Karnataka High Court
Canara Bank vs Commercial Tax Officer And Another on 7 February, 1996
Equivalent citations: ILR1996KAR810
Author: B.N. Mallikarjuna
Bench: B.N. Mallikarjuna
JUDGMENT M.L. Pendse, C.J.
1. An Interesting question as to whether a banking company under the Banking Regulation Act, 1949, can be treated as a "dealer" under section 2(1)(k) of the Karnataka Sales Tax Act, 1957, while realising the security, falls for determination in this appeal preferred by a nationalised bank. The facts which gave rise to the filing of this appeal, are not in dispute and are required to be briefly stated to appreciate the claim of the appellant-bank.
The appellant is a Government of India undertaking which was acquired by the Government of India under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. The business of the appellant-bank is regulated under the provisions of the Banking Regulation Act, 1949. The expression "banking" is defined under section 5(b) and means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. The expression "secured loan or advance" is defined under section 5(n) and means a loan or advance made on the security of assets, the market value of which is not at any time less than the amount of such loan or advance. Section 6 of the Act sets out the forms of business in which banking companies may engage and sub-section (1)(a), inter alia, provides that in addition to the business of banking, a banking company may engage in lending or advancing of money either upon or without security. Section 6(1)(a) to (n) sets out various forms of business in which the banking companies can engage. Clause (f) confers power on the banking company to manage, sell or realise any property which may come into the possession in satisfaction or part satisfaction of any of its claims, while clause (i) authorises the banking company to undertake the administration of estates as executor, trustee to otherwise. Clause (o) of sub-section (1) of section 6 entitles the banking company to engage in any other form of business which the Central Government may specify as a form of business. Sub-section (2) of section 6 prescribes that no banking company shall engage in any form of business other than those referred to in sub-section (1).
Section 8 of the Banking Regulation Act reads as follows :
"8. Prohibition of trading. - Notwithstanding anything contained in section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the 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) section 6 :
Provided that this section shall not apply to any such business as is specified in pursuance of clause (o) of sub-section (1) of section 6.
Explanation. - For the purposes of this section, 'goods' means every kind of movable property, other than actionable claims, stocks, shares, money, bullion and specie, and all instruments referred to in clause (a) of sub-section (1) of section 6."
2. The Karnataka Legislature passed the Karnataka Sales Tax Act, 1957, to consolidate and amend the laws relating to the levy of tax on the purchase or sale of goods in the State. Section 5 of the Act provides that every dealer shall pay for each year tax on his taxable turnover. The expression "dealer" is defined under section 2(k) and 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. The expression "business" is defined under section 2(1)(f-2), which reads as follows :
"(f-2) '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 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
(ii) any transaction in connection with, or incidental or ancillary to such trade, commerce, manufacture, adventure or concern."
The Commercial Tax Officer, XXI Circle, Bangalore-9, served notice dated July 20, 1988, on the General Manager of the appellant-bank informing that the disposal of gold and silver forfeited against the loans outstanding is liable for tax under the provisions of the Karnataka Sales Tax Act and 2 per cent in respect of articles and at 1 per cent in respect of bullion. The General Manager was called upon to furnish the information of such disposals within a period of one week from the date of receipt of the notice. The period for which the information was sought, was from April 1, 1983, to March 31, 1988. The appellant-bank sent reply pointing out that incidence to pay sales tax arises only if a person is a "dealer" and it is not that every person who sells the goods becomes a dealer or a casual trader. The bank also pointed out that auction sale of gold ornaments by the banks for realisation of loans advanced cannot be equated with the expression "sale" as defined under the Sales Tax Act. The expression "sale" is defined under section 2(1)(t) with all its grammatical variation and cognate expressions and 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. The reply sent by the bank did not satisfy the Commercial Tax Officer and on December 5, 1988, the bank was threatened with legal proceedings as contemplated under the Sales Tax Act. The threatened action by the Commercial Tax Officer gave rise to the filing of writ petition under articles 226 and 227 of the Constitution before the learned single Judge. The bank sought a writ of certiorari for quashing the impugned notices served by the Commercial Tax Officer.
3. The petition filed by the bank was placed for hearing before the learned single Judge along with batch of other petitions filed by pawn brokers and the Karnataka Pawn Brokers' Association. The pawn brokers were claiming that they cannot be treated as "dealers" under the Sales Tax Act. The learned single Judge, by judgment dated July 24, 1992 [reported in [1992] 87 STC 366 (Kar)] came to the conclusion that the pawn brokers must be considered as "dealers" under the provisions of the Sales Tax Act. The learned Judge disposed of the petition filed by the appellant-bank by observing that the petition does not survive for consideration in view of the decision delivered in Karnataka Pawan Brokers' Association's case [1992] 87 STC 366 (Kar). The dismissal of the petition by the learned single Judge has given rise to the filing of the present appeal.
