Federal
Bank Ltd. & Ors Vs. State of Kerala & Ors [2007] Insc 312 (21 March 2007)
S.H. KAPADIA & B. SUDERSHAN REDDY
WITH
Civil Appeal No.6460 of 2003 Badagara Co-Operative Rural Bank Ltd. Appellant
versus State of Kerala & Ors. Respondents KAPADIA, J.
A short question which arises in these two civil appeals is : whether banks
are "dealers" under Section 2(viii) read with Explanation I of the
Kerala General Sales Tax Act, 1963.
Since common question of law arises in both the civil appeals, they are heard
together and disposed of by this common judgment. For the sake of convenience,
we may refer to the facts in C.A.No.6459 of 2003 filed by Federal Bank Ltd. and
Ors. V. State of Kerala and Ors.
By the Kerala Finance Act, 1998 a clause (g) was inserted in Section 2(viii)
by which the definition of the word "dealer"
was expanded to cover a bank or a financial institution which, whether in
the course of its business or not, sells any gold or other valuables pledged
with it to secure any loan, for the realization of such loan amount. After the
said amendment, the Department called upon Federal Bank to furnish details of
the gold auction during the year 1998-1999 and 1999-2000.
This was vide notice dated 31.8.99 issued by the Sales Tax Officer to the
assessee. On 1.11.99 the Department called upon the bank to furnish details of
the turnover relating to the gold auction sale on and after 1.4.98; the
Department also called upon the assessee to pay tax at 4% on the sale turnover
within 15 days. This was vide notice dated 1.11.99. Federal Bank submitted its
reply contending that a scheduled bank cannot be compared with a pawn broker
and, therefore, it was not a dealer under the 1963 Act. The Federal Bank
refused to file its return on the ground that there was no sale of ornaments
pledged to the bank and that the position of the bank remained unaltered even
after introduction of clause (g) in Section 2(viii) of the 1963 Act vide Kerala
Finance Act 1998 dated 29.7.98.
Ultimately, Federal Bank Ltd. filed O.P.No.1169 of 2000 in the Kerala High
Court challenging the validity of Section 2(viii)(g) of the 1963 Act as also
the notices issued by the Department pursuant to the Kerala Finance Act, 1998
directing Federal Bank to file returns and pay tax on sale of pledged articles.
By judgment and order dated 11.4.2002 the Single Judge held that in view of
Kerala Finance Act, 1998, by which clause (g) stood incorporated under Section
2(viii) of the 1963 Act, the transaction of sale, whether in the course of
business or not, would cover auction sale or ornaments pledged with the bank.
Therefore, banks, according to the learned Single Judge, came within the
definition of the word "dealer" and since the pledged articles were
goods and since the sale was for money consideration, Section 5 of the 1963 was
applicable and in the circumstances the leaned Single Judge upheld the demand
notices leaving the question of legislative competence open to challenge.
Aggrieved by the said decision of the learned Single Judge, Federal Bank
along with other banks carried the matter in appeal. By the impugned judgment
dated 3.4.03 it was held that in view of the Kerala Finance Act, 1998 under
which the definition of the word "dealer" is expanded to cover banks,
the Department was right in seeking to cover the transactions of auction sale
of pledged gold articles. It was further held that amended Section 2(viii)(g)
was intra vires the Constitution of India and that the said section did not
infringe Articles 14 and 19 of the Constitution. It was further held that even
assuming that the transaction of sale of pledged articles is not a part of the
main business activity still the said transaction would come within the meaning
of incidental or ancillary to the business of banking and in the circumstances there
was no infirmity in the judgment of the learned Single Judge. Accordingly, the
Division Bench dismissed the writ appeals filed by the appellants herein.
Hence, this civil appeal.
