
enter into an agreement with the customer. At that stage the financier became
the owner and the customer became the hirer till such time as he carried out
the terms of the agreement. A further variation of the transaction was that the
customer purchased the goods by paying the entire consideration to the dealer
with the help of the financier; he then sold the goods to the financier and
entered into an agreement of hire-purchase with him. In this type of
transaction, the dealer went out of the picture altogether : the financier took
the place of the dealer and the customer continued to be the hirer. Sometimes,
as the present case illustrates, the customer might find some money but could
not provide the whole consideration. In that event also, the transaction could
be put through in the aforesaid manner either with the dealer or the financier,
as the case may be.
The object of the hire-purchase system was to
help to finance the customer in order that he might purchase the property.
Though that was the object, the transaction took the form of hire purchase
agreement. The main feature of the agreement, apart from small variations, was
that the dealer or the financier continued to be the owner till the terms of
the agreement were fully complied with by the customer and the option to
purchase the same was exercised by him. If the terms were not complied with,
the dealer or the financier, as the case may be, could terminate the agreement
and take back the goods. In such a transaction, the common intention of the
dealer, the financier and the customer was that the transaction should take the
form of a hire purchase agreement which would become a sale on the compliance
of the terms of that agreement. No doubt the financing operation could have
taken the form of a mortgage or pledge, but the parties, for their mutual
benefit and convenience, entered into a hire-purchase transaction.
833 In the absence of any fraud or undue
influence, the question resolves itself into a simple question of intention.
The transactions were in accordance with the mercantile usage.
Both 'the financier and the customers with
open eyes entered into the transactions of hire-purchase. Their intention was
expressed in clear terms. They could have executed hypothecation bonds, but
they did not, and instead entered 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 agreements.
The subtle distinction sought to be made
between the transactions in question and other transactions are out of place :
little clues have no bearing, as there was no attempt to camouflage the real
nature of the transactions. It may be that the consideration was not the full
value, but nothing prevented the owners from selling their cars for a smaller
price, for they expected to got them back on their returning the amount in
terms of the agreements. The circumstance that there was no express term for reconvening
is not material, for the term that on the compliance of the terms of the
agreement the hirer would become the owner would serve the same purpose.
The whole fallacy of the argument lies in the
attempt to equate such commercial transactions with ordinary sales of property
and agreements to evade statutory provisions. it is true that in India there
are reports replete with decisions where courts attempted to find out the real
intention of the parties when documents were executed to hide their real
intention. There are also decisions, both in India and in England, where courts
applied various tests to find out the real intention of a document when it was
executed to evade certain statutory provisions. These decisions have no bearing
in the context of a hire-purchase agreement entered into in the course of
business. All the parties knew the nature of the transaction and accepted the
terms embodied there under.
In the present case the transactions were
admittedly hire purchase agreements. The financier purchased the cars for the
amounts required to be paid to the dealer and entered into specific
hire-purchase agreements with the customers.
They contained all the usual terms that are
found in a hire purchase agreement. Neither the fact that the agreements were
entered into because the customers had no funds to purchase the motor-cars nor
the circumstance 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 834 the financier does not affect the
question, for that was merged in the hire-purchase 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 freed from any
obligation created under the agreements. Can the financier thereafter enforce
the promissory note ? I think he cannot. As I have stated earlier, 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 scrutiny of the transactions shows that the dealer and
the financier were closely connected companies and for their own reasons they
have 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.
For the aforesaid reasons, I hold that if the
agreements had fructified into sales, they were liable to sales-tax. The High
Court, in my view, gave a correct answer to the question propounded for its
In the result, the appeals fail and are
dismissed with costs.
Shah, J. On September 29, 1958 the Sales Tax
Officer, 1st Circle, Ernakulam, issued a notice calling upon the appellants to
file returns of their turnover from sales in the course of business and to
secure registration as dealers under the Travancore-Cochin General Sales Tax
Act 11 of 1125 M.E. and to furnish details of the transactions of sale with
parties in the State of Kerala in the years 1955-56, 1956-57 & 1957-58. A
similar notice was issued by the Sales Tax Officer on March 3, 1962 in respect
of the transactions within the State for the years 1958-59 and 1959-60. The
appellants contended that they were not liable to be assessed under the Act.
They contended that they were mere financiers and that they did not enter into
any transactions of sale of goods with parties within the State of Kerala and
that they were not "dealers" within the meaning of the Act.
The Sales Tax Officer by orders dated March
25, 1962 and July 6, 1962 held that the transactions between the appellants and
certain parties within the State of Kerala were sales within the meaning of the
Act and the appellants were dealers liable to be assessed under the Act. The
Sales Tax Officer accordingly reiterated his demand upon the appellants to file
returns of their turnover in respect of sales for the five years in question
along with details of all transactions in the State and "to produce
prove the correctness and completeness of
835 The appellants then moved the High Court
of Kerala under Art. 226 of the Constitution for writs of certiorari quashing
the proceedings of the Sales Tax Officer and for writs of prohibition
restraining that Officer from taking further proceedings against the appellants
under his orders dated March 25, 1962 and July 6, 1962. The High Court of
Kerala rejected these petitions upholding the view of the Sales Tax Officer
that on the transactions between the appellants and their customers sales tax
was payable under the Travancore-Cochin General Sales Tax Act. With certificate
granted by the High Court under Art. 133(1) (a) of the Constitution, these
appeals are preferred.
