Kerala High Court
Federal Bank Ltd. vs State Of Kerala on 3 April, 2003
Equivalent citations: I(2004)BC378, 2003(2)KLT347, [2003]45SCL555(KER), [2004]134STC377(KER)
Author: G. Sivarajan
Bench: G. Sivarajan, J.M. James
JUDGMENT G. Sivarajan, J.
1. Petitioners in O.P. No. 1169 of 2002 are the appellants. They are scheduled banks engaged in banking business in accordance with the provisions of the Banking Regulation Act. As part of their business some of the branches of the appellants advanced loans as against pledge of gold ornaments. In case of default committed by the customer in the matter of repayment of loan, the bank is vested with the right of realisation of the loan amount with interest by sale in public auction of the gold ornaments pledged. Accordingly when the customers defaulted repayment of the loan amount secured by pledge of gold ornaments the banks had effected sale of the pledged gold ornaments by public auction for the purpose of realisation of the loan amounts with interest from the customers. The proceeds of the auction sale is credited to the account of the customers and the balance, if any, after adjusting the amounts towards the dues of the bank is being returned to the customers in due course.
2. The respondents who are the State of Kerala and the authorities under the Kerala General Sales Tax, 1963 (for short 'the Act') have been taking the view that such transaction of the sale of gold ornaments in public auction by the banks and other financial institutions are liable to tax under the Act. Earlier when the sales tax authorities initiated action against the Federal Bank Ltd. - the first appellant herein - they approached this Court by filing Writ Petition, O.P. No. 9508 of 1994 challenging the said action. The learned Single Judge disposed of the said Writ Petition along with five other Writ Petitions upholding the action of the sales tax authorities. The learned Single Judge held that the petitioners therein are dealers as per Section 2(viii) of the Act and are liable to pay tax under Section 5 of the Act. It was also held that Section 2(viii)(f)(1) of the Act is constitutionally valid. The petitioners therein took up the matter in Appeal, W.A. No. 634 of 1997 and connected cases. A Division Bench (Chief Justice U.P. Singh as his Lordship then was and Justice S. Sankarasubban) in Lord Krishna Bank Limited and Anr. v. Assistant Commissioner (Assessment), Sales Tax Office, Special Circle, Trichur and Anr. ((1999) 114 STC 333) set aside the judgment of the learned Single Judge and allowed the appeals. The Division Bench held that the business of a banking company under the Banking Regulation Act, 1949 is not trading in goods; it mainly involves the accepting for the purpose of lending or investmentof deposits of money from the public and also the granting of money with security; banks advance money or give loans to customers on the basis of security; one type of security that is accepted is the pledge of gold ornaments; when the gold ornaments are pledged, the bank stands in the shoes of a bailee; the bank does not become the owner of the goods; the bank has got a special right in the property or goods to retain it so long as the amount borrowed on its security is not paid; it has also got a right to sell the goods not as an owner or an agent or in any other capacity; it sells the goods after giving notice to the pawner and the amount obtained is to be appropriated to the amount due to it; the entire consideration is not taken by the pawnee, because if the amount obtained exceeds the loan amount, the balance has to be returned to the owner of the goods; the owner of the goods can avoid the sale by redeeming the goods just before the sale is effected; it cannot be said that because the bank sells the property for realisation of the debts it stands in the shoes of a dealer who is engaged in the business of buying or selling; no doubt, from the definition of 'business' in the Act, it is not necessary that the sale should be with a profit motive; but even if it is not with a profit motive, the sale, business, or trade should be in the course of the activities or business of the assessee or it should be connected with the main business of the assessee; admittedly, the business of the bank is not the selling of goods or in any way connected with the goods; instead of selling the goods directly, it could sue and through the court realise the amount due to it and viewed from this angle, it cannot be said that the bank is carrying on any activities in trade or business in goods. It was also observed that the expression 'sale' as defined in the Act makes it clear that mere transfer of the property in goods by one person to another does not attract the provisions of the Act unless such transfer is in the course of trade or business, that the transaction of selling of secured goods is not incidental or main business of the bank and that since banks are prohibited from trading in goods it cannot be said that trading in goods is the main business. The State took up the matter in appeal before the Supreme Court (Civil Appeal Nos. 3550-53 of 1997 (State of Kerala v. Lord Krishna Bank)). The respondent bank sought permission to withdraw the cases. The Supreme Court in the above circumstances disposed of the Civil Appeals asfollows:
"In view of the fact that for a proper appreciation of the legal issues arising for consideration, the particulars of the nature of transactions is necessary, leave is sought for withdrawing the writ petitions with liberty to raise all the issues factual and legal, before the concerned authority.
The statement is made after we have heard learned counsel for the appellants and, partly, learned counsel for the respondents and have expressed our strong, prima facie, reservations about the correctness of the judgments under appeal.
On the application of learned counsel for the respondents aforestated, the writ petitions filed before the High Courts of Karnataka and Kerala (Writ Petition Nos. 18751/86, 13591/89, 1339/ 93 H, 9568/94 F, 962-63/93 M and 15547/92 A) are allowed to be withdrawn. Consequently, the judgments and orders delivered therein and in appeals therefrom, i.e., the judgments and orders under appeal stand set aside.
All arguments shall be open to either side in proceedings before the sales tax authorities. No order as to costs."
This is the situation which prevailed prior to the amendment of the definition of 'dealer' in Section 2(viii) of the Act. In Section 2(viii) a new clause - Clause (g) was added whereby a bank or a financial 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 realisation of such loan amount, will be a dealer. Subsequent to this amendment, the sales tax authorities respondents 2 to 4 and 6 had issued notices to the appellants stating that they have not furnished the details of sale or auction sale of gold ornaments made in their branch for the period from 1.4.1998 and whenever there is a sale or auction sale, the tax due thereon should be remitted to the State exchequer. The authorities have also brought to their notice the decision of this Court in Kerala Small Financiers Association v. State of Kerala and Ors. ((1999) 115 STC 563). The amendment to Section 2(viii) is made as per the Amendment Act 14 of 1988.