At the outset, we may point out that before us the constitutional validity
of Section 2(viii)(g) of the 1963 Act was not argued. Before us it was urged on
behalf of banks (appellants) that although by the Kerala Finance Act, 1998 the
definition of the word "dealer" under Section 2(viii) of the 1963 Act
stood expanded so as to include banks, the said Act was still not applicable to
"sale" of pledged ornaments as the said transaction did not take
place in the course of banking business in terms of Section 2 (xxi). It was
submitted that the word "sale" is defined in the said section to mean
every transfer of the property in goods by one person to another in the course
of trade or business for cash, deferred payment or other valuable consideration
excluding mortgage, hypothecation charge or pledge. According to the banks
(appellants) since the auction sale of pledged ornaments did not fall within
the definition of the word "sale" in Section 2(xxi), such transaction
are not exigible to tax under the said Act, even after the insertion of clause
(g) to Section 2(viii). On behalf of the banks it was further submitted that
even under 1949 Act the word "banking" has been defined under Section
5(b) to mean accepting, for the purpose of lending or investment, of deposits
of money from the public, repayable on demand or otherwise. According to the
banks (appellants) auction sale of pledged ornaments does not come under the
definition of the word "banking" under Section 5(b) of the 1949 Act
and, therefore, it cannot be said that the banks were in the business of
selling pledged ornaments. On behalf of banks it was further submitted that
under Section 6 of the 1949 Act, in addition to the business of banking, a
banking company may engage in one of the following forms of business, namely,
borrowing, raising of loans, lending with or without security, drawing of
bills, accepting bills, discounting, buying, selling, collecting and dealing in
bills of exchange. According to the banks (appellants) the "banking
business" consists of accepting deposits from the public. However, under
Section 6 a bank is permitted to engage in the other form of business apart
from acceptance of deposits. According to the banks (appellants) Section 6
enables a banking company if it so desires to engage in other form of business
stipulated in Section 6(1)(a) of the 1949 Act. It was further contended that
under Section 8 of the said 1949 Act, banks are prohibited expressly from
trading in goods except to the extent of buying or selling of goods in
realization of security given to it by the borrower. Under the Explanation to Section
8 of the 1949 "goods" are defined to mean every kind of movable
property other than actionable claims, stocks, shares, money etc. It is
submitted that in view of Section 8 banks cannot sell goods in the course of
business and in view of the said prohibition it cannot be said that banks are
in the business of selling pledged ornaments. Therefore, according to the banks
(appellants) auction sale of pledged ornaments by banks for realization of
security will not fall in the course of banking business and, therefore, such
transactions will not come within the definition of the word "sale"
as defined in Section 2(xxi) of the 1963 Act.
We do not find any merit in the above contention. As stated above, we are
not concerned in the present civil appeals with the question of legislative
competence of the State Legislature to insert clause (g) in Section 2(viii) of
the 1963 Act. In the present case, we are concerned only with the limited
question argued before us, namely, whether auction sale of pledged goods by scheduled
banks is a "transaction"
which takes place in the course of banking business in terms of the 1949
Act. In the present case, we are concerned with the situation which arose after
enactment of the Kerala Finance Act, 1998. By that amendment the definition of
the word "dealer" in Section 2(viii) was expressly amended to mean
any person who carries on business of buying, selling, supplying or
distributing goods for cash or deferred payment or for any other valuable
consideration. It is important to note that prior to Kerala Finance Act, 1998
there was litigation.
The result of that litigation was that the High Court had taken the view in
the earlier rounds that sale of pledged ornaments did not fall "in the
course of banking business" and in order to get over the judgments, the
Kerala Legislature introduced clause (g) to Section 2(viii) by making it clear
that even if the sale of pledged ornaments took place, not in the course of
business, still such a transaction would make the person (banks/financial
institutions) a "dealer" under Section 2(viii) of the 1963 Act.
Therefore, in deciding the matter we have to keep in mind the object behind the
Kerala Finance Act, 1998.
In order to answer the controversy in hand we quote hereinbelow the relevant
sections of the 1963 Act:
"Section 2. Definitions. In this Act, unless the context otherwise
requires:
(vi) "Business" includes (a) any trade, commerce or manufacture
or any adventure or concern in the nature of trade, commerce, or manufacture,
whether or not such trade, commerce, manufacture, adventure or concern is
carried on with a motive to make gain or profit and whether or not any profit
accrues from such trade, commerce, manufacture adventure or concern; and (b)
any transaction in connection with, or incidental or ancillary to such trade,
commerce, manufacture, adventure or concern.