4. The learned counsel appearing on behalf of the appellant-bank submitted that the learned single Judge was in error in dismissing the petition filed by the bank by observing that the issue stands concluded in view of the judgment delivered in the case of Karnataka Pawn Brokers' Association (Regd.) v. State of Karnataka . It was contended that the case of the appellant-bank stands on an entirely different footing from that of the Pawan Brokers' Association's case [1992] 87 STC 366 (Kar) and the grievance of the appellant-bank had gone unheard before the learned single Judge. The learned counsel submitted that it is impossible to suggest that a nationalised bank can be considered as "dealer" under section 2(1)(k) of the Karnataka Sales Tax Act. It was submitted that section 8 of the Banking Regulation Act prohibits the banks from trading and consequently, the banks cannot be treated as "dealers" under the Sales Tax Act. The Government Advocate appearing on behalf of the Commercial Tax Officer, on the other hand, submitted that the decision in the case of Karnataka Pawn Brokers' Association [1992] 87 STC 366 (Kar) was upheld by the Division Bench in the case of Karnataka Pawn Brokers' Association v. State of Karnataka and the ratio laid down by the Division Bench would squarely apply to the case of the appellant-bank. It was further submitted that though section 8 prohibits the banking companies from trading, there are certain exceptions set out under the section and when the bank, for realisation of the security, sells the goods, then the bank becomes a "dealer" and is liable to pay sales tax. It was further submitted that even if the bank is not carrying on the business of selling, still the bank performs the duties which are of a commercial nature and consequently, it carries on business and as such, should be treated as "dealer". In view of the rival submissions, the question, which falls for determination, is whether a banking company constituted under the Banking Regulation Act can be treated as a "dealer" when, in realisation of loans advanced to the customers, securities are sold.
5. As mentioned hereinabove, section 6 of the Banking Regulation Act prescribes the business which a banking company can engage into and one of the business is lending or advancing of money either upon or without security. The bank undertakes several activities permitted under the provisions of section 6 of the Banking Regulation Act. Indeed, the banks are not permitted to engage in any form of business other than those referred to in section 6. In respect of advance of loans, restrictions are put on the banking companies by the provisions of section 20. The banks are not permitted to advance loans without obtaining proper securities and the securities are normally of actionable claims, shares, money, bullion and specie. The bank also purchases bonds, scrips or other forms of securities on behalf of constituents and administers the estates as executors or trustees of the customers. While administering the estates as executors or trustees, the banking companies are required to purchase or sell properties both movable and immovable. The conduct of the banking companies is regulated by the Reserve Bank and the Reserve Bank is entitled to issue directions to the banking companies in accordance with the provisions of section 35-A of the Banking Regulation Act in the public interest or in the interest of the Banking Policy. The perusal of section 8 of the Banking Act makes it clear that there is a prohibition of trading. The section opens with a non obstante clause and prescribes that notwithstanding anything contained in section 6 or in any contract, 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 to in clause (i) of sub-section (1) of section 6. The first exception is in respect of the securities held by the bank and these securities can be sold by the bank for the realisation of the loans advanced. The second exception is in respect of the sale of goods not held by the bank, but by other persons, that is, the customers. The last exception is in respect of the business of administration of estates as executors or trustees. It is obvious that the Parliament, in its wisdom, has carved out the three exceptions to the rule of prohibition of trading with a view to enable the banking companies to function smoothly and to achieve the object of public service. The first exception of sale of securities for realisation of loans was necessary because in the absence of sale of securities, the bank would not recover the loans and which were advanced from the funds deposited by the customers. The second exception enables the bank to sell the goods which are hypothecated or in respect of which the bank holds a floating charge. The third exception enables the bank to dispose of the properties while administering the estate as executor or trustee. While the securities are sold or the goods are sold or the properties in administration are sold, the banking companies are not carrying on any business, trade or commerce. The assumption of the Commercial Tax Officer that every sale of property would attract the provisions of the Sales Tax Act is entirely erroneous. The imposition of tax is in respect of sale effected by the dealer who carries on the business of buying or selling for consideration. It is futile to suggest that the provisions of the Sales Tax Act are attracted as soon as sale is effected by transfer of the property in goods by one person to another. The expression "sale" as defined under section 2(1)(k) of the Sales Tax 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 course of trade or business for cash or for other valuable consideration. Section 8 prohibits the banking companies from carrying on any trade and the exceptions carved out in section 8 only entitle the banking authorities to perform their functions efficiently. It is also necessary to bear in mind that the explanation to section 8 excludes actionable claims, stocks, shares, money, bullion and specie and as mentioned earlier, normally the security obtained by the bank for advancing loan is that of a stock, shares, money and bullion. It is, therefore, obvious 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. The contention urged on behalf of the respondents that the expression "business" as defined under section 2(1)(f-2) includes not only the trade, but also the commerce and it is irrelevant whether trade or commerce is carried on with a motive to make gain or profit. It was further submitted that the expression "takes it in sweep" any transaction in connection with or incidental or ancillary to such trade or commerce and when the banking companies dispose of the pledged articles held as securities, the transaction is incidental or ancillary to the commercial activities of the bank. It is not possible to accede to the submission of the respondents. 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 its sweep the disposal of the security for realisation of loans. 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. The Parliament was very clear while enacting the provisions of section 8 of the Banking Regulation Act that the banks are prohibited from trading and the expression "trading" should include business and commerce. Once the banking companies are prohibited from trading, then it is not accurate to suggest that the transaction of selling of secured goods is incidental or ancillary to the trade or commerce. In our judgment, 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.
