Supreme Court of India
KARNATAKA PAWN BROKERS ASSON. AND ORS. ETC.versusSTATE OF KARNATAKA AND ORS.
- Citation
- 1998 INSC 406
- Decided
- 29 October 1998
- Disposal
- Dismissed
- Bench
- S P BHARUCHA
Holding
A pawnbroker who causes the sale of unredeemed pledged goods is a dealer carrying on business and is liable to pay sales tax; the auctioneer is not a dealer.
Summary
The appellants, Karnataka Pawnbrokers Association, challenged the liability to pay sales tax on the sale of unredeemed pledged goods disposed of through public auction. The issue was whether a pawnbroker, by virtue of statutory authority to sell defaulted pledges, qualifies as a "dealer" and carries on "business" within the meaning of the Karnataka and Tamil Nadu Sales Tax Acts, and whether the auctioneer could be treated as the seller liable for tax. The Supreme Court held that a pawnbroker possesses a special property right in the pledged goods and, when he initiates their sale, satisfies the statutory definitions of dealer and business, making him liable for sales tax. The auctioneer was deemed merely a facilitator and not a dealer. Consequently, the High Court judgments upholding tax liability were affirmed. The appeals were dismissed.
Issues considered
- Whether a pawnbroker is a "dealer" under the Karnataka and Tamil Nadu Sales Tax Acts when he causes the sale of unredeemed pledged goods.
- Whether the activity of selling unredeemed pledged goods constitutes "business" within the meaning of the Sales Tax Acts.
- Whether the auctioneer, who conducts the public auction, is liable to pay sales tax as the seller.
Legislation cited
- Indian Contract Act, 1872s. 172, s. 173, s. 174, s. 175, s. 176, s. 177
- Karnataka Sales Tax Act, 1957s. 2(1-2), s. 2(k), s. 2(t)
- Tamil Nadu General Sales Tax Act, 1959s. 2(d), s. 2(g), s. 2(n)
Subjects
pawn brokersales taxdealerbusiness definitionpublic auctionunredeemed goodstax liabilityspecial property rightauctioneer
Judgment
KARNATAKA PAWN BROKERS ASSON. AND ORS. ETC. A
v.
STATE OF KARNATAKA AND ORS.
OCTOBER 29, 1998
[S.P. BHARUCHA AND K. VENKATASWAMI, JJ.] B
Sales Tax:
Karnataka Sales Tax Act, 1957, Sections 2(1-2), (k) & (t)-Tamil Nadu
General Sales Tax Act, 1959, Sections 2(d), (g) & (n)- 'Dealer' and 'business'- C
Meaning and scope of-Pawnbrokers causing sale of articles/goods through
statutory auctioneer on default of pawner to redeem the pledged articles-
Held, such activities satisfy the definition of "dealer" as well as the definition
of "business"-Hence, pawnbrokers are required to pay sales tax on such
sale-Further held, that in such cases neither the pawner nor the statutory D
auctioneer is a dealer liable to pay sales tax-Sale-Pawnbroker-Debt Laws-
Karnataka Pawnbrokers Act, 1961, Sections 2(7), 3, 7, l l & 12-Karnataka
Pawnbrokers Rules, 1966, Rule 20-Tamil Nadu Pawnbrokers Act, 1939,
Sections 2(6), 3, 7, l l and 12-Tamil Nadu Pawnbrokers Rules, 1943, Rule
12-Contract Act, 1872, Sections 172 and 173 to 177.
E
Words and Phrases:
Word ''pawnbroker"-Meaning of-In the context of Karnataka
Pawnbrokers Act, 1961, Section 2(7) and Tamil Nadu Pawnbrokers Act, 1939,
Section 2(6).
F
Words "dealer." and "business''-Meaning of-In the context of General
Sales Tax Acts of Karnataka ancl Tamil Nadu.
The question involved in the instant appeals was whether a
pawnbroker, causing sales of unredeemed articles/goods who carried on G
"business" within the meaning oftheT. N. General Sales Tax Act, 1959 read
with T. N. Pawnbrokers Act, 1943 as Rules thereunder as well as the
Karnataka Sales Tax Act, 1957 read with the Karnataka Pawnbrokers Act,
1961 and Rules thereunder. Provisions of the Pawnbroker Acts of both the
States were substantially the same.
461 H
462 SUPREME COURT REPORTS (1998] SUPP. 2 S.C.R.
A It was contended by the appellants that pawnbrokers lent money on
the pledge of articles and that they were not engaged in the business of
buying and/or selling of goods; the pledge of the articles created a relation
of bailor and bailee and as such they had no right to sell the property
contrary to the contract or other statutory provisions regulating their
B relationship; in a sale occasioned by the default of the pawner in redeeming
the article, the auctioneer and not the pawnbroker should be treated to be
the seller and liable to pay sales tax; as the pawnbroker himself was entitled
to bid at the sale under the Rules at most the sale could be deemed to be
merely incidental to the main business to the pawnbroker not attracting
sales tax; and that the statutory method of disposal of the pawned articles
C through an auctioneer did not amount to transferring the general property
rights in the goods by the pawnbroker to the purchaser.
It was contended by the respondents-States that the factum of sale
in disposing of the pledged articles through public auction, could not be
disputed; that the right to bring the articles for sale through public auction
D in the event of default on the part of the pawner to redeem vests with the
pawnbrok<-rs and the same was incidental to the business of 'pawnbroker';
and that the concept of'business' included the business of pawnbroker with
the incidental right to sell the unredeemed goods and on these facts the
auctioneer could not be treated as a seller for imposing tax on him.