3. In the Writ Petitions the appellants have sought for a declaration that Sub-clause(g) of Clause (viii) of Section 2 of the Act introduced by the Finance Act 14 of 1998 is ultra vires and unconstitutional. They have also sought to quash the various notices, Exts.P4(a) and (b), P6(a) and (b), P7, P8, P10, PI 1, P12 to P15 and P17 and P18 and further consequential reliefs.
4. The respondents had filed a counter affidavit. It was contended therein that the amendment to Section 2(viii) is within the legislative competence of State and consequently unassailable, that the banks, in the process of effecting sale of the pledged gold ornaments, is really in the position of a pawnbroker and the sales of the pledged gold ornaments will in unmistakable terms fall within the ambit of 'sale' as defined in the Act and that in view of the new amendment introduced to Section 2(viii) of the Act, the scope of the definition of 'dealer' is widened to embrace banks also. It is stated that the banks are really carrying on business and they are dealers within the meaning of the Act, that while pledging an article with the bank the pawner not only parts with the possession of the pledged article in favour of the banks, but by virtue of such pledge parts with the rights he held to sell the pledged articles in case of default of payment and discharge of the loan or redemption of the articles pledged within the time stipulated therefor, that such auction sale by the banks do not depend upon any further consent or permission by the pawner, that there is no compulsion or mandate upon the banks to necessarily sell the articles even beyond the period fixed for redemption, that they can do so if they chose or they can always retain the article and return the same to the pawner on receipt of the dues even after the expiry of the period of redemption, that the exercise of discretion by the banks and their action alone sets in motion the process or procedure for having the pawned articles sold in public auction and therefore, the sale of pawned articles can be safely and legitimately be said to be occasioned or brought about by the method or action of the banks only and consequently, they alone have to be treated in law as the person responsible and also as the person who has sold the pledged articles. The respondents have denied the various other allegations made on facts. It is stated that a combined reading of the provisions such as 2(vi), 2(vii), 2(viii) and 2(xxi) would clearly reveal that sale need not necessarily be in the course of business or incidental or ancillary to any business activity as the definition of the word 'business' is an inclusive one. It is further stated that the petitioners are casual traders under Section 2(viii)(b) of the Act, that the sale of the pledged gold ornaments are being effected by the petitioners not as full owners of the goods, that it is by virtue of an implied authority from the pawner to do under Section 176 of the Indian Contract Act, that the said Section gives the petitioners the status of agent for the sale of the gold ornaments pledged by the principal pawner and that the sale of gold ornaments pledged is incidental or ancillary to the main activity of banking by the petitioners. It is further stated that by virtue of Article 246 read with Entry 54 of List II "of the Seventh Schedule of the Constitution of India the State Legislature is well within its competency to make the amendment as has been introduced by the Finance Act, 1998. The learned Single Judge dismissed the Writ Petition by holding that the amendment made to Section 2(viii) and the follow-up action are valid, however, with certain directions.
5. Shri. V. Ramachandran, learned senior counsel appearing for the appellants submitted before us that banks are not generally engaged in the business of buying or selling of goods, that they are only engaged in the business of banking and the transaction, viz., the auction sale of pledged gold ornaments by the banks cannot be treated as their business, either the main business or as incidental to the main activity and, therefore, the said transactions are not liable to be assessed under the Act. The senior counsel further submitted that though the definition of dealer in Section 2(viii) of the Act is amended by the Finance Act, 1998 by introducing a new Sub-clause(g) bringing the banks and financial institutions which effects sale of any gold or other valuable articles pledged with them to secure any loan for realisation of such loan amount within the definition of dealer, in the absence of corresponding amendments to the definition of 'business' and 'sale' in the Act, Legislature could not achieve the purpose for which the amendment was made. The senior counsel submitted that in order to bring the transaction of sale of gold or other valuable articles pledged with the bank to secure any loan as incidental to the business of the appellants the main business of the appellants must be one of dealing in goods. The activity in question cannot be brought under the definition of business under Section 2(vi) of the Act. The senior counsel brought to our notice the decisions reported in Lord Krishna Bank Limited and Anr. v. Assistant Commissioner (Assessment I), Sales Tax Office, Special Circle, Trichur and Anr. ((1999) 114 STC 333); Canara Bank v. Commercial Tax Officer and Anr. ((1997) 107 STC 488); Corporation Bank v. Government of Andhra Pradesh and Anr. ((2002) 125 STC 346); State of Tamil Nadu and Anr. v. Board of Trustees of the Port of Madras ((1999) 114 STC 520) and Commissioner of Sales Tax v. Sal Publication Fund ((2002) 126 STC 288). The senior counsel also sought to distinguish the decision of the Division Bench of this Court in Kerala Small Financier's Association and Ors. v. State of Kerala and Ors. ((1999) 115 STC 563) and the decision of the Supreme Court in Karnataka Pawn Brokers' Association and Ors. v. State of Karnataka and Ors. ((1998) 111 STC 752) by stating that the said decisions were rendered in the context of the provisions of the Karnataka Pawn Brokers' Act and Rules and Tamil Nadu Pawn Brokers' Act and Rules and that there is no similar provision in the Banking Regulation Act. The senior counsel also submits that the nature of business which the banking company like the appellants may engage is enumerated in Section 6 of the Banking Regulation Act, 1949 and that there is a specific prohibition in Section 8 against carrying on of any business other than that specified in Section 6. The senior counsel accordingly submitted that Section 2(viii)(g) of the Act is ultra vires and beyond the legislative competence of the State and since the banks are not engaged in the business of sale of any goods they are not liable to pay any tax in respect of the transactions in question. The senior counsel also submitted that the respondents must be interdicted from proceedings with the notices under challenge.