(viii) "dealer" means any person who carries on the business of
buying, selling, supplying or distributing goods, executing works contract,
transferring the right to use any goods or supplying by way of or as part of
any service, any goods directly or otherwise, whether for cash or for deferred
payment, or for commission remuneration or other valuable consideration and
includes:- (a) xxx xxx xxx (b) a casual trader;
(c) a commission agent, a broker or a delcredere agent or an autioneer or
any other mercantile agent, by whatever name called, who carried on the
business of buying, selling, supplying or distributing goods [executing works
contract, transferring right to use any goods or supplying by way of or as part
of any service, any goods] on behalf of any principal;
(d) a non-resident dealer or an agent of a non- resident dealer, or a local
branch of a firm or company of [association of body of persons whether
incorporated or not] situated outside the State;
(e) a person who, whether in the course of business or not, sells;
(i) goods produced by him by manufacture, agriculture, horticulture or
otherwise; or (ii) trees which grow spontaneously and which are agreed to be severed
before sale or under the contract of sale;
(f) a person who whether in the course of business or not: - (1) transfers
any goods, including controlled goods whether in pursuance of a contract or
not, for cash or deferred payment or other valuable consideration;
(2) transfers property in goods (whether as goods or in some other form)
involved in the execution of a works contract;
(3) delivers any goods on hire- purchase or any system of payment by
instalments;
(4) transfers the right to use any goods for any purpose (whether or not for
a specified period) for cash, deferred payment or other valuable consideration;
(5) supplies, by way of or as part of any service or in any other manner
whatsoever, goods, being food or any other articles for human consumption or
any drink (whether or not intoxicating), where such supply or service is for
cash, deferred payment or other valuable consideration);
Explanation.-(1) A society (including a co- operative society, club or firm
or an association or body of persons, whether incorporated or not) which
whether or not in the course of business, buys, sells, supplies or distributes
goods from or to its members for cash or for deferred payment, or for
commission, remuneration or other valuable consideration, shall be deemed to be
a dealer for the purposes of this Act;
Explanation.-(2) The Central Government or a State Government, which,
whether or not in the course of business, buy, sell, supply or distribute
goods, directly or otherwise, for cash or for deferred payment, or for
commission, remuneration or other valuable consideration, shall be deemed to be
a dealer for the purposes of this Act.
(g) a bank or a financing 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 realization of such loan amount;
Explanation I.-Bank for the purposes of this clause includes a Nationalised
Bank or a Scheduled Bank or a Co-operative Bank;
Explanation II.- Financing Institution means a financing institution other
than a bank.
(xii) "goods" means all kind of movable property (other than
newspapers, actionable claims, electricity, stocks and shares and securities)
and includes live stock, all materials, commodities and articles (including
those to be used in the construction, fitting out, improvement or repair of
immovable property or used in the fitting out, improvement or repair of movable
property) and every kind of property (whether as goods or in some other form)
involved in the execution of a works contract, and all growing crops, grass or
things attached to, or forming part of the land which are agreed to be severed
before sale or under the contract of sale.
(xxi) "sale" with all its grammatical variations and cognate
expressions means every transfer (whether in pursuance of a contract or not) 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, but
does not include a mortgage, hypothecation charge or pledge.
(xxv) "taxable turnover" means the turnover on which a dealer
shall be liable to pay tax as determined after making such deductions from his
total turnover of purchase or sale in the course of inter-state trade or
commerce or in the course of export of the goods out of the territory of India
or in the course of import of the goods into territory of India;
(xxvi) "total turnover" means the aggregate turnover in all goods
of a dealer at all places of business in the State, whether or not the whole or
any portion of such turnover is liable to tax including the turnover of
purchase or sale in the course of inter-state trade or commerce or in the
course of export of the goods out of the territory of India or in the course of
import of the goods into the territory of India.
Section 5 Levy of tax on sale of goods.- (1) Every dealer (other than a
casual trader or agent of a non-resident dealer or the Central Government, or
Government of Kerala or the Government of any other State or of any Union
Territory, or any local authority) whose total turnover for a year is not less
than two lakh rupees and every casual trader or agent of a non-resident dealer,
the Central Government, the Government of Kerala, the Government of any other
State or of any Union Territory or any local authority, whatever be its total
turnover for the year, shall pay tax on his taxable turnover for that year in
respect of goods included in the Schedule at the rate mentioned against such
goods."