E Dismissing the appeals, this Court
HELD : 1.1. Pawnbroker is a person who carries on the business of
taking goods and chattels in pawn for a loan. On payment of the money
lent with interest and other admissible incidental expenses, the pawnbroker
is liable to return the articles pledged. Sections 172 and 173 to 177 of the
F Contract Act, 1872, Sections 2(7), 3, 7, 11 and 12 of the Karnataka
Pawnbrokers Act, 1961, Rule 20 of Karnataka Pawnbrokers Rules and
Section 2(f-2), (k) and (t) of the Karnataka Sales Tax Act, 1957 show that
the pawner can redeem the pledged article within the period stipulated or
within the grace period provided or before the sale of the pawned article
takes place through the auctioneer. However, once the article is brought
G for sale and sold, the pawner would lose his right in the pawned article as
the general property right in the said article passes on to the purchaser.
1465-F; 466-E-F; 470-G-H)
1.2. The pawnbroker has special property rights in the goods pledged,
a right higher than the mere right of detention of goods but a right lesser
H than general property right in the goods. The pawner at the time of the
KARNATAKAPAWNBROKERSASSON. v. STATE 463
pledge not only transfers to the pawnee the special right in the pledge but A
also passes on his right to transfer the general property right in the pledge
in the event of the pledge remaining unredeemed resulting in the sale of the
pledge by public auction through an approved auctioneer. Therefore, it is
the pawnee who holds not only the absolute special property right in the
pledge but also the conditional general property interest in the pledge, the B
condition being that he can pass on that general property only in the event
of the pledge being brought to sale by public auction in accordance with
the Act and the Rules framed thereunder. [474-C-E]
Bagal Kot Cement Co. v. State of Mysore, [1976] 1SCC336, relied on.
Kandula Radhakrishna Rao v. Province of Madras, (1952) 3 STC, 121
c
(Mad) approved.
1.3. In the sales of unredeemed goods through public auction by an
approved auctioneer, the pawnee who has control or possession over the
goods and who was given statutory authority to pass on the general property D
in and title to the goods, is the seller and as such, satisfies the definition of
"dealer" under the General Sales Tax Act of both the States. This conclusion
is further strengthened by the definition.of"pawnbroker". The Explanation
to the definition of"pawnbroker" contemplates that every person who keeps
a shop for the purchase or sale of goods or chattels and who purchases goods E
and chattels and pays or advances thereon any sum of money, with or under
an agreement or understanding expressed or implied that the goods or
chattels may be afterwards repurchased on any terms, is a "pawnbroker"
within the meaning of the main clause. The activities ofa pawnbroker as in
question, will satisfy the definition of "business" as well. The pawner has
no role at all in the sale of the goods pledged except to redeem the same F
before the sale is concluded. Therefore, he cannot be treated as a seller in
the context of the transaction. [476-A-D)
Bagal Kot Cement Co. v. State ofMysore, [1976] 1 SCC 336 and Member,
Board of Revenue, West Bengal v. Controller of Stores, Eastern Railway, 74 G
STC 5, relied on.
1.4. An auctioneer cannot be treated as a seller liable to pay sales tax
on the turnover as the role of the auctioneer in the facts of the present cases
is very limited and he is not under the control of the pawnbroker. Instead
the auctioneer is under the control of the authorities concerned who granted H
464 SUPREME COURT REPORTS [1998] SUPP. 2 S.C.R.
A him approval for being an auctioneer. Therefore, the appellants' contention
that in the transactions in question, the auctioneer must be held liable for
payment of tax, is rejected. (476-D-E; 478-E)
Dy. Commissioner of Commercial Taxes v. Sri Dayanand Corporation,
21 STC 346 (Mad), approved.
B
l.S. The appellants' further contention that having liberty to bid and
purchase at the sale of unredeemed goods, the pawnbroker could not be
deemed as a "seller" as he could not sell the goods to himself, is misconceived
as the pawnbroker in such circumstance plays a dual role-one as a
C pawnbroker and the other as the individual selr. Therefore, the contention
that the pawnbroker could not be treated as a seller of goods in the facts
and circumstances of the present cases and, therefore, not a "dealer" under
the Sales Tax Act, has to be rejected. (478-F-H; 479-A-B)
L.S. Chandramouli v. State ofMadras, 18 STC 325 (Mad), approved.
D
1.6. Moreover, it is now well settled that any activity incidental or
ancillary to the main business will also come within the definition of
"business" under the Sales Tax Act and, therefore, the contention that the
sale of unredeemed goods, being incidental to the business of pawnbroker
was not liable to sales tax, cannot be accepted. (479-B-C)
E
Lal/an Prasad v. Rahmat Ali, (1967) 2 .&,CR 233; Balkrishan Gupta v.
Swadeshi Politex Ltd., (1985) 2 SCC 167; Chowringhee Sales Bureau (P) Ltd
v. CIT, (1972) 3 SCC 196; Provincial Govt. of Madras v. Mudukuru
Munirathnam Chetti, 4 STC 296 and Dy. Commissioner ofCommercial Taxes
F v. A.R.S. Thirumeninatha Nadar, 21 STC 184 (Mad), distinguished.
Bank of Bihar v. State ofBihar, (1972) 3 SCC 196, referred to.
2. Therefore, it has to be held that the impugned judgments of the High
Courts holding that the pawnbrokers are liable to pay sales tax on the sales
G of articles through public auction on account of default committed by the
pawner, lay down the correct law and do not call for any interference.
[472-D; 481-A)
Karnataka Pawnbrokers' 'Association v. State ofKarnataka, 94 STC 243
(Kant.) (DB) and Madras Pawnbrokers' Association v. State of Tamil Nadu,
H 98 STC 457 (Mad.) (DB), affirmed.
KARNATAKAPAWNBROKERS ASSON. v. STATE [K. VENKATASWAM!,J.] 465
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 7321- A
7327 of 1995.