6. Shri. Raju Joseph, learned Special Government Pleader for Taxes appearing for the respondents submits that Sub-clause (g) of Clause (viii) of Section 2 of the Act introduced by the Kerala Finance Act, 1998 is constitutionally valid, that the appellant banks squarely fell within the extended definition of dealer under Section 2(viii) of the Act and that the authorities under the Act have acted legally and with jurisdiction in issuing impugned notices. The Special Government Pleader took us to the provisions of Section 5(1) of the Act and the definition of the terms 'dealer' and 'turnover' and submitted that there is no requirement in the charging Section that the turnover which is subjected to tax under the Act must be the result of any business carried on by the appellant banks. The Special Governmen Pleader also submitted that under the definition of 'dealer' even in respect of : transaction which is not in the course of business makes a person as a dealer under the Act, that the definition of the term business is only an inclusive one and not exhaustive and therefore, even if the transaction did not strictly come within the definition of the said word, still it will fall within the meaning of the word 'business'. He also pointed out that the legislative Entry 54 of the List II of Seventh Schedule is "taxes on the sale or purchase of goods" and the scope of the said words have been widened by the constitutional amendments made to Article 366 of the Constitution by introducing Clause (29 A) as per which wherever there is a transfer of property in the goods for cash, deferred payment or other valuable consideration is involved not as a direct result of sale is also brought within the meaning of the words 'tax on sale or purchase of goods'. The Special Government Pleader submitted that the constitutional provisions do not in any way provide that the tax on the sale or purchase of goods must be in the course of business. He accordingly submits that the amendment to the definition of 'dealer' in Section 2(viii) by introducing Clause (g) is constitutionally valid. The Special Government Pleader also submitted that the Division Bench decision of this Court in Lord Krishna Bank's case (mentioned supra) has been nullified by the judgment of the Supreme Court in Civil Appeals Nos. 3550-53 of 1997, that some of the appellants herein had submitted before the Supreme Court that they will pursue the matter before the authorities under the Act and, therefore, even without the amendment the appellants are liable to be proceeded under the Act. The Special Government Pleader also took us to the provisions of Sections 6 and 8 of the Banking Regulation Act and submitted that the said provisions clearly enabled the banks in conducting the business of sale of pledged articles apart from the sale of securities held by them and that the Division Bench decision of this Court in Lord Krishna Bank Ltd. 's case and the decision of the Andra Pradesh High Court in Corporation Bank's case (mentioned supra) did not notice the above provisions meticulously while holding that Section 8 of the Banking Regulation Act clearly prohibits the banks from carrying on business of sale or purchase of goods. The Special Government Pleader further submitted that the decision of the Supreme Court in Karnataka Pawn Brokers' Association's case (mentioned supra) squarely applied to the present case. He further relied on the decision of the Supreme Court in Food Corporation of India v. State of Kerala ((1997) 5 KTR 74).
7. The crucial question that arises for consideration in this case is as to whether the activity of auction sale of gold ornaments or other valuables pledged by customers as security for the loans taken by them from the banks forrealisation of the loan amount with interest can be said to attract the provisions of the Act making the bank liable to pay tax under the Act on such transactions. The State Legislature has amended the provisions of Section 2(viii) of the Act by introducing Sub-clause(g) by the Finance Act, 1998 including the transaction of sale of pledged gold ornaments by the banks within the definition of the term 'dealer' under the Act. The appellants, as already noted, submitted that the impugned amendment to the definition of dealer is not sufficient to make the banks liable to pay tax under the Act on the transaction of sale of pledged articles. According to them to achieve the said purpose the definition of the terms 'business' and 'sale' has also to be amended as done in the definition of 'turnover'. The appellants have also got a case that Clause (g) of Section 2(viii) is beyond the legislative competence of the State.
8. Before considering the constitutional validity of the amendment made to Section 2(viii) of the Act it is necessary to understand the scheme of the Act to ascertain as to whether the transaction of sale of pledged gold ornaments by the appellant banks can be subjected to tax under the Act. For that purpose we have to refer to the provisions of Section 5(1) of the Act which is the charging Section. Relevant portion of Section 5(1) reads:
"5. Levy of tax on sale or purchase of goods:-(1) Every dealer (other than a casual trader or agent of a non-resident dealer) whose total turnover for the year is not less than two lakh rupees and every casual trader or agent of a non-resident dealer, whatever be his total turnover for the year, shall pay tax on his taxable turnover for that year."
Relevant portion of Section 2(viii)(g) reads:
"(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:-
(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 realisation of such loan amount."
S.2(xxvii) reads:
"(xxvii) "turnover" means the aggregate amount for which goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration, provided that the proceeds of the sale by a person of agricultural or horticultural produce, grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover."
Section 2(xxvi) reads:
"(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 interstate 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."
The term 'business' is defined in Section 2(vi) which reads as follows:
"(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."
The term 'sale' is defined in Section 2(xxi) which reads as follows:
"(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."
The extended definition of sale contained in the explanations to the definition of sale takes in transactions which are not made in the course of business also (vide Explanations (1), (1A), (1B) and (2)).