We also quote hereinbelow the relevant provisions of the 1949 Act:
"Section 5. Interpretation.- In this Act, unless there is anything
repugnant in the subject or context,- (b) "banking" means the
accepting, for the purpose of lending or investment, of deposits of money from
the public, repayable on demand or otherwise, and withdrawable by cheque,
draft, order or otherwise.
Section 6. Forms of business in which banking companies may engaged.-(1) In
addition to the business of banking, a banking company may engage in any one or
more of the following forms of business, namely:- (a) the borrowing, raising,
or taking up of money; the lending or advancing of money either upon or without
security; the drawing, making, accepting, discounting, buying, selling,
collecting and dealing in bills of exchange, hoondees, promissory notes,
coupons, drafts, bills of lading, railway receipts, warrants, debentures,
certificates, scrips and other instruments, and securities whether transferable
or negotiable or not; the granting and issuing of letters of credit,
traveller's cheques and circular notes; the buying, selling and dealing in
bullion and specie; the buying and selling of foreign exchange including
foreign bank notes; the acquiring, holding, issuing on commission, underwriting
and dealing in stock, funds, shares, debentures, debenture stock, bonds,
obligations, securities and investments of all kinds; the purchase and selling
of bonds, scrips or other forms of securities on behalf of constituents or
others, the negotiating of loans and advances; the receiving of all kinds of
bonds, scrips or valuables on deposit or for safe custody or otherwise; the
providing of safe deposit vaults; the collecting and transmitting of money and
securities;
(b) acting as agents for any Government or local authority or any other
person or persons; the carrying on of agency business of any description
including the clearing and forwarding of goods, giving of receipts and
discharges and otherwise acting as an attorney on behalf of customers, but
excluding the business of a (managing agent or secretary and treasurer) of a
company;
(c) contracting for public and private loans and negotiating and issuing the
same;
(d) the effecting, insuring, guaranteeing, underwriting, participating in
managing and carrying out of any issue, public or private, of State, municipal
or other loans or of shares, stock, debentures, or debenture stock of any
company, corporation or association and the lending of money for the purpose of
any such issue;
(e) carrying on and transacting every kind of guarantee and indemnity
business;
(f) managing, selling and realizing any property which may come into the
possession of the company in satisfaction or part satisfaction of any of its
claims;
(g)acquiring and holding and generally dealing with any property or any
right, title or interest in any such property which may form the security or
part of the security for any loans or advances or which may be connected with
any such security;
(h) undertaking and executing trusts;
(i) undertaking the administration of estates as executor, trustee or
otherwise;
(j) establishing and supporting or aiding in the establishment and support
of associations, institutions, funds, trusts and conveniences calculated to
benefit employees or ex- employees of the company or the dependents or
connections of such persons; granting pensions and allowances and making
payments towards insurance; subscribing to or guaranteeing moneys for
charitable or benevolent objects or for any exhibition or for any public,
general or useful object;
(k) the acquisition, construction, maintenance and alteration of any
building or works necessary or convenient for the purposes of the company;
(l) selling, improving, managing, developing, exchanging, leasing,
mortgaging, disposing of or turning into account or otherwise dealing with all
or any part of the property and rights of the company;
(m) acquiring and undertaking the whole or any part of the business of any
person or company, when such business is of a nature enumerated or described in
this sub-section;
(n) doing all such other things as are incidental or conducive to the
promotion or advancement of the business of the company;
(o) any other form of business which the Central Government may, by
notification in the Official Gazette, specify as a form of business in which it
is lawful for a banking company to engage.
(2) No banking company shall engage in any form of business other than those
referred to in sub-section (1).
Section 8. Prohibition of trading.- Notwithstanding anything contained in
section 6 or in any contract, no banking company shall directly or indirectly
deal in the buying or selling or bartering of goods, except in connection with
the realization of security given to or held by it, or engage in any trade, or
buy, sell or barter goods for others otherwise than in connection with bills of
exchange received for collection or negotiation or with such of its business as
is referred to in clause (i) of sub-section (1) of Section 6.
Explanation.- For the purposes of this section, "goods" means
every kind of movable property, other than actionable claims, stocks, shares,
money bullion and specie, and all instruments referred to in clause (a) of
sub-section (1) of section 6.