WITH
Civil Appeal Nos. 9297-9298 of 1995, 9482 of 1995, 1800 of 1996,
6894-6895 of 1996, 7683 of 1996, 11293 of 1995.
From the Judgment and Order dated 26.11.92 and 4.12.92 of the B
Kamataka High Court in W.A. Nos. 1710-11 and 1784-88 of 1992.
Dushyant Dave, K. Parasaran, T.L.V. Iyer, S.R. Setia, K.K. Mani, K.
Ram Kumar, T.V.S.N. Chari, M.A. Chinnaswamy, S. Srinivasan, M. Veerappa
and V. Krishnamurthy for the appearing Parties.
The Judgment of the Court was delivered by c
K. VENKATASWAMI, J. The common question that arises for
consideration in all these appeals is whether a Pawn-broker is a '·dealer' and
carries on 'business' within the meaning of the State General Sales Tax Act
. read with the State Pawnbrokers Act and Rules when he causes the sales of
unredeemed articles/goods, occasioned by the default of the Pawner through
D
(statutory) Auctioneer.
The above question has to be considered with reference to the provisions
of the Tamil Nadu General Sales Tax Act read with the Tamil Nadu
Pawnbrokers Act and Rules as well as the Kamataka Sales Tax Act read with E
the Kamataka Pawnbrokers Act and Rules. We may point out that the relevant
provisions of both the Sales Tax Acts and the Pawnbrokers Act are substantially
the same and for the sake of convenience the provisions mentioned hereinafter
are the provisions of the Kamataka Acts.
Before going into the submissions advanced at the bar, certain basic F
background facts need to be stated.
'Pawn-broker' is a person who carries on the business of taking goods
and chattels in pawn for a loan. On payment of the money lent with interest
and other admissible incidental expenses, the pawn-broker is liable to return
the articles pledged. Under the Act and Rules framed thereunder, the pawn- G
broker has to take out a licence to carry on the business of pawn-broker. In
addition to that, he has to maintain various account books, registers and
records as prescribed under the Rules. In the event of the pawner's failure to
redeem the pledged articles within the stipulated time and the grace period
statutorily allowed, the pawn-broker is at liberty to bring the articles pawned
for sale at a public auction conducted in accordance with the rules prescribed H
466 SUPREME COURT REPORTS [1998] SUPP. 2 S.C.R.
A under the Act. Such sale by public auction must be conducted only through
an approved auctioneer and in the manner specified in the rules. The pawn-
broker is given liberty to bid at such public auction.
The relevant statutory provisions may now be noted.
Before the enactment of the Pawn-brokers Act by the States, the
B transactions of pledge/pawn were governed by the provisions of the
Indian Contract Act. Chapter IX of the Contract Act deals with the
bailments of Pledges. Section 172 defines 'pledge', 'pawner' and
'pawnee' as under :-
"The bailment of goods as security for payment of a debt or
c performance of a promise is called "pledge". The bail or is in this case
called the "pawner". The bailee is called the "pawnee".
Sections 173 to 176 deal with the various rights of the Pawnee. Section
177 deals with the defaulting pawner's right to redeem.
D In addition to the provisions in the Contract Act dealing with the pledge,
it was felt necessary by the States to bring in a separate legislation concerning
the business of Pawn-brokers in order to regulate and control that business
of Pawn-brokers. Accordingly, the Pawnbrokers Act came to be enacted. The
Pawnbrokers Act provides details of the manner in which the business of a
E Pawn-broker should be carried on and how the rights and liabilities of the
Pawner and the Pawnee should be adjusted and settled.
A Pawn-broker in the Karnataka Pawnbrokers Act (hereinafter called
the 'Act') is defined in Section 2(7) as follows:-
"Pawn-broker'' means a person who carries on the business of taking
F goods and chattels in pawn for a Joan;
Explanation-Every person who keeps a shop for the purchase or
sale of goods or chattels and who purchases goods or chattels and
pays or advances thereon any sum of money, with or under an
agreement or understanding expressed or implied that the goods or
G chattels may be afterwards re-purchased on any terms, is a pawnbroker
within the meaning of this clause."
Section 3 compels the Pawn-broker to obtain a licence. Section 7 directs
the Pawn-broker to give a ticket to the Pawner on taking a pledge in pawn.
Section 11, an important section, deals with the redemption of pledge, which
H reads as follows:-
KARNATAKAPAWN BROKERSASSON. v. STATE[K. VENKATASWAMl,J.] 467
"11. Redemption of pledge - (!) Every pledge shall be redeemable A
within one year from the day of pawning. exclusive of that day; and
there shall be added to that year of redemption fifteen days of grace
within which every pledge (if not redeemed within the period of
redemption) shall continue to be redeemable.
(2) A pledge pawned for a sum not exceeding ten rupees, if not B
redeemed within the period of redemption and days of grace, shall at
the end of the days of grace become the pawnbroker's absolute
property.
(3) A pledge pawned for a sum exceeding ten rupees shall further C
continue to be redeemable until it is disposed of as provided in this
Act, although the period of redemption and days of grace have expired.
Explanation -Where the contract between the parties provides a longer
period for redemption than one year, the provisions of sub-sections ( 1), (2)
and (3) shall be read and construed as ifreferences to such longer period had D
been substituted for the references to the period of one year therein."
Section 12 of the Act deals with the sale of pledge and inspection of
sale book, which reads as follows:-
"Sale ofpledge and inspection of sale book. (1) A pledge pawned for E
a sum exceeding ten rupees shall, when disposed of by the pawnbroker,
be disposed of by sale by auction and not otherwise, and the sale
shall be conducted in accordance with such rules as may be prescribed.