6. The reliance placed by the counsel appearing for the respondents, on the decision of the Division Bench of this Court in Karnataka Pawn Brokers' Association's case , is not accurate. The Karnataka Legislature passed the Karnataka Pawan Brokers act and section 3 of that Act demands that no person shall carry on business as a pawn broker unless a pawn broker's licence under the Act is secured. The expression "pawn broker" is defined under section 2(7) and means a person who carries on the business of taking goods and chattels in pawn for a loan. The expression "loan" is defined under section 2(5) and means an advance at interest whether of money or in kind and includes any transaction which the court finds in substance to amount to such an advance. The definition specifically excludes an advance made by a banking company as defined in the Banking Regulation Act. The perusal of the provisions of the Act makes it clear that a person who secures a licence for carrying on business as a pawn broker, is clearly engaged in trade or commerce and will fall within the expression "dealer" under section 2(1)(k) of the Sales Tax Act. The decision in Karnataka Pawn Broker's Association's case recorded by the Division Bench has no application while considering whether the company can be considered as a "dealer" under the Sales Tax Act. The decision of the Division Bench deals with a case where the pawn broker was admittedly carrying on trade or commerce as a motive of profit. The learned counsel for the appellant is right in his submission that the learned single Judge could not have dismissed the petition filed by the appellant-bank by relying on the decision in Karnataka Pawn Brokers' Association's case . The said decision has no application to the claim of the appellant-bank.
The counsel for the respondents referred to two decision of the Supreme Court in support of the submission that the act of the appellant-bank of selling securities would be "business" within clause (f-2) of section 2(1) of the Sales Tax Act. The first decision is in the case of the District Controller of Stores, Northern Railway v. Assistant Commercial Taxation Officer . In the case before the Supreme Court, the issue was whether the Northern Railways, Jodhpur, was liable to pay sales tax on the sales of unserviceable materials and scrap, etc. After setting out the definition of the expressions "dealer" and "business" under the Rajasthan Sales Tax Act and which are almost similar to the Karnataka Sales Tax Act, the Supreme Court held that the activity of the Northern Railways in the selling of unserviceable material and scrap iron, etc., would be "business". It was held that even assuming that the activity would not amount to carrying on business in the normal connotation of the term, it would be "business" within clause (i) of the sub-clause as amended. It was further held that the activity of transportation engaged in by the respondents there falls within the expression "commerce". The second decision is in the case of Member, Board of Revenue, West Bengal v. Controller of Stores, Eastern Railway . The Supreme Court was examining the question as to whether the Eastern Railway, Calcutta, was a "dealer" within the meaning of the Bengal Finance (Sales Tax) Act, 1941. In this case also, the South Eastern Railway had disposed of unclaimed and uncollected goods and subsequently had applied for registration as a "dealer" and was accordingly registered. Later, the Railway applied for cancellation of the registration and the claim was not accepted by the Commercial Tax Officer. The revision application filed by the respondents was rejected and so also, the second revision. The Board of Revenue, West Bengal, upheld the decision and at the instance of the Railways, reference was made to the Calcutta High Court. The High Court accepted the claim of the respondents and held that the disposal of the goods did not indicate that the Railway was carrying on business as a "dealer" liable to assessment under the Act. The Supreme Court reversed the decision of the High Court by observing that the activity of disposing of the goods was adjunctive to