The appellants are a company incorporated
under the Indian Companies Act, 1913, and have their registered office in
Madras. The Company carries on business of financing purchases of motor
vehicles on the security of those vehicles. The manner in which these
transactions were effected is briefly this. A customer desirous of purchasing a
motor-vehicle, but unable to pay the price to the dealer, agrees to purchase
the vehicle and makes part payment of the price to the dealer. He then
approaches the appellants and requests that a loan be advanced to him. On the
appellants' agreeing to grant a loan, the customer executes nine documents-(1)
an application requesting the appellants to grant a loan of a stated amount on
the security of the motor vehicle; (2) a "sale letter" reciting that
the customer had on the date of the application for loan sold to the appellants
the motor-,vehicle; (3) a bill which recites that for the amount mentioned in
the "sale letter" and received in full, the customer has sold to the
appellants the vehicle belonging to the customer; (4) a receipt for the amount of
the bill describing it as the value of the vehicle sold to the appellants; (5)
an agreement called the hire-purchase agreement under which the appellants
agree to let out to the customer and. the customer agrees to take on hire the
motor vehicle for a specified term subject to determination on conditions
mentioned therein; (6) 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; (7) a letter from the customer
requesting the appellants to pay to the dealer the amount agreed to be advanced
to him; (8) a letter addressed to the appellants agreeing and undertaking to
keep the vehicle, on the security of which the loan was granted, insured against
"comprehensive risks"; and (9) a letter addressed to the Motor
Vehicles Authorities intimating that the motor-vehicle "is the subject of
hire. purchase agreement between the customer "as owner" and the
appellants, and requesting the Authorities to "make a note of the 836
hire-purchase agreement" in the registration certificate standing in the
name of the customer. The scheme for financing the purchase of the vehicle is
therefore that the customer purchases the vehicle from the dealer directly and
gets it registered in his name. At his request the appellants agree to advance
the balance of the price remaining to be paid, and pay it to the dealer on the
customer's executing a promissory-note for repayment of the amount, a
hire-purchase agreement and other related documents. On repayment of the amount
stipulated to be paid, the vehicle becomes the sole and absolute property of
The relevant terms of the hire-purchase
agreement may now be set out. In the preamble of the agreement, it is recited
that the agreement is between the appellants to be described as "the
owners" the customer to be described as "the Hirer" and
"the Guarantor", who guarantees due performance and observance by the
customer of all the clauses and covenants of the agreement and agrees to pay on
demand any monies due or which may become payable to the owners under the
agreement either by way of hire expenses or damages, repairs, replacements or
other supplies. By the first clause it is recited that the owners (the
appellants) will let and the hirer (the customer) will take on hire the motor
vehicle for a specified number of calendar months subject to determination as
mentioned in the agreement. Clause 2 sets out the conditions of hiring. Thereby
the customer agrees to pay rent to the appellants punctually; to take proper
care of the vehicle and keep it in good condition and to keep it insured for
its full value; to pay all rents, rates, taxes payable by him in respect of the
premises where the vehicle shall for the time being be garaged and all licence
fees, insurance premium and other duties payable in respect of the said
vehicle; to keep the vehicle in his sole custody and possession; and to permit
the appellants to inspect the vehicle at all reasonable times during the
hiring; not to cause, permit, allow or suffer any person to acquire any lion on
the vehicle; not to cause, permit or allow or suffer the vehicle to become
liable to distress, execution or any other process levied or issued against the
customer; and not to assign, sell, pledge, charge, under let, lend or otherwise
part with the possession, custody or beneficial interest in the vehicle of the
customer therein under the agreement without the consent of the owners. By cl.
3 all monies payable to the customer by any insurer for loss or damage to the
motor-vehicle are assigned to the owners.
Clause 4 sets out the conditions in which the
agreement is to stand determined without any notice to the customer.
Those conditions are 837 (a) failure to pay
any of the hiring installments within the stipulated time;
(b) customer becoming insolvent or
compounding with his creditors;
(c) customer pledging or selling or
attempting to pledge or sell or otherwise alienate or transfer the vehicle;
(d) customer suffering any act or thing whereby
or in consequence of which the vehicle may be distrained, seized or taken in
execution under legal process;
(e) customer breaking or failing to perform
or observe any conditions.