(2) A pawnbroker may bid for and purchase at a sale by public
auction conducted under sub-section (1 ), a pledge pawned with him; F
and on such purchase he shall become the absolute owner of the
pledge.
(3) At any time within three years after the public auction, the holder
of the pawn-ticket may inspect the entry relating to the sale either in G
the pawnbroker's book or in such catalogue of the auction as may be
prescribed.
(4) (a) Where on such inspection or otherwise the ple4ge appears to
have been sold for more than the amount of the loan and the interest
and charges due at the time of the sale, the pawnbroker shall pay to H
468 SUPREME COURT REPORTS [1998] SUPP. 2 S.C.R.
A the holder of the pawn-ticket, on demand made within three years
after the sale, the surplus after deducting therefrom the necessary
costs and charges of the sale.
(b) If on such demand it appears that the sale of the pledge has
resulted in a surplus but that within twelve months before or after
B such sale, the sale of another pledge or pledges of the same person
has resulted in a deficit, the pawnbroker may set off the deficit against
the surplus and shall be liable to pay only the balance, if any, after
such set off."
The next relevant provision will be Rule 20 of the Karnataka
C Pawnbrokers Rules, which reads as under :-
"20. Procedure in auction of pledges. - The procedure for sale by
public auction of pledges shall be as follows:-
(I) The sale shall be conducted by an auctioneer approved by the
D Licensing Authority or from the Inspector of Money Lenders and the
Pawn-Brokers.
(2) The auctioneer shall-
(i) cause all pledges to be exposed to public view;
E (ii) get a catalogue of the pledges to be sold in auction containing
the following particulars printed:-
(a) the name, place of business and licence number of the pawn-
broker concerned;
F (b) date of loan;
(c) number of the pledge in the pledge book;
(d) full and detailed description of the article (weight to be noted
in case of jewels);
G (e) name and address of pawner; and
(t) date, hour and place of sale;
(iii) publish the printed catalogue by getting a copy thereof posted at
the place of business of the pawn-broker and by distributing copies
H among intending bidders;
KARNATAKA PAWN BROKERS ASSON. v. STATE [K. VENKATASWAMI, J.] 469
(iv) send at least a week before the date fixed for the sale:- A
(a) two copies of the printed catalogue to the police station
having jurisdiction over the premises where the auction is to be
held, one copy for being posted on the notice board of the
police station and another copy for record at the police station:]
B
[(aa) two copies of the printed catalogue to the Licensing
Authority having jurisdiction over the premises where the auction
is to be held, one copy for being pasted on the notice board of
his office and another copy for record;
(b) one copy of the printed catalogue to the police station or C
each of the police stations having jurisdiction over the place of
the business of the pawnbroker concerned for record at such
police station; and
(c) in any case, shall notify each of the police stations having
jurisdiction over the places of business of the pawnbroker D
concerned and the place or places of sale, and postponement of
such auction and all the subsequent dates of auction;]
(v) send a copy of the printed catalogue by registered post to the
pawner at least a week before the date fixed for sale.
E
(3) The pledges of each pawnbroker in the catalogue shall be separate
from the pledges of any other pawnbroker notifying the sale in a
news paper approved by the Licensing Authority or the Inspectors of
Money Lenders and the Pawnbrokers furnishing the following details
also:
F
(a) the pawnbroker's name and place of business; and
(b) the months in which the pledges were pawned.
(4) Where the pawnbroker himself bids at the sale, the auctioneer
shall not take the bidding in any form other than that in which he G
takes, the bidding of other persons at the same scale, and the auctioneer
on knocking clown any article to a pawnbroker shall forthwith declare
audibly the name of the pawnbroker as purchaser.
(5) The auctioneer shall, within fourteen days, after the sale deliver
to the pawnbroker an authenticated copy of the catalogue, or of so H
470 SUPREME COURT REPORTS (1998] SUPP. 2 S.C.R.
A much thereof as relates to the pledges of that pawnbroker indicating
also the charges for the sale of each article.
(6) The pawnbroker shall preserve every such catalogue for at least
three years after the auction."
B Section 2(f-2) of the Kamataka Sales Tax Act, 1957 defines 'business'
as follows;
"Business" includes -
"(i) any trade, commerce or manufacture or any adventure or concern
in the nature of trade, commerce or manufacture, whether or not such
c 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
D (ii) any transaction in connection with, or incidental or ancillary to
such trade commerce, manufacture, adventure or concern."
Section 2(k) defines 'dealer'. The relevant portion is as follows:
"2(k) "Dealer" means any person who carries on the business of
buying, selling, supplying or distributing goods directly or otherwise,
E whether for cash or for deferred payment, or for commission,
remuneration or other valuable consideration, and includes - ............. "
The definition of 'sale' is found in Section 2(t). The relevant portion
is as follows:-
F
"2(t) "Sale" with all its grammatical variation and cognate expressions
means every transfer of the property in goods [other than by way of
a mortgage, hypothecation, charge or pledge] by one person to another
in the course of trade or business for cash or for deferred payment or
other valuable consideration, [and includes, ......... "
G
A careful reading of the above extracted provisions will show that the
Pawner can redeem the pledged article within the period stipulated or within
the grace period provided or IJefore the sale of pawned article takes place
through auctioneer. However, once the article is brought for sale and sold,
the Pawner would lose his right in the pawned article as the general property
H right in the said article passes on to the purchaser.
KARNATAKAPAWNBROKERSASSON. v. STATE[K. VENKATASWAMI,J.] 471
On the basis of the general facts broadly stated as above, the contentions A
of the learned counsel were advanced.
S/Shri K. Parasaran and D.A. Da,ve, learned senior counsel, advanced
leading arguments on behalf of the appellants. The contentions raised by the
counsel are as follows:-
B
The Pawn-brokers as money lenders lend money on the pledge of articles.
