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Report No. 168

1.5. Certain important cases relating to hire-purchase decided by courts in India.-

Industrialisation and commercial activities in India were introduced by the British rulers which were designed and devised for safeguarding the economic interests of our colonial masters. The advent of hire-purchase transaction in England was subsequently introduced into various colonies of Great Britain depending on the economic and commercial development in the colonies. India was no exception. Disputes involving hire-purchase transactions in India perhaps reached the court in the first quarter of the twentieth century. Perhaps the first important reported case is that of A. Cecil Cole v. Nanalal Moraji Dave in which Justice Martin observed1:

"Now the very expression "hire-purchase agreement" is not one that originated in this country. It, is clearly a form of an agreement which has originated in England and has been created by those engaged in the trade of particular Articles. Substantially in this country there is little or no authority on hire-purchase agreement....."

1. AIR 1925 Born 18.

1.5.1. In Auto Supply, Company Ltd. v. V. Raghunatha Chetty : AIR 1929 Mad 884, a company had agreed to offer a bus on a hire-purchase" agreement, on condition that Rs. 1140 were to be paid by the hirer on delivery, and 11 monthly instalments were to be paid thereafter, each of Rs. 226, and the owners were to be entitled to terminate the contract on default occurring if hirer for any month was in arrears.

A suit was brought by the owners for possession of the bus on the happening of the said condition. Lord Coutts Trotter, C.J. held that though there was no such explicit condition, yet it was the necessary implication that when the agreement terminated either by the choice or default of the hirer, all sums paid by him are to be retained by the owners, the amount Rs. 1140 being construed either as the first instalment or the hire money or as the premium taken by the owner for granting lease and in either case money received was not to be refunded. The money was not to be regarded as advance of rent. Justice Ananthakrishnan Ayyar held1-

"In a contract of sale for a price payable by instalments, the purchaser has no option of terminating the contract and returning the chattel, whereas in a contract of hire-purchase the hirer has such an option. In the case of hire-purchase contract, the hirer has got option to purchase, which he may exercise or not according to his sweet will and pleasure; but in the case of a contract of sale the purchaser has become the owner of the chattel, but the price is by agreement payable by agreement payable by instalments."

1. Ibid., p. 886.

1.5.2. In the case of S.S. Tizvari v. Remington Rand (Incorporated), Grille, J.C : AIR 1934 Nag 151 held-

"Where in the agreement to purchase a typewriter, there is a clause by which the hirer is entitled to put an end to the contract by return of the machine at any time, forfeiting former payments, it is a contract for hire-purchase and not a contract for sale. In such a case there is nothing illegal or inequitable in the company enforcing its rights on the contract to recover the arrears of the instalments while recovering the machine at the same time. Once the machine is in the possession of the company whether it is handed over by the hirer or recovered otherwise, it is the company's property to be disposed of by them as they wished, and such disposal can have no bearing whatever on the arrears which are arrears for hire and not instalments of the purchase money in respect of a purchase which the hirer was bound to fulfil."

1.5.3. In the case of Babu Balmakund v. Mahesh Narayan Singh : AIR 1934 Oudh 133, the court held that-

"Where under a hire-purchase agreement, the purchaser is given the option to terminate the contract of hire at any time by returning the goods and paying the hire due upto the date of such return, the transaction cannot be regarded as an out and out sale."

1.5.4. In V. Dakshinamurthi Mudaliar v. General and Credit Corporation (India) Ltd. : AIR 1960 Mad 328 the Madras High Court, inter alia, observed as follow:-

"To sum up, the law of hire and hire-purchase stems from the law of contract of which it forms an important segment. It is comparatively modern in origin and is designed to serve the needs of credit buying while at the same time protecting the vendor from being caught in the meshes of the law relating to sales stricto sensu. In effect hire-purchase is bailment with an option to purchase though it is sometimes used in a wider sense to include agreements where there is an irrevocable agreement to buy in instalment terms with the proviso that the title shall not pass until the instalments are paid.

A hire-purchase agreement thus creates a bailment, but is a bailment plus an option to purchase. The transaction is compounded of the element of both the law of hire and sale and it would be clearly wrong to assimilate it to a hypothecation of moveable property."

1.5.5. In Damodar Valley Corporation v. State of Bihar : AIR 1961 SC 440 the Supreme Court observed the distinction between a mere contract of hiring, a sale or a hire-purchase as follows:-

"8. the sole question for determination in this appeal is whether, in respect of the machinery and equipments admittedly supplied by the Corporation to the Contractors, it was a mere contract of hiring as contended on behalf of the appellant Corporation, or a sale or a hire-purchase, as contended on behalf of the respondent State. The law on the subject is not in doubt, but the difficulty arises in applying that law to the facts and circumstances of a particular case on a proper construction of the document evidencing the transaction between the parties.