On the determination of the agreement all the
installments previously paid by the customer stand forfeited to the owners who
shall thereupon be entitled to sieze the vehicle and to sue for all the installments
due and for damages for breach of the agreement. Under cl. 5 the customer has
the option at any time to determine the agreement by delivering up the vehicle
at his own cost to the owners, and by cl. 6 on the customer paying the entire
amounts due under the second schedule, the vehicle becomes the sole and
absolute property of the customer. By el. 7 it is provided that if the
appellants seize the vehicle and take possession of it under cl. 4, or if the
customer returns it under cl. 5, the customer shall remain liable to the
appellants for arrears of the amount of hire up to the date of such seizure or
return. Under cl. 8 it is agreed that the customer shall maintain registration
of the vehicle in his own name, provided that the customer shall transfer the
registration in the name of the appellants whenever required to do so by them,
and especially when the customer commits a breach of any of the conditions of
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 of the vehicle without any encumbrance,
three sale transactions were interposed : a sale by the dealer to the customer;
a sale by the customer to the appellants under the "sale letter"
referred to earlier; and a sale by virtue of cl. 6 of the hire-purchase
agreement. It is common ground that the first transaction is taxable under the
appropriate Sales Tax Act. On behalf of the State of Kerala it is conceded that
the second transaction is not taxable, but it is so because the customer is
ordinarily not a dealer within the meaning of the Act, but they contend that
inasmuch as under that transaction the appellants 838 become transferees of the
rights of the customer in the vehicle under the sale letter, when by the
operation of cl.
6 of the hire purchase agreement the rights
of the appellants are extinguished, there results a sale in favour of the
customer which is taxable under the Act. We are in this case concerned with the
exigibility to tax of what the State of Kerala contends is a sale resulting
from the payment of all the installments under the hire-purchase agreement.
The appellants submit that execution of a
"sale letter" by the ,customer acknowledging sale of the vehicle to
them does not create in them any right of ownership, the "sale
letter" being merely one of a set of documents under which arrangement for
granting a loan and for ensuringrepayment of the money advanced by the
appellant's is made. The appellants say that they do not become owners of the
vehicle under the "sale letter", that the true effect of the
transaction on the execution of the nine documents is to hypothecate the
vehicle in favour of the appellants, that the vehicle ,continues to remain of
the ownership of the customer, and that under cl. 6 of the hire-purchase
agreement there is extinction of ,encumbrance and not a transfer of title which
may be called a sale taxable under the 'Travancore-Cochin General Tax Act.
The Travancore-Cochin General Sales Tax Act
11 of 1125 M.E.
was brought into force in May 1950. The State
authorities had, it is conceded, no power to enact a statute for levying tax on
a transaction which does not conform to the definition of 'sale' within the
meaning of the Indian Sale of Goods Act : State of Madras v. Gannon Dunkerley
& Co. (Madras) Ltd.(1) The 'Travancore-Cochin General Sales Tax Act by S.
2(j) defines 'sale' as follows :
" ' sale' with all its grammatical
variations and cognate expressions means every transfer of the property in
goods by one person to another in the course of trade or business for cash or
for deferred payment or other valuable consideration and includes also a
transfer of property in goods involved in the execution of a works ,contract,
but does not include a mortgage, hypothecation', charge or pledge;
Explanation (1).--A transfer of goods on the
hire purchase or other installment system of payment shall, notwithstanding the
fact that the seller retains the title in the goods as security for payment of
the price, be deemed to be a sale.
(1)  S.C.R. 379.
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 agreement 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
The appellants are financiers and their
business is to advance loans 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
letter addressed to the appellants undertaking to insure the vehicle expressly
mention that a loan is asked for and granted on the security 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 out goings 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 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 pCI.166-7 840 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 there-by that
"Upon the Hirer (customer) paying the entire amount due under Second
Schedule herein, the said vehicle shall become the sole and absolute property
of the Hirer." The intention clearly disclosed thereby is that on payment
of the amount due at any time 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 repayment of the loan 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, ignoring 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 installments 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 Commercial Tax Officer(1) 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)  2 S.C.R. 112.
841 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 subsequent 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 embodying, 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 unquestionably 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 against 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 installments of hire arises when the installments are paid
and not before. In 'such a hirepurchase 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 stipulated
hire and the price for exercising the option.
This class of him-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.
842 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 from the Bills of
Sale Act, 1878 and the Hire Purchase Act, 1938, may be briefly noticed. In Re
Watson, Ex Parte Official' Receiver in Bankruptcy(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 default 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 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 document itself
must be looked 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(2) one M entered into a contract with a wine merchant under
which the latter was to provide pound 2,000 for purchasing the furniture of a
hotel which was agreed to be purchased by M. The wine merchant paid pound 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 let the furniture to M to be paid for by installments
and the furniture not to become property of M till all the installments were
paid. It was (1)  25 Q.B.D. 27.
(2)  A.C. 102.
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-purchase 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 hirepurchase 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. Maclure-(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 Bankruptcy-(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 reletting 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 (1)  1 All E.R.
844 documents. It must discover what the real
transaction was. As Lord Esher, M.R., said (1891) 1 Q.B. 2341 in Madell v.
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 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 with costs in this Court and the High Court.
One hearing fee.