It is incorrect to state that they are engaged in the business of buying and/
or selling of goods. On the pledge of the articles, a relationship of bailor and
bailee comes into existence and as such the bailee has no right to sell the
property contrary to the contract or other statutory provisions regulating their C
relationship. If at all there is a sale occasioned by the default of the Pawner
in redeeming the article, the auctioneer must be treated as the seller and the
liability to pay the sales tax will be only on the auctioneer. As the Pawn-
broker himself is given a right to bid at the sale under the rules, he cannot
be treated as the seller. Consequently, the Pawn-broker cannot be considered
as a dealer effecting a sale. According to the learned senior counsel, on a D
harmonious reading of the relevant provisions of the Sales Tax Act and the
Pawnbrokers Act, the only conclusion possible is that the Pawn-broker is not
a dealer effecting a sale of property and, therefore, he is not liable for sales
tax on such sales. At the most, it is contended that the sale of pledged
articles, in the circumstances, must be deemed to be incidental to the main E
business of pawn-broker not attracting the provisions of the State General
Sales Tax Act. It is also contended that the fact that Pawnbrokers Act and the
Rules framed therein enabled the Pawn-brokers to dispose of the pawned
articles by way of sale through an auctioneer; it does not in any way amount
to transferring the general property right in goods by the Pawn-broker to the
purchaser. Next it was contended that if it were to be held that the sale of F
pawned articles conducted at the instance of the Pawn-broker resulting in
passing on of the property to the purchaser, it would be contrary to the
concept of sale as contained in the Sale of Goods Act as the law does not
recognise such a transaction as a sale.
G
Mr. T.L.Vishwanatha Iyer, learned senior counsel appearing on behalf
of the State ofKamataka ~d Mr. V. Krishnamurthi, learned counsel appearing
on behalf of the State of Tamil Nadu, answering the contentions of learned
counsel for the appellants, submitted that factually there is a sale in disposing
of the pledged articles through public auction, cannot be disputed. The right
to bring the articles for sale through public auction in the event of default on H
472 SUPREME COURT REPORTS [1998] SUPP. 2 S.C.R.
A the part of the pawner to redeem, vests with the 'Pawn-broker' and the same
is incidental to the business of p~wn;broker. The concept of 'business' includes
the business of pawn-broker with incidental right to sell the unredeemed
goods. On the facts of the case, the auctioneer cannot be treated as the seller
for imposing tax on him. The appellants have admitted that the sale of
B unredeemed articles is incidental to the business of pawnbroker. If that be so
the liability to pay sales tax on such sales cannot be avoided in view of the
definitions of 'business', 'dealer' and 'sale' in the Sales Tax Acts. The learned
counsel submitted that the reasonings given by the High Courts are well-
founded and the conclusions thereon do not call for interference in these
appeals.
c
The case law cited by the learned counsel on both the sides will be
referred to at the appropriate place.
All the contentions now raised by the learned counsel for the appellants
were raised before the High Courts of Karnataka and Madras, but without
D success. Both the High Courts rejected similar contentions and found th11! the
Pawnbrokers are liable to pay sales tax on the sales of articles through public
auction on account of default committed by the Pawner.
The learned judges of the Division Bench of the Karnataka High Court
E after referring to a judgment of this Court in Bank of Bihar v. State of Bihar,
AIR (1971) SC 1210, held that the Pawnbroker has a special property right
in the pledge and that special property right is to be distineuished from the
mere right of detention which the holder of a lien possesses. The Division
Bench also held that the sale of unredeemed goods takes place at the instance
of the Pawnbroker and such sale held through the approved auctioneer results
F in passing on the general property right in the goods to the purchaser.
According to the learned Judges the Pawnbroker squarely falls in the main
definition of 'dealer' under the Karnataka General Sales Tax Act. To come
to the above conclusion the learned Judges invoked the aid of definition of
'pawnbroker' in Section 2(7) of the Pawn Brokers Act. After referring to a
G judgment of this Court in La/Ian Prasad v. Rahmat Ali and Anr., [1967) 2
SCR 233, the learned Judges held that a Pawn-broker has an implied authority
to sell and such activity of sale which is incidental/ancillary to the business
of Pawn-broker falls within the definition of business under the Karnataka
Sales Tax Act. The learned Judges rejected the contention of the assessees
that, if at all, for the sale of pawned articles the auctioneer is liable for sales
H tax and not the Pawn-broker. The reason for rejecting the above contention
KARNAT AKA PAWN BROKERS AS SON. v. STATE [K. VEN KA TASW AMI, J.] 4 73
was that the auctioneer was not the agent of the Pawn-broker but appointed A
as auctioneer under the relevant rule. According to the learned Judges, the
Pawn-broker has authority under the statute to bring the pawned articles for
sale and the pawner loses all his rights in the article sold through the auctioneer
at the instance of the Pawn-broker.
The learned Judges of the Division Bench of the Madras High Court B
also took the view as that of the Karnataka High Court and gave additional
reasons as well. After referring to a full Bench judgment of the Madras High
Court in Kandula Radhakrishna Rao and Ors. v. The Province of Madras, 3
STC 121, the learned judges held that the pawner, who pledges the article
with the licensed Pawn-broker, not only parts with the possession of the C
pledged article in favour of the Pawn-broker, but by virtue of such pledge
parts with the rights he held to sell the pledged article in case of default of
payment and discharge of loan or redemption of the article pledged within
the time stipulated therefor by the contract or by the provisions of the Act
and the rules made thereunder. The learned Judges further held that the sale
of the pawned article can be safely and legitimately be said to be occasioned D
or brought about by the action of the Pawn-broker only and consequently, he
alone has to be treated in law as the person responsible and also as the person
who has sold the pledged articles. The intervention of an approved auctioneer
is only to prevent abuse by the Pawn-broker of his right to auction the un-
redeemed pledged articles to the detriment of the pawner and to prevent E
exploitation of his innocence or indigent circumstances. The position of the
auctioneer was that of a mere crier or broker, who brings about sale. Therefore,
the auctioneer can by no stretch of imagination be characterised as a seller
inasmuch as he cannot be said to have any personal or propriety interest
either in the pledged articles or in the amount realised by virtue of the sale.