It is well-settled that a mere contract of hiring, without more, is a species of the contract of bailment, which does not create a title in the bailee, but the law of hire-purchase has undergone considerable development during the last half a century or more and has introduced a number of variations, thus leading to categories, and it becomes a question of some nicety as to which category a particular contract between the parties comes under. Ordinarily, a contract of hire-purchase confers no title on the hirer, but a mere option to purchase on fulfilment of certain conditions.

But a contract of hire-purchase may also provide for the agreement to purchase the thing hired by deferred payments subject to the condition that title to the thing shall not pass until all the instalments have been paid. There may be other variations of a contract of hire-purchase depending upon the terms agreed between the parties. When rights in third parties have been created by acts of parties or by operation of law, the question, which does not arise here may arise as to what exactly were the rights and obligations of the parties to the original contract.

It is equally well-settled that for the purpose of determining as to which category a particular contract comes under, the Court will look at the substance of the agreement and not at the mere words describing the category. One of the tests to determine the question whether a particular agreement is a contract of mere hiring or whether it is a contract of purchase on a system of deferred payments of the purchase price is whether there is any binding obligation on the hirer to purchases the goods.

Another useful test in determine such a controversy is whether there is a right reserved to the hirer to return the goods at any time during the subsistence of the contract. If there is such a right reserved, then clearly there is no contract of sale, vide Helby v. Matthews, 1895 AC 471. Applying these two tests to the transaction in the present case, it becomes clear that it was a case of sale of goods with a condition of hire-purchase on certain conditions depending upon the satisfaction of the Corporation as to whether the "residual life" of the machinery or the equipment was not less than one-third of the standard life in accordance with the terms agreed between the parties."

(Emphasis laid)

1.5.6. K.L. Johar & Co. v . The Deputy Commercial Tax Officer : AIR 1965 SC 1082, is the case relating to hire-purchase which came up for decision before the Supreme Court of India. The appellant was a finance company doing business of advancing money to persons who purchased motor vehicles but were themselves not in a position to find ready money to pay the price. The appellant since the commencement of their business had entered into several hire-purchase agreements with persons desirous of purchasing motor vehicles.

On April 28, 1956, the appellant submitted a return to the Assistant Commercial Tax Officer Coimbatore, showing a turnover for the purposes of sales tax for Rs. 2,37,993 for the year 1955-56. The Asstt. Commercial Tax Officer made a provisional assessment on the basis of the return submitted by the appellant and fixed instalments for payment thereof. The appellant paid the instalments but preferred a revision to the Commercial Tax Officer mainly on the ground that hire-purchase agreements were not transactions of sale liable to be taxed under the Madras General Sales Tax Act, 1939. The matter came in appeal to the Supreme Court and it was observed in paragraphs 11 and 17 as follows:-

"This brings us to a consideration of the validity of Explanation 1, which we have already set out. It is necessary in this connection to understand the nature of a typical hire-purchase agreement as distinct from a sale in which the price is to be paid later by instalments. In the case of a sale in which the price is to be paid by instalments, the property passes as soon as the sale is made, even though the price has not been fully paid and may later be paid in instalments. This follows from the definition of sale in section 4 of the Indian Sale of Goods Act (as distinguished from an agreement to sell) which requires that the seller transfers the property in the goods to the buyer for a price.

The essence of a sale is that the property is transferred from the seller to the buyer for a price, whether paid at only or paid later in instalments. On the other hand, a hire-purchase agreement, as its very name implies, has two aspects. There is first an aspect of bailment of the goods subjected to the hire-purchase agreement, and there is next an element of sale which fructifies when the option to purchase, which is usually a term of hire-purchase agreements, is exercised by the intending purchaser.

Thus the intending purchaser is known as the hirer so long as the option to purchase is not exercised, and the essence of a hire-purchase agreement properly so called is that the property in the goods does not pass at the time of the agreement but remains in the intending seller, and only passes later when the option is exercised by the intending purchaser. The distinguishing feature of a typical hire-purchase agreement therefore is that the property does not pass when the agreement is made but only passes when the option is finally exercised after complying with all the terms of the agreement.

The next question that arises is whether a hire-purchase agreement ever ripens into a sale and if so when. We have already pointed out that a hire-purchase agreement has two elements: (1) 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 exercised a sale takes place of the goods which till then had been hired.