Section 29. Accounts and balance-sheet.- (1) At the expiration of each
calendar year (or at the expiration of a period of twelve months ending with
such date as the Central Government may, by notification in the Official
Gazette, specify in this behalf,) every banking company incorporated (in
India), in respect of all business transacted by it, and every banking company
incorporated (outside India), in respect of all business transacted through its
branches (in India), shall prepare with reference to (that year or period, as
the case may be,) a balance-sheet and profit and loss account as on the last
working day of (that year or the period, as the case may be) in the Forms set
out in the Third Schedule or as near thereto as circumstances admit:
Provided that with a view to facilitating the transition from one period, of
accounting to another period of accounting under this sub-section, the Central
Government may, by order published in the Official Gazette, make such
provisions as it considers necessary or expedient for the preparation of, or
for other matters relating to, the balance-sheet or profit and loss account in
respect of the concerned year or period, as the case may be.
(2) The balance-sheet and profit and loss account shall be signed,- (a) in
the case of a banking company incorporated (in India), by the manager or the
principal officer of the company and where there are more than three directors
of the company, by at least three of those directors, or where there are not
more than three directors, by all the directors, and (b) in the case of a banking
company incorporated (outside India) by the manager or agent of the principal
office of the company (in India).
(3) Notwithstanding that the balance-sheet of banking company is under
sub-section (1) required to be prepared in a form other than the form (set out
in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), the
requirements of that relating to the balance- sheet and profit and loss account
of a company shall, insofar as they are not inconsistent with this Act, apply
to the balance-sheet or profit and loss account, as the case may be, of a
banking company.
(3-A) Notwithstanding anything to the contrary contained in sub-section (3)
of Section 210 of the Companies Act, 1956 (1 of 1956), the period to which the
profit and loss account relates shall, in the case of a banking company, be the
period ending with the last working day of the year immediately preceding the
year in which the annual general meeting is held.
Explanation.-In sub-section (3-A), "year" means the year or, as
the case may be, the period referred to in sub-section (1).
(4) The Central Government, after giving not less than three months' notice
of its intention so to do by a notification in the Official Gazette, may from
time to time by a like notification amend the Form set out in the Third
Schedule.
"THE THIRD SCHEDULE (see section 29) FORM A Form of Balance-sheet C
CAPITAL AND LIABILITIES PROPERTY AND ASSETS Rs. P. Rs. P.
Rs. P. Rs. P.
1. CAPITAL:
(i) Authorised Capital ..... shares of Rs. ....each ..... shares of Rs. ....
each ................................
_______________ (ii) Subscribed Capital ..... shares of Rs. .... each .....
shares of Rs. .... each _______________ (iii) Amount called up On.....shares of
Rs..... each less class unpaid On..... shares of Rs.....
each less calls unpaid of (iii) above, held by (a) Individuals (b)
Co-operative institutions (c) State Government ______________ ______________ 1.
CASH:
In hand and with Reserve Bank 31[National Bank] State Bank of India, State
Co-operative Bank and Central Co-operative Bank 2. BALANCES WITH OTHER BANKS:
(i) Current deposits (ii) Savings bank deposits (iii) Fixed deposits
3. MONEY AT CALL AND SHORT NOTICE:
4. Investments:
(i) In Central and State Government Securities (at book value) Face value Rs.
Market value Rs.