The pawner plays no role whatever in the actual sale of the articles, though F
it is his default in redemption of the pledged articles that results in the
auction sale of the pledged articles. It was the view of the learned Judges that
the Pawn-broker, whose action and decision brings about the sale and who
alone having possession hands over the pledged articles to the successful
bidder subsequently, is to be considered as a seller under the Sales Tax law. G
The learned Judges held that the Pawn-broker satisfies the definition of 'dealer'
as well as 'business' under the Tamil Nadu General Sales Tax Act, which are
substantially the same as that of the corresponding definitions in the Karnataka
Sales Tax Act.
Aggrieved by the above conclusions the present appeals by special H
474 SUPREME COURT REPORTS [1998] SUPP. 2 S.C.R.
A leave are filed.
The learned Judges of the Division Bench of the Kamataka High Court
as well as the learned Judges of the Division Bench of the Madras High
Court have written elaborately on the subject citing numerous authorities of
this Court and of the High Courts to support their conclusions. We are, with
B respect in agreement with the conclusions and the reasonings given for such
conclusions in the judgments under appeal. We do not, therefore, propose to
give elaborate reasonings, except to point out the principal reasonings to
sustain the conclusions reached in judgments under appeal.
It cannot be and it is not disputed that the Pawn-broker has special
C property rights in the goods pledged, a right higher than a mere right of
detention of goods but a right lesser than general property right in the goods.
To put it differently, the pawner at the time of pledge not only transfers to
the pawnee the special right in the pledge but also passes on his right to
transfer the general property right in the pledge in the event of the pledge
..
remained unredeemed resulting in the sale of the pledge by public auction
D through an approved auctioneer. The position being what is stated above the
natural consequence will be that it is the pawnee who holds not only the
absolute special property right in the pledge but also conditional general
property interest in the pledge, the condition being that he can pass on that
general property only in the event of the pledge brought to sale by public
E auction in accordance with the Act and the Rules framed thereunder.
In this connection, we can usefully quote a passage from Kandula
Radhakrishna Rao (supra), which has been approved by this Court in Bagal
Kot Cement Co. v. State of Mysore, [1976] 1 SCC 336.
F The Madras High Court in Kandula Radhakrishna Rao 's case (supra),
(a Full Bench Judgment) speaking through Rajamannar, C.J., an eminent
Judge, had an occasion to consider the position of a broker and a commission
G
agent under the Madras General Sales Tax Act, 1939 and the rules made
thereunder. The question that was considered in the said judgment was as to
whether a commission agent is a dealer or not under the Taxing Enactment.
The learned Chief Justice observed as follows :-
-
"As no written conveyance, still less a registered deed, is necessary
for the sale of goods, unlike in the case of sale of immovable property,
the contract of sale is preformed when the goods are actually delivered.
It is because that there can be a sale by a person who has no title to
H the goods that Section 27 enunciates the rule that the buyer acquires
KARNATAKAPAWN BROKERSASSON. v. STATE[K. VENKATASWAMI,J.] 475
no better title to the goods than the seller had. !n the case of a A
commission agent, the accepted mercantile practice is that he has
control over or possession of the goods and he has the authority from
the owner of the goods to pass the property in and title to the goods.
If this is so, undoubtedly when a commission agent sells goods
belonging to his principal with his authority and consent and without B
disclosing to the buyer the name of the owner, there is certainly a
transfer of property in the goods from the commission agent to the
buyer. A business which consists in such transactions can properly be
described as a business of selling goods. A similar position would
arise even in the case of a commission agent buying for an undisclosed
principal. A Commission agent doing this kind of business would, in C
my opinion, fall within the definition of dealer in the Sales Tax Act.
Neither the definition of dealer nor of sale contemplates as a necessary
condition, that the goods sold should belong to the person selling or
buying. There can be a sale or purchase on behalf of another."
We have already pointed out that this view of the Full Bench of the D
Madras High Court had the approval of this Court in Bagal Kot Cement Co.
(supra).
In Member, Board of Revenue, West Bengal v. Controller of Stores,
Eastern Railway, Calcutta, [74 STC 5], this Court had an occasion to consider E
whether the South Eastern Railway as a carrier of goods when sells the
unclaimed goods was carrying on an activity incidental or ancillary to its
business as carrier of goods and, therefore, was a 'dealer' for the purpose of
the Bengal Finance (Sales Tax) Act, 1941 and liable to pay sales tax on the
sale of unclaimed goods. While answering the question in the affirmative the
learned judges held as follows : F
"In these appeals the question is whether the assessee - railway in
each case is a "dealer" for the purpose of assessment under the Bengal
Finance (Sales Tax) Act, 1941. In the case of the assessee, South
Eastern Railway, what were sold were unclaimed goods. The railway G
was a carrier of the goods and if at the stage of delivery goods
remained unclaimed for a period the railway was entitled to dispose
them of. There can be no doubt that the activity of so disposing of
the goods was adjunctive to the principal activity of the carriage of
goods by the railway. It is an activity which may be regarded as
necessarily incidental or ancillary to its business as carrier of the H
476 SUPREME COURT REPORTS (1998] SUPP. 2 S.C.R.
A goods. It seems to us that the assessee, South Eastern Railway, was
a "dealer" for the purposes of the Bengal Finance (Sales Tax) Act.