9. Under the charging Section 5 every dealer whose total turnover for a year is not less than Rs. 2 lakhs shall pay tax on his taxable turnover. The definition of 'dealer' prior to the introduction of Sub-clause (g) by the Finance Act 14 of 1998, under the main part means any person who carries on the business of buying, selling, supplying or distributing goods directly or otherwise, whether for cash or for deferred payment, or for commission remuneration or other valuable consideration. This part of the definition contemplates the carrying of the business of buying, selling, supplying or distributing goods for consideration. However Sub-clause (e) thereof includes a person who, whether in the course of business or not, sells goods produced by him by manufacture, agriculture, horticulture or otherwise or trees which grow spontaneously and which are agreed to be severed before sale or under the contract of sale. Sub-clause (f) also includes a person who whether in the course of business or not, for cash or deferred payment or other valuable consideration sells goods. As per the definition of dealer in Clauses (e) and (f) of Section 2(viii) a person who sells goods specified therein will fall within the definition of dealer even though such sale was effected not in the course of business. In other words, carrying on of a business is not a requirement of the definition of dealerin Section 2(viii) in all cases. To put it differently in cases covered by Sub-clauses (e) and (f) of Section 2(viii) even though the person who effects sale of the goods mentioned therein is not carrying on any business the transaction will come within the definition of dealer. It must also be noted that the definition of turnover or taxable turnover does not mention about 'business' or regarding the carrying on of the business. However, the definition of total turnover refers to the place of business. Here it must be noted that the Act is one dealing with sale or purchase of goods and, therefore, the definition of sale has to be satisfied in order to make a person liable to tax under the Act. The definition of 'sale' under Section 2(xxi) clearly provides that every transfer of 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. Explanations 1 to 5 thereof widen the scope of the main part of the definition of sale by including transfer of property in certain goods or by persons effected otherwise than in the course of trade or business. The transaction in question does not fall within the extended definition of sale in Explanations 1 to 5 of Section 2(xxi). From the above provisions it would appear that transfer of the property in goods in the course of trade or business is a necessary ingredient of sale except in the cases specified in Explanations 1 to 5 of the definition of sale. In other words carrying on of a business as defined in the Act by a person is a necessary ingredient to attract the provisions of the Act in cases other than covered by explanations 1 to 5 of the definition of sale.
10. Now, let us see whether the appellant banks are engaged in any business coming within the definition of the said word under Section 2(vi). We have already extracted the definition of the word 'business' which includes 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. The term 'business' also includes any transaction in connection with or incidental or ancillary to such trade, commerce, manufacture, adventure or concern. Here, it is necessary to refer to the provisions of the Banking Regulation Act, 1949 under which the appellant banks are carrying on banking business, Section 5A of the Banking Regulation Act, 1949 provides that the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum of articles of a banking company, or in any agreement executed by it, or in any resolution passed by the banking company in general meeting or by its Board of Directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of the Banking Companies (Amendment) Act, 1959. Section 6 of the Banking Regulation Act deals with the business which can be carried on by banking companies. It provides that in addition to the business of banking, a banking company may engage in any one or more of the following forms of business, i.e. Clause (a) inter alia, provides for the buying, selling and dealing in stock, shares, securities, etc. and for purchasing and selling of all forms of securities, etc. Clauses (f) and (g) of Section 6(1) of the said Act, which are very relevant for the purpose of this case reads as follows:
"(f) managing, selling and realising any property which may come into the possession of the company in satisfaction or pan 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."
S.8 of the Banking Regulation Act reads as follows:
"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 realisation 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."
(underlining supplied) The Explanation also provides that for the purpose 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. These provisions clearly establish that the business of banking companies is one clearly falling within the definition of business in Section 2(vi) of the Act. Clauses (f) and (g) of Section 6(1) of the Banking Regulation Act, 1949 clearly provides for effecting sale of any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims. It also enabled the appellant banks to acquire and hold and to generally deal 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. Section 8 clearly saves the transaction covered by Clauses (f) and (g) of Section 6( 1). In view of the provisions of Sections 6 and 8 of the Banking Regulation Act, 1949, it is idle to contend that the appellant banks are not engaged in any business falling within the definition of 'business' under Section 2(vi) of the Act.
11. Now, let us refer to the decisions relied on by the appellants. A Division Bench of this Court in Lord Krishna Bank Ltd. and Anr. v. Assistant Commissioner (Assessment I), Sales Tax Office, Special Circle, Trichur and Anr. considered the question as to whether banks are liable to pay tax under Section 5 of the Act in respect of the sale of jewellery or gold ornaments in exercise of the right which the banks obtained as a result of the pledge of gold ornaments or other valuable articles. The Division Bench after referring to the provisions of the Banking Regulation Act, particularly the provisions of Sections 6 and 8 of the said Act, the provisions of the Indian Contract Act, Section 176 thereof and the commentaries on the subject and the provisions of the Act, particularly the definition of the terms 'business, casual trader, and dealer' considered the main contention on behalf of the bank that trading in goods is prohibited by Section 8 of the Banking Regulation Act and the contention of the Government that the sale of goods is incidental to the main business of the banks which attracts the definition of 'casual trader' and 'business'. The Division Bench observed that in order to decide the issue it is necessary to find out what is business of the banking company. The Division Bench considered the matter thus:
"The business of the banking company is not trading in goods. It mainly involves the accepting for the purpose of lending or investment of deposits of money from the public and also the granting of money with security. The banks advance money or give loans to customers on the basis of security. One type of security that is accepted is the pledge of gold ornaments. When the gold ornaments are pledged, the bank stands in the shoes of a bailee. The bank does not become the owner of the goods. The bank has got a special right in the property or goods to retain it so long as the amount borrowed on its security is not paid. It has also got a right to sell the goods not as an owner or an agent or in any other capacity. It sells goods after giving notice to the pawnor and the amount obtained is to be appropriated to the amount due to it. Thus, the entire consideration is not taken by the pawnee, because if the amount obtained exceeds the loan amount, the balance has to be returned to the owner of the goods. The owner of the goods can avoid the sale by redeeming the goods just before the sale is effected. This is a process by which the amount due to the bank is realised. It cannot be said that because the bank sells the property for realisation of the debts it stands in the shoes of a dealer who is engaged in the business of buying or selling. No doubt, from the definition of "business" it is not necessary that the sale should be with a profit-motive. But even if it is not with a profit-motive, the sale, business, or trade should be in the course of the activities or business of the assessee orit should be connected with the main business of the assessee. Admittedly, the business of the bank is not selling of goods or in any way connected with the goods. The business of the bank is receiving or lending loans. Tn this context, it is pertinent to notice that in the definition of sale, "pledge" or "mortgage" are excluded. It is not necessary that the bank should take upon itself the act of selling the goods. Instead of selling the goods directly, it could sue and through the court realise the amount due to it. Viewed from this angle, it cannot be said that the bank is carrying on any activities in trade or business in goods."