When this sale takes place it will be liable to sales tax under the Act for the taxable event under the Act is the taking place of the sale, the Act providing for a multi-point sales-tax at the relevant time. Where, however option is not exorcised or cannot be exercised because of the inability of the intending purchaser to fulfil the terms of the agreement, there is no sale at all. As the taxable event is the sale of goods, the tax ran only be levied when the option is exercised after fulfilling all the terms of the hire-purchase agreement.

We cannot agree with the view of the High Court that because in most of such cases the option is exercised, tax is leviable immediately on the making of the hire-purchase agreement and that in a few cases where there is failure to carry out the terms of the agreement or to exercise the option, there can be adjustment by elimination of such portion of the turnover. As we have pointed out the taxable event under the Act is the sale of goods and until that taxable event takes place there can be no liability to pay tax.

Therefore, even though eventually most cases of hire-purchase may result in sales by the exercise of the option and the fulfilment of the terms of the agreement, tax is not exigible at the time when the hire-purchase agreement is made, for at that time the taxable event has not taken place: it can only be exigible when the option has been exercised and all the terms of agreement fulfilled and the sale actually takes place. When sale takes place in a particular case will depend upon the terms of the hire-purchase agreement but till the sale takes place there can be no liability to sales tax under the Act.

The High Court therefore was in error in holding that transactions of hire-purchase of the kind with which we are dealing having regard to their main intent and purpose might be treated as sales at the time the agreement is entered into: in all hire-purchase agreements of the type with which we are dealing sale only takes place when the option is exercised after all the terms of the agreements are fulfilled and it is at that time that the tax is exigible."

1.5.7. The next important case decided by the Supreme Court on the point of hire-purchase is Sundaram Finance Ltd. v. State of Kerala : AIR 1966 SC 1178, the appellants in this case were a company incorporated under the Companies Act and carried on business of financing purchases of motor vehicles on security of those vehicles. The short question in this case was whether the hire-purchase agreements entered into by the appellant with its documents were transactions of sale of goods or were only documents securing the return of the loans advanced by it to its customers. The Supreme Court in its judgment in paras. 23 and 24 held:

"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 instalments of the stipulated hire and exercising his option to purchase the goods on payments of a nominal price. The decision of the Court in AIR 1965 SC 1082, 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 obtains a hire-purchase agreement which gives him a license to seize the goods in the event of failure by the customer to abide by the conditions of the hire-purchase agreements.

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 transactions 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 obstensibly 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 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 stipulated hire and the price for exercising the option.

This class of hire-purchase agreement must be distinguished from transaction in which the customer is the owner of the good and with a view to finance his purchase he enters into an arrangement which is in the form of a hire-purchase agreements with the financier, but in substance evidences a loan transaction, subject to hiring agreement under which the lender is given the license to seize the goods."

1.5.8. In Instalment Supply Ltd. v. S.T.O Ahmedabad : AIR 1974 SC 1105 the petitioner, a limited company, carried on the business of financing the purchase of motor vehicles. The person desiring to purchase a motor vehicle entered into a hire-purchase agreement with the petitioner company on certain terms and conditions. The question before the Supreme Court was when does a sale liable to sales-tax take place under a hire-purchase agreement the Supreme Court observed in para. 7:

"A contract of sale should be distinguished from a contract of hire-purchase. A contract of hire-purchase is properly speaking a contract of hire by which the hirer is granted an option to buy but is not, as under a contract of sale, under a legal obligation to do so. The contract of hire-purchase is one of the variations of the contract of bailment, but it is a modern development of commercial life, and the rules with regard to bailments, which were laid down before any contract of hire-purchase was contemplated, cannot be applied simpliciter, because such contract has in it not only the element of bailment but also the element of sale.

At common law the term "hire-purchase" properly applied only to contracts of hire conferring an option to purchase but it is often used to describe contracts which are in reality agreement to purchaser chattels by instalments, subject to a condition that the property in them is not to pass until all instalments have been paid.

The distinction between these two types of hire-purchase contracts is, however, a most important one, because under the latter type of contract there is a binding obligation on the hirer to buy and the hirer can therefore pass a good title to a pin-chaser or pledgee dealing with him in good faith and without notice of the rights of the true owner, whereas in the case of a contract which merely confers an option to purchase there is no binding obligation on the hirer to buy, and a purchaser or pledgee can obtain no better title then the hirer had. (Halsbury's Laws of England, 3rd Edn., Vol. 19, para. 823, pp. 510-511). These propositions of law have been quoted with approval by this Court in the two decisions earlier referred to."

1.5.9. Thus the concept of hire-purchase has been put beyond the pale of doubt by the courts in our country. However, it cannot be gainsaid that a separate Act should be enacted to regulate hire-purchase transactions. We proceed on to consider the views obtained on the questionnaire circulated by us.

The Hire-Purchase Act, 1972 Back

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