1941."
Applying the above principle to the facts of these cases, we are clearly
of the opinion that in the sales of unredeemed goods through public auction
B by an approved auctioneer the pawnee, who has control or possession over
the goods and who was given statutory authority to pass the general property
in and title to the goods, is the seller and as such, satisfies the definition of
'dealer' under the General Sales Tax Act of both the States. This conclusion
t
is further strengthened by the definition of 'Pawn-broker' (supra). The
C explanation to the defmltion of 'Pawn-broker' contemplates that every person
who keeps th : shop for the purchase or sale of goods or chattels and who
purchases goods or chattels and pays or advances thereon any sum of money,
with or under an agreement or understanding expressed or implied that the
goods or chattels may be afterwards re-purchased on any terms, is a
'Pawnbroker' within the meaning of main clause. The activities of pawnbroker
D as detailed above will satisfy the definition of business as well. We have also
noticed that the pawner has no role at all in the sale of goods pledged except
to redeem the same before the sale is concluded. Therefore, he cannot be
treated as seller in the context of the transaction.
Likewise, the auctioneer cannot be treated as a seller liable to pay sales
E tax on the turnover as the role of the auctioneer in the facts of these cases
is very limited and he is not under the control of the pawnbroker. Instead tl1e
auctioneer is under the control of authorities concerned who granted approval
for being an auctioneer. In this connection we can usefully cite a Division
Bench judgment of the Madras High Court in The Deputy Commissioner of
F Commercial Taxes, Madras Division, Madras -7 v. Sri Dayanand Corporation,
Madras-I, [21 STC 346]. The issue for decision in that case was whether the
auctioneer can be considered as a dealer for the purpose of levy of sales tax.
The auctioneer in that case was also an approved Auctioneer under the
provisions of the Tamil Nadu Pawnbrokers Act. While holding that the
auctioneer was not a 'dealer' liable to pay tax, the learned judges observed
G as follows :-
"We have carefully gone through the formalities which the above
rules have laid down for the procedure at the auction of pledged
goods by the auctioneer. But nowhere has it been stated that the
auctioneer should take over possession of the goods from the
H pawnbroker and sell them. Even the specific provision in rule 15(2)
KARNATAKA PAWN BROKERS ASSON. v. STATE [K. VENKATASWAMI, J.] 477
extracted above, only directs the auctioneer to cause all pledges to be A
exposed to public view. He could perform this obligation by directing
the pawnbroker to be present at the time of the sale with the articles
proposed to be sold and keep them ready for inspection. But this
obligation will not make it necessary for the pawnbroker to part with
possession of the goods in favour of the auctioneer.
B
With a little reflection, one also realises that a careful pawnbroker
would like to keep the goods in his own custody until they are sold
and would not like to hand over possession to the auctioneer without
any security for their safe custody. The provisions in the pawnbrokers
Act and in particular, the obligation that auction sales of unredeemed
., goods shall be effected according to certain prescribed rules through
c
approved auctioneers are intended to safeguard the pledgers of goods
from the effect of nominal or bogus sales of their goods by
pawnbrokers in the event of non-redemption, which will otherwise
have the effect of preventing poor persons, who resort to the
pawnbrokers for loans, from getting a proper value of the pledged D
goods when they remain unredeemed. The intervention of the
auctioneer is, therefore, intended for safeguarding the interest of the
pledgers of goods but at the same time, the rules are careful to see
that the interest of pawnbrokers are not also affected and they do not
require them to part with the possession of the goods to the auctioneer
E
before the sale. In fact the rules are silent about the mode of delivery
of the goods. They have meticulously provided for the manner in
which the sales are to be published and conducted. The auctioneer
will be carrying out the obligations under the rules, even without
taking possession of the pledged goods and delivering them to the
highest bidder on the fall of the hammer. The pawnbroker can still be F
a person who retains the possession of the goods, and he can deliver
them to the successful bidder at the auction by the auctioneer. It is
from this point of view that we are impressed by the circumstances
mentioned by the Tribunal in its order including clause 5 of the
conditions of the auction sale which allows the bidder to take delivery
G
of the goods from the pawnbroker, and the bill of sale which makes
mention of the fact that the buyer will take delivery of the goods
from the pawnbroker on payment of t~e price to the auctioneer.
It is no doubt a fact that Section 2(g) of the Madras General Sales
Tax Act, 1959, which defines "dealer" includes an auctioneer. The H
478 SUPREME COURT REPORTS [1998] SUPP. 2 S.C.R.
A "auctioneer" is, however, included therein only as an instance of
other types of dealers who are also referred to in the definition. But
the main part of the definition at the beginning of Section 2(g) refers
to a person who carries on the.business of buying, selling, supplying
<>r distributing goods. Before these requirements can apply to a dealer,
for the purpose of levy of sales tax the transaction must amount to a
B sale as defmed in Section 2(n) of the Act. That defmition makes it
necessary that there should be a transfer of property in the goods by
one person to another in the course of business for cash or deferred
payment or other valuable consideration. In the present case, there is
a clear finding that the auctioneer merely served the purpose of
c bringing the bidders and the pawnbrokers into contact with each other
and also arranged for the holding of a sale in an open and fair manner,
giving the widest publicity to the sales so that the pledgers might get
the most advantageous price at the open sale of their pledged articles.
But it is the pawnbroker who ultimately delivers possession of
D the goods to the bidder. On this fmding of fact by the Tribunal it has
to be concluded that the respondent discharged only the duty of a
crier or a broker who brought the parties together, but he was not a
dealer who transferred the property in the goods to the highest bidder."
E We are in agreement with the above observations and the conclusions
reached thereon. This answers, in the negative, the contention advanced on
behalf of the appellants that if at all in the transactions in question, the
Auctioneer must be held liable for payment of tax.