The Division Bench considering the provisions of Section 8 of the Banking Regulation Act further observed thus:
"The section opens with a non obstante clause. It states that no banking company shall deal in buying or selling or bartering of goods. The section carves out three exceptions and those are: (i) in connection with the realisation of security given to or held by it; (ii) buy or sell goods for others otherwise than in connection with bills of exchange received for collection or negotiation; and (iii) such of the business as is referred loin Clause (i) of Sub-section (1) of Section 6. The first exception is sale of securities for realisation of the loans. This had to be there because in the absence of sale of securities, the bank would not be able to recover the loans which were deposited by the customers. It cannot be said that while the securities are sold the bank is carrying on business in trade or commerce. The expression "sale" as defined in the Act makes it clear that mere transfer of the property in goods by one person to another does not attract the provisions of the Act unless such transfer is in the course of trade or business. Every commercial activities will not attract the expression "business" and transactions which are incidental or ancillary to trade or commerce cannot take inits sweep the disposal of the security for realisation of loans. The transaction of selling of secured goods is not incidental or main business of the bank. When it is found that the banks are prohibited from trading in goods it cannot be said that trading in goods is the main business. Hence, it cannot be said that the sale of goods for the purpose of realisation of debts due to the scheduled bank is concerned with the business in goods."
This decision, it must be noted, has been nullified by the Supreme Court in the judgment in Civil Appeal Nos. 3550 to 53 of 1997. The banks involved in the said case were permitted to withdraw the Writ Petition itself and this judgment is specifically set aside. The Division Bench decision discussed above, it must be noted, is in tune with the decision of the Karnataka High Court in Canara Bank v. Commercial Tax Officer and Anr. ((1997) 107 STC 488) and the decision of the AndhraPradesh High Court in Corporation Bank v. Government of A.P. ((2002) 125 STC 346). In fact the Andhra Pradesh High Court has specifically followed the decision of this Court in Lord Krishna Bank Ltd. mentioned above. In Canara Bank's case Karnataka High Court considered the question as to whether a banking company constituted under the Banking Regulation Act can be treated as a dealer, when for realisation of loans advanced to customers securities are sold. The Karnataka High Court also referred to the relevant provisions of the Banking Regulation Act, 1949, particularly Section 8 thereof and the definition of 'dealer', 'business' and 'sale' in the Karnataka Sales Tax Act, 1957 and held that the banking companies cannot be treated as 'dealers' as contemplated under Section 2(1)(k) of the Sales Tax Act as the banking companies are not carrying on the business of buying or selling. It was also held that every commercial activity will not attract the expression "business" and the transactions which are incidental or ancillary to the trade or commerce cannot take in the disposal of the security for realisation of loans and further it is not permissible to do violence to the clear cut provisions of Section 8 of the Banking Regulation Act and put a construction which would defeat the intention of the Legislature. It was accordingly held that the assumption of the Commercial Tax Officer that the appellant-bank was a dealer as contemplated under the Sales Tax Act and was required to so register and pay the tax was clearly misconceived. In Corporation Bank's case the Andhra Pradesh High Court also was concerned with the question as to whether the petitioner bank is a dealer carrying on business of buying and selling of goods within the meaning of Section 5 of the AndhraPradesh General Sales Tax Act, 1957. The Andhra Pradesh High Court referred to the provisions of Section 5(b), the definition of 'dealer' and 'business' and had also referred to the provisions of Banking Regulation Act and observed as follows:
"Now, from the perusal of different provisions of Sales Tax Act and the Banking Regulation Act following things become clear: (1) That the bank is adealer within the meaning of Section 2(e) of the Andhra Pradesh General Sales Tax Act, 1957. (2) That the banks are basically doing the banking business in accordance with the Banking Regulation Act, 1949 and banking companies cannot trade as in terms of Section 8 of Banking Regulation Act. Banking company is prohibited from trading in any goods except in connection with realisation of security given to or held by it."