(ii) Other Trustee securities (iii) Shares in co-operative institutions
other than in item (5) below (iv) other investments (to be specified)
2. RESERVE FUND AND OTHER RESERVES (i) Statutory Reserve (ii) Agricultural
(Credit stabilization fund) (iii) Building Fund (iv) Dividend Equalization Fund
(v) Special Bad Debts Reserve (vi) Bad and Doubtful Debts Reserve (vii)
Investment and Depreciation Reserve (viii) Other Funds and Reserves (to be
specified)
5. INVESTMENT OUT OF THE PRINCIPAL SUBSIDIARY STATE PARTNERSHIP FUNDS In
shares of:
(i) Central Co-operative Banks (ii) Primary agricultural credit societies
(iii) Other societies 6. ADVANCES:
(i) Short-term loans, cash credits, overdrafts and bills discounted Of which
secured against:
(a) Government and other
3. PRINCIPAL/SUBSIDIARY STATE PARTNERSHIP FUND ACCOUNT:
For share capital of:
(i) Central co-operative banks (ii) Primary agricultural credit societies
(iii) other societies ____________ approved securities (b) Other tangible
securities @ Of the advances, amount due from Individuals Of the advances,
amount overdue Considered bad and doubtful of recovery (ii) Medium-term loans
Of which secured against:
4. DEPOSITS AND OTHER ACCOUNTS:
(i) Fixed deposits* (a) Individuals** (b) Central co-operative banks (c)
Other societies (ii) Savings Bank Deposits (a) Individuals** (b) Central
co-operative banks (c) Other societies (iii) Current deposits (a) individuals**
(b) Central co-operative bank (c) Other societies (iv) Money at call and short
notice ____________ (a) Government and other approved securities (b) Other
tangible securities @ Of the advances, amount due from individuals Of the
advances, amount overdue considered bad and doubtful of recovery (ii) Long-term
loans Of which secured against (a) Government and other approved securities (b)
Other tangible securities @ 5. BORROWINGS:
(i) From the Reserve Bank of India 32[the National Bank] State/Central
co-operative Bank:
(a) Short-term loans, cash, credits and overdrafts (A) Government and other
approved securities (B) Other tangible securities @ (b) Medium term loans Of
which secured against (A) Government and other approved securities (B) Other
tangible Securities @ Of the advances, amount due from individuals Of the
advances, amount over due Considered bad and doubtful of recovery ____________
7. INTEREST RECEIVABLE Of which overdue Considered bad and doubtful of
recovery (A) (B) (ii) (A) (B) (A) (B) (A) (B) (iii) (A) (B) (A) (B) (A) (B)
(iv) (c) Long-term loans Of which secured against:
Government and other approved securities Other tangible securities @ From
the State Bank of India (a) Short-term loans, cash- credits and over drafts Of
which secured against:
Government and other approved securities Other tangible securities @ (b)
Medium term- loans Of which secured against:
Government and other approved securities:
Other tangible securities @ (c) Long-term loans:
Of which secured against:
Government and other approved securities Other tangible securities @ From
the State Government (a) Short-term loans Of which secured against:
Government and other approved securities Other tangible securities @ (d)
Medium term loans Of which secured against:
Government and other approved securities Other tangible securities @ (c)
Long-term loans Of which secured against:
Government and other approved securities Other tangible securities @ Loans
from other sources (source and security to be specified rule)
8. BILLS RECEIVABLE BEING BILLS FOR COLLECTION As per contra _____________
9. BRANCH ADJUSTMENT _____________
10. PREMISES LESS DEPRECIATION _____________
11. FURNITURE AND FIXTURES LESS DEPRECIATION _____________
12. OTHER ASSETS (to be specified)
13. NON-BANKING ASSETS
ACQUIRED IN SATISFACTION
OF CLAIMS (standing mode of valuation) _____________
14. PROFIT AND LOSS
6. BILL FOR COLLECTION BEING BILLS RECEIVABLE As per contra ____________
7. BRANCH ADJUSTMENTS ____________
8. OVERDUE INTEREST RESERVE ____________
9. INTEREST PAYABLE ____________
10. OTHER LIABILITIES (i) Bills payable (ii) Unclaimed dividends (iii)
Suspense (iv) Sundries
11. PROFIT AND LOSS Profit as per last balance-sheet Less appropriations Add
profit for the year brought from the Profit and Loss Account ____________ Total
____________ ___________ Total ___________ CONTINGENT LIABILITIES (i)
Outstanding liabilities for guarantees issued (ii) Others ___________ Total
___________ ____________ Total ____________ FORM B Form of Profit and Loss
Account Profit and Loss Account for the year ended EXPENDITURE INCOME Rs. P.
Rs. P.
Rs. P. Rs. P.
1. Interest on deposits, borrowings,etc.
2. Salaries and allowances and provident fund
3. Directors and local committee members' fees and allowances
4. Rent, taxes, insurance, lighting, etc.
5. Law charges
6. Postage, telegrams and telephonic charges
7. Auditor's fees
8. Depreciation on and repairs in property
9. Stationery, printing and advertisement,etc.
10. Loss from sale of or dealing with non-banking assets
11. Other expenditure
12. Balance of profit ___________ Total ___________
1. Interest and discount
2. Commission, exchange and brokerage
3. Subsidies and donations
4. Income from non-banking Assets and profit from sale of or dealing with
such assets
5. Other receipts
6. Loss (if any) _ ___________ Total ____________ General InstructionsThe
corresponding figures (to the nearest rupee, if so desired for the year
immediately preceding the year to which the profit and loss account relates
should be shown in separate columns."