Now coming to the contention that inasmuch as the pawn-broker is
F given liberty to bid and purchase at the sale of unredeemed goods, he cannot
be deemed as a seller as one cannot sell the goods to himself. This contention
is mis-conceived as the Pawn-broker in such circumstance plays a dual role-
one as a pawnbroker and the other as individual self. As a matter of fact, a
similar question arose before the Madras High Court in L.S. Chandramouli
G and Co. v. The State of Madras, 18 STC 325. In that case, the question for
consideration was whether a local agent of a non-resident principal, who
carried on business of his.own also transfers the goods of non-resident principal
to his own business can be considered as a transaction of sale chargeable to
tax. The learned judges overruling a similar contention held that the concerned
agent held two different capacities - one as an agent of a non-resident principal
H - and the other as proprietor of his own business, two different identities
KARNATAKAPAWNBROKERSASSON. v. STATE [K. VENKATASWAMI,J.) 479
altogether, while transferring the goods of the non-resident principal to himself, A
he not only acted as agent of his non-resident principal but also as a purchaser
and there is nothing in law which militates against the said conclusions and
consequent tax liability on such person. We have no hesitation to reject the
contention of the learned counsel for the appellants that the Pawn-broker
cannot be treated as a seller of goods in the facts and circumstances of these B
case and, therefore, not a 'dealer' under the Sales Tax Act.
It is now well settled that any activity incidental or ancillary to the
main business will also come within the definition of 'business' under the
Sales Tax Act and, therefore, the contention that the sale of unredeemed
goods, being incidental to the business of Pawn-broker was not liable to sales C
tax, cannot be accepted.
Let us now consider the decisions cited on behalf of the learned counsel
for the appellants.
Mr. K. Parasaran, learned senior counsel for the appellants, cited a D
Single Bench judgment of the Madras High Court in Provincial Government
of Madras v. Mudukuru Munirathnam Chetti and Anr., [4 STC 296]. This
judgment apart from the fact that it was rendered under the Madras General
Sales Tax Act, I 939, is not directly on the point and the context in which the
· judgment was rendered, was entirely different. That judgment considered a
transaction treated by both the parties as loan and entrustment of goods for E
sale to others to discharge the loan. It was held that transaction cannot be
treated as a sale at the hands of the person, who advanced the money for the
purpose of levy of sales tax. The nature and character of the transaction in
the case on hand are totally different. Therefore, the case cited has no
application to the facts of this case. F
Likewise, the decisions cited by Mr. Dave, learned senior counsel for
the appellants, namely, The Deputy Commissioner of Commercial Taxes,
Madurai Division, Madurai v. A.R.S. Thirumeninatha Nadar Firm, Tuticorin,
[21 STC 184], Lal/an Prasad v. Rahmat Ali and Anr., [1967] 2 SCR 233;
Balkrishan Gupta and Ors. v. Swadeshi Polytex Ltd and Anr., (1985] 2 SCC G
167 and Mis Chowringhee Sales Bureau (P) Ltd. v. C.lT. West Bengal,
[ 1973] I SCC 46, are all under different circumstances and with reference to
the facts of those cases which have no direct bearing to the issues raised in
these cases.
In The Deputy Commissioner of Commercial Taxes, Madurai Division H
480 SUPREME COURT REPORTS [1998] SUPP. 2 S.C.R.
A Madurai (supra), the Division Bench of the Madras High Court, on the facts
of the case, held that the bank in selling the goods pawned to it did not act
as agenc of the assessee and the sales were on behalf of the pledger. The
learned Judges further held that the pawn or pledge by itself did not make the
pawnee or pledgee the owner of the goods on the peculiar facts of that case.
B In La/Ian Prasad's case (supra), this Court considered a question whether
the appellant in that case was entitled to a decree in view of his denial of the
pledge and his failure to offer to redeliver the goods. In answering that
question, this Court, after referring to Section 176 of the Indian Contract Act,
held that so long, however, as the sale does not take place, the pawner is
C entitled to redeem the goods on payment of the debt. Therefore, the right to
sue on the debt assumes that he is in a position to redeliver the goods on
payment of the debt, and if by denying the pledge or otherwise, he has put
himself in a position whereby he is not able to redeliver the goods, he cannot
obtain a decree.
D In Balkrishna Gupta and Ors. (supra), again a judgment of this Court
had considered a question that arose under the Companies Act, 1956 and the
effect and consequence of appointment of a Receiver in respect of certain
shares of a company.
E In Mis Chowringhee Sales Bureau {P.) Ltd. (supra), this Court, on the
peculiar facts of that case, found that there was a close and direct connection
between an auctioneer and the transaction of auction sale in that case. On the
basis of the peculiar facts, this Court also found that the auctioneer had
collected sales tax on the auction sale of the goods but had not passed on the
F same to the Revenue. In such circumstances, this Court held that the auctioneer
was liable to pay sales tax under the West Bengal Act.
None of the cases cited by the learned counsel for the appellants has
any bearing to the facts of the cases on hand. On the other hand, the decisions
cited in the judgments under appeal and cited in this judgment in support of
G the conclusions are directly on point.
We have already stated that we are in agreement with the conclusions
reached by the learned judges in the judgments under appeal and we have
dealt with only the principal reasons sufficient for approving the judgments
H under appeal.
KARNATAKA PAWN BROKERSASSON. v. STATE [K. VENKATASWAMI,J.] 481
In the light of the discussions made above and for the reasons given A
above, we are of the view that the judgment under appeal lay down the
correct law and do not call for any interference. Accordingly, the appeals fail
and are dismissed. However, there will be no order as to costs.
R.K.S. Appeals dismissed.
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