The Andhra Pradesh High Court then considered the question as to whether it can be held that a bank while realising the loans after selling the goods pledged to it, was carrying on business for the purpose of sales tax. The decision of the Supreme Court in State of Tamil Nadu v. Board of Trustees of the Port of Madras ((1999) 114 STC 520) which considered the question with respect to the sale of unclaimed and unserviceable goods by Madras Port Trust through auctioneers. Two questions were raised, (1) whether the Port Trust was a department of Central Government and (2) whether the Port Trust was a dealer and its activity of selling the unclaimed and unserviceable goods could be subjected to sales tax. In that case the High Court held that the transactions of sale were not liable to sales tax and the Port Trust could not be treated as a dealer. The question before the Supreme Court was as to what is "carrying on business" in terms of Section 2(d) of the Madras General Sales Tax Act; The Supreme Court referring to the definition of business under Section 2(d) observed that in most of the sales tax statutes it is an inclusive definition and includes 'trade or business or manufacture, etc.' which itself will show that the Legislature has recognised that the word 'business' is wider than the words 'trade, commerce or manufacture, etc.'. It was further observed that the word 'business' though extensively used is a word of indefinite import, in taxing statutes, it is normally used in the sense of an occupation, a profession - which occupies time, attention and labour of a person, normally with a profit-motive and there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive and not for sport of pleasure. The decision of the Supreme Court in State of Andhra Pradesh v. H. Abdul Bakshi and Bros. ((1964) 15 STC 644 (SC)) is cited. It was also observed that even if such profit-motive is statutorily excluded from the definition of 'business' yet the person could be doing 'business'. It was also observed that the words 'carrying on business' requires something more than merely selling or buying, etc. and whether a person 'carries on business' in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive and that such profit-motive may, however, be statutorily excluded from the definition of 'business' but still the person may be 'carrying on business'. The Supreme Court, thereafter considering he activities of the Port Trust in terms of the Port Trust Act held that the Port Trust was not constituted by Parliament to 'carry on business' as stated in Aminchand Pyarelal's case ((1976) 1 SCR 721). The Division Bench of the Andhra Pradesh High Court relying on the principles laid down in the said decision held that in view of Sections 5(b), 6(1) and 8 of the Banking Regulation Act, 1949 banks have specifically been created for the purpose of banking business and Section 8 of the Banking Regulation Act, 1949 creates a prohibition for banking companies to deal in buying or selling or bartering of goods. It was also observed that in view of the judgment of the Supreme Court the "sale" as defined in the Act is not mere transfer of property or goods by one person to another person, which could be "sale" for the purpose of sales tax if it is not in the course of trade or business and the transactions in question are not amenable to the sales tax. The decision of the Supreme Court in Board of Trustees of the Port of Madras case mentioned above, it must be noted, was a case pertaining to Madras Port Trust which is governed by Major Port Trusts Act, 1963 and the Supreme Court had specifically stated in paragraph 39 of the said judgment that the Port Trust was not constituted by Parliament to 'carry on business'. It is in those circumstances, the Supreme Court has held that the Port Trust is not involved in any activity of 'carrying on business' and that unclaimed and unserviceable goods are sold in discharge of various statutory charges, items, etc. and the sales of these items are also an infinitesimal part of the Port Trust's main activities or services. The Supreme Court had clearly observed that the sales of goods are in connection with, or incidental or ancillary to the main 'non-business' activities, but they cannot be treated as 'business' without any plea by the State of Tamil Nadu that the Port Trust had an independent intention to carry on business in the sale of unserviceable/unclaimed goods and further that this is not the case of the department in the show cause notice. It was also observed that the contention of the State that the main activities of the Port Trust amounted to 'carrying on business* and that these sales, even if they were incidental, fell within the meaning of the word 'business' fails in view of their finding that the main activity is not one amounting to 'carrying on business'. The decision of the Supreme Court in Commissioner of Sales Tax v. Sai Publication Fund ((2002) 126 STC 288) was also a case where a trust for spreading the message of Saibaba of Shiridi supplied books, pamphlets and other literature containing the message of Saibaba to devotees on nominal charge to meet the cost. The question arose as to whether the trust is a dealer liable to tax under the Bombay Sales Tax Act, 1959. In that case the trust filed an application seeking determination of the question whether the trust could be said to be carrying on 'business' as defined in Section 2(5-A) and whether it was a 'dealer' under Section 2(11) of the Bombay Sales Tax Act. The Deputy Commissioner held that the activity of publication and sale of books, etc., amounted to business and the trust was a dealer, and, therefore, the trust was liable to sales tax on the value of the publications sold. The Sales Tax Tribunal, on appeal, held that the trust was not a "dealer" within the meaning of Section 2(11) as it was not engaged in activity which amounted to "business" in view of its object and activities. This was affirmed by the High Court on reference. The Supreme Court referred to the definition of 'dealer' in Section 2(l1) and observed that the said definition clearly indicates that in order to hold a person to be a 'dealer', he must 'carry on business' and then only he may also be deemed to be carrying on business in respect of transactions incidental or ancillary thereto. The Supreme Court applied the principles laid down in Board of Trustees of the Port of Madras case mentioned earlier.
12. From the decisions of the Supreme Court and of this Court discussed above, it is clear that the question as to whether the bank is liable to sales tax on its transactions of sale of gold ornaments pledged by the customers as security for the loans will depend on the provisions of the concerned sales tax enactments and the provisions of the Banking Regulation Act. It can also be seen that the Karnataka and Andhra Pradesh High Courts and this Court in Lord Krishna Bank's case took the view that the transactions of sale of pledged gold ornaments by the banks by public auction are not liable to sales tax mainly on the ground that the banks are prohibited under Section 8 of the Banking Regulation Act from carrying on business of sale of gold ornaments. It is only in those circumstances, the Karnataka and Andhra Pradesh High Courts and this Court have taken the view that the banks are not dealers and are not carrying on the business within the meaning of the said terms in the concerned sales tax enactments.
13. In this context, it is relevant to refer to the decisions of the Supreme Court which have taken the view that certain transactions which are incidental to the carrying on business make the dealers liable to tax under the Sales Tax Act. The Supreme Court in District Controller of Stores, Northern Railway, Jodhpur v. Assistant Commercial Taxation Officer ((1976) 37 STC 423) was concerned with the question whether the Northern Railway, Jodhpur was liable to pay sales tax on the sale of unserviceable materials, scrap, etc. for the period in question. Mathew, J. (as His Lordship then was) speaking on behalf of the Bench, held that the activity of the appellant in the selling of unserviceable material and scrap-iron, etc., would be 'business' within Clause (i) of the definition of the word 'business' introduced by the amending Act which included any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce, or manufacture whether or not it is carried on with a motive to make gain or profit. The Supreme Court also observed that "there is no fallacy in thinking that the Railway since it is concerned in the activity of transportation is engaged in commerce within the meaning of Clause (i) of the definition and that the sale of unserviceable materials and scrap-iron, etc., is transaction in connection with or ancillary to such commerce........." Again this question was considered by the Supreme Court in Member, Board of Revenue, West Bengal v. Controller of Stores, Eastern Railway, Calcutta ((1989) 74 STC 5). A Bench of three Judges observed that the assessee, South Eastern Railway, was a carrier of the goods and if at the stage of deli very 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 goods. Again the said question was before the Supreme Court in State of Orissa v. Orissa Road Transport Co, Ltd, ((1997) 107 STC 204). The question arose whether the Orissa Road Transport Company was liable to pay tax with regard to the sale of unserviceable, old and unutilised parts from its stores. Following the decision in District Controller of Stores, Northern Railway, Jodhpur's case mentioned earlier and the definition of the words 'casual dealer' the Supreme Court held that the Orissa Road Transport Company Ltd. is liable to be assessed under the Orissa Sales Tax Act.