In order to answer the contentions raised on behalf of the banks
(appellants) it is important to note that we are concerned with the 1963 Act.
The said Act is enacted to consolidate and amend the law relating to the levy
of tax on sale or purchase of goods in State of Kerala. In our opinion, the
word "sale" in Section 2(xxi) of the 1963 is very important.
The word "sale" is defined to mean transfer of the property in
goods in the course of trade or business for cash, deferred payment or for any
other valuable consideration. This definition is different from the definition
of the word "sale"
under the Sale
of Goods Act, 1930. When the pledged article is put to auction it is no
doubt for satisfaction of claims. It also results in an income from non-banking
assets. The first question which, therefore, arises is : whether sale of
pledged ornaments for consideration falls in the course of trade or business of
the bank. It is no doubt true that banks have to act on instructions of the
borrower. In the present case, we are not concerned with the provisions of
Section 176 of the Contract Act, 1872. We are concerned with the definition of
the word "sale" under the 1963 Act. When a bank sells the pledged
ornaments it is not acting as an agent of the borrower even under the 1949 Act.
When the bank sells the goods pledged to them they do not act as the agents of
the borrower.
As pledgees, the banks, acting under Section 176 of the Contract Act, 1872
have a right to sell the goods. That sale is not as agents but that sale is in
exercise of the statutory power under the 1949 Act. No doubt the sale is on
behalf of the pledgor, however, the sale is in exercise of the statutory power
[See: The Deputy Commissioner of Commercial Taxes v.
A.R.S. Thirumeninatha Nadar Firm (1968) 21 STC 184 (Mad)]. To the same
effect is the judgment of the Punjab and Haryana High Court in the case of High
Channel Video v.
Enclave Electronics and others (1999) 116 STC 131 (P. &
H.)] Further on reading the provisions of the 1949 Act, one finds that every
bank is required to maintain its balance-sheet in Form 'A" of the Third
Schedule, quoted above. The prescribed form indicates that non-banking assets
acquired by the banks even in satisfaction of claims, are required to declare
their holdings. The prescribed form of balance-sheet indicates that banks are
required to show on the asset side non-banking assets acquired by them in
satisfaction of claims.
Similarly, in Form 'B' of the Third Schedule under Profit and Loss Account,
banks are required to show income from non- banking assets and profit from sale
of such assets. In our view, therefore, sale of pledged assets takes place in
the course of banking business. Therefore, as stated above, the banks, in selling
the goods pledged to them, did not act as agents of the borrowers/pledgors and
that their sale was in exercise of statutory power under the 1949 Act. Further,
in our view it is no doubt true that under Section 8 of the 1949 Act banks are
prohibited from trading in goods. However, if one reads Section 8 along with
Third Schedule to the 1949 Act it is clear that dealing in non-banking assets
is a banking business and the exception made in Section 8 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. In the circumstances, we are
of the view that sale of pledged ornaments falls within the course of banking
business under the 1949 Act. In the circumstances, such transactions are taxable
under Section 2(viii)(g) read with Section 5 of the 1963 Act. We also find
merit in the contention advanced on behalf of the Department (respondents
herein) that 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
Court which took the view that sale of pledged goods did not fall in the course
of banking business. We have quoted clause (g). That clause 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
transactions fall under Section 2(viii)(g) of the 1963 Act, banks become
"dealers" and they are liable to pay sales tax under the said 1963
Act. 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 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 [See: State of Maharashtra v. Embee Corporation, Bombay - 1997
(7) SCC 190]. Further, when charge or pledge is enforced that enforcement is by
way of sale of the pledged or hypothecated goods; that sale is for
consideration and, therefore, it falls within the ambit of Section 2(xxi) of
the 1963 Act.
In the circumstances, there is no infirmity in the impugned judgments of the
Division Bench of the Kerala High Court.
Accordingly, the above civil appeals have no merit and they are dismissed
with no order as to costs.
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