14. The Supreme Court in Karnataka Pawn Brokers' Association and Ors. v. State of Karnataka and Ors. ((1998) 111 STC 752) considered a similar question with regard to the sale of unredeemed pledged articles through approved auctioneer. The Supreme Court considered a question as to whether a pawn broker is a 'dealer' and doing 'business' within the meaning of the State General Sales Tax Act read with State Pawn Brokers' Rules when he causes the sales of unredeemed articles/goods auctioned by default of the pawner through (statutory) auctioneer. The Supreme Court referring to the provisions of the Tamil Nadu and Karnataka General Sales Tax Act and also the provisions of the Tamil Nadu and Karnataka Pawn Brokers' Act and Rules held that a pawn broker is a dealer and carries on business within the meaning of the aforesaid enactments liable to tax under the Tamil Nadu and Karnataka General Sales Tax Act. The Supreme Court after considering the provisions of the Pawn Brokers' Act observed that a careful reading of the provisions will show that the pawner can redeem the pledged article within the period stipulated or within the grace period provided or before the sale of pawned article takes place through auctioneer and however, once the article is brought 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. The Supreme Court then considered its earlier decision in Member, Board of Revenue, West Bengal v. Controller of Stores, Eastern Railway ((1989) 74 STC 5) where the Supreme Court considered the question whether the South Eastern Railway as a carrier of goods when it 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. We have already referred to the said decision earlier in this judgment where the Supreme Court has held the view that the activity of so disposing of the goods was adjunctive to the principal activity of the carriage of goods by the railway and that it is an activity which may be regarded as necessarily incidental or ancillary to its business as carrier of the goods and that the assessee, South Eastern Railway was a 'dealer' for the purpose of Bengal Finance (Sales Tax) Act, 1941. The Supreme Court in Pawn Brokers' case applied the above principle and held that in the sale 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 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. The Supreme Court also observed that the aforesaid conclusion is further strengthened by the definition of 'pawnbroker'; the explanation to the definition of 'pawnbroker' contemplates that every person who keeps the 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. It was also held that the activities of pawnbroker as detailed above will satisfy the definition of 'business' as well. Here, it must be noted that the Supreme Court and the various High Courts were considering the questions, viz., whether the Railways while effecting sale of unserviceable materials, scrap, etc. or the Road Transport Company while effecting sale of unserviceable, old and unutilised parts from its stores or the pawn brokers while effecting auction sale of unredeemed pledged articles can be said to be dealers carrying on business so as to attract the provisions of the concerned Sales Tax Legislations only with reference to the definition of 'dealer, business and sale' which are similar to the unamended provisions of the Kerala General Sales Tax Act. The definition of 'dealer' in Section 2(viii) of the Act was amended by the Kerala Finance Act, 1998 by which a new Clause, Clause (g) was added whereby 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 realisation of such loan amount was added. The Kerala Small Financier's Association and others had challenged the said amendment in Writ Petition, O.P. No. 13070 of 1998. A Division Bench of this Court in Kerala Small Financier's Association and Ors. v. State of Kerala and Ors. ((1999)115 STC 563) dismissed the Writ Petition relying on the decision of the Supreme Court in Karnataka Pawn Brokers' Association's case mentioned above. It was contended before the Division Bench that the State is not entitled in law to levy sales tax on the auction sale of gold (pledged) conducted by the private small financiers and that the amendments brought into Section 2 of the Kerala General Sales Tax Act is unconstitutional and void. According to the petitioners the members of the petitioner association stand in the shoes of a bailee and does not become the owner of the goods and that they have also got a right to sell the goods not as an owner or as agent or any other capacity and that they can sell the goods after giving notice to the pawner and the amount obtained is to be appropriated to the amount due to them. The Division Bench held that in an identical case filed by the Karnataka Pawn Brokers' Association against the State of Karnataka before the Supreme Court, the Supreme Court in (1998) 111 STC 752 held that by the sales of unredeemed goods through public auction by an approved auctioneer, the pawnee who has control or possession over the goods and who has been given statutory authority to pass the general property in and title to the goods is the seller and as such he satisfies the definition of dealer' under the General Sales Tax Act of both the States, viz., Karnataka and Tamil Nadu. It was also noted that the Supreme Court had further observed that the above conclusion is further strengthened by the definition of pawnbroker and that any activity incidental or ancillary to the main business will also come within the definition of 'business' under the Kcrala General Sales Tax Act and, therefore, the contention that the sale of unredeemed gold being incidental or ancillary to the business of the pawnbroker was not liable to sales tax cannot be accepted. The Division Bench held that the above judgment squarely applied to the facts and circumstances of the case and the contentions raised therein. Thus, it can be seen that the challenge made to the amended provisions of the definition of 'dealer' in Section 2(viii) of the Act by the Finance Act, 1998 was repelled by this Court.
15. The only question that remains to be considered is as to whether any distinction can be drawn in the case of banks which are governed by the provisions of the Banking Regulation Act, 1949. We have noted that the Karnataka and Andhra Pradesh High Courts and this Court have taken the view that the banks cannot be treated as a 'dealer' carrying on business in pledged gold ornaments in view of the prohibitions contained in Section 8 of the Banking Regulation Act. Had the decision of this Court in Lord Krishna Bank's case ruled the situation where it was held that in view of the prohibitions contained in Section 8 of the Banking Regulation Act the bank cannot be treated as a dealer in carrying on business in pledged gold ornaments if we are not agreeing with the said conclusion, we had no option but to refer the matter to a larger Bench. But there is no such situation since, as already noted, the said decision does not survive in view of the permission granted by the Supreme Court to the respondent banks in that case to withdraw the Original Petition itself and the consequent setting aside of the judgment in the judgment in Civil Appeal Nos. 3550 to 53 of 1997. We have already taken the view with reference to the provisions of Sections 6 and 8 of the Banking Regulation Act that the banks are also engaged in the business of sale of pledged articles as part of its business which satisfies the definition of 'business' under Section 2(vi) of the Act.
16. As already noted, the decisions discussed earlier were rendered in the context of the provisions similar to the unamended definition of 'dealer' in the concerned sales tax enactments. This Court also in Lord Krishna Bank's case considered the question in the context of the unamended definition of 'dealer' in the Act. Now the definition of 'dealer' in Section 2(viii) has been amended by Finance Act, 1998 under which a bank or a financial 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 realisation of such loan amount comes within the definition of 'dealer' and as such carrying on the business contained in the main part of the definition of dealer has no relevance so far as the banks and financial institutions coming under Clause (g) are concerned. It is also relevant to note that Entry 54 of List II of Seventh Schedule which is the legislative entry only speaks of "taxes on the sale or purchase of goods other than newspapers subject to the provisions of Entry 92 A of the List II". The provisions of Article 366 of the Constitution was also amended by inserting Clause (29A) by the Constitution (46th amendment) Act, 1982 to widen the scope of the legislative Entry 54 under which six categories of transactions which are not instances of purchase or sale in the ordinary sense are included within the meaning of sale or purchase of goods. Under the constitutional entry it is not the requirement of taxing sale or purchase of goods that the sale or purchase referred to therein should be by a dealer or in the course of business. Thus, the contention that the amended provisions of the definition of 'dealer' in Section 2(viii) of the Act is unconstitutional has no basis. The said provision making the transaction of sale of pledged articles by the banks and financial institutions exigible to tax also does not in any way infringe the provisions of Articles 14 and 19 of the Constitution of India.
17. As we have already noted, the appellant banks are engaged in the business of banking contemplated under Section 6 of the Banking Regulation Act which takes in the sale of pledged articles and securities held by it. As such the appellants are not justified in contending that their business is only banking and that the transaction of sale of pledged articles is not either their main business or incidental or ancillary to the main business. Even assuming that the transaction of sale of pledged articles is not a part of their main business activities, still the said transaction will come within the meaning of incidental or ancillary to the business as held by the Supreme Court in District Controller of Stores, Northern Railway, Jodhpur v. Assistant Commercial Taxation Officer ((1976) 37 STC 423), Member, Board of Revenue, West Bengal v. Controller of Stores, Eastern Railway ((1989) 74 STC 5) and Karnataka Pawn Brokers' Association and Ors. v. State of Karnataka and Ors. ((1998) 111 STC 752).
18. For completion sake, we will also refer to the decision of the Supreme Court in Food Corporation of India v. State of Kerala ((1997) 5 KTR 74) relied on by the Special Government Pleader where the Supreme Court held that the Food Corporation of India effecting levy procurement of food grains and distribution of fertilisers under the provisions of the Essential Commodities Act is a dealer liable to tax under the Sales Tax Act and that the provisions are not ultra vires. The contentions taken by the Food Corporation of India in that case were that the sale/purchase of food grains and distribution of fertilisers pursuant to the orders issued under Section 3 of the Essential Commodities Act have acquired a character of compulsory transaction and that the element of consensus, which makes the transaction contractual, was to a great extent absent. The Supreme Court following the ratio of the decision of the Supreme Court in Vishnu Agencies (P) Ltd. v. Commercial Tax Officer and Ors. ((1978) 42 STC 31) rendered by a Bench of seven Judges, which did not approve the ratio of the decision in Chittermal Narain Das v. Commissioner of Sales Tax ((1970) 26 STC 344) which took the view that the levy procurement is a compulsory acquisition and not a sale, held that some area of consensual arrangement and some field for volition is left untouched by the legislation in all disputed transactions and that therefore, the transactions are exigible to tax under the Act. The Supreme Court in Sai Publication Fund's case ((2002) 126 STC 288) which we have already considered earlier was also considering the question as to whether the supply of books, pamphlets, etc. containing message of Saibaba which were made available to devotees on nominal charges to meet the cost makes the trust which is established for spreading message of Saibaba of Shiridi carrying on business. The Supreme Court observed that the main activity of the trust is not carrying on any business and their activity of supply of books, pamphlets, etc. to devotees on nominal charges to meet the cost cannot be treated as incidental to the business, exigible to tax under the Act. In other words, the Supreme Court held that unless the main activity is carrying on some business the incidental activity can not be subjected to tax. This is not the position in the present case where the activity of the bank is carrying on banking business which includes sale of pledged securities.
19. In view of the facts and circumstances stated above, we are of the view that the learned Single Judge was perfectly justified in holding that there is no infirmity in the legislation authorising levy of tax on pledged articles like gold ornaments when sold by petitioners in the course of realisation of loan amounts and interest thereon.
There is no merit in this Writ Appeal. It is accordingly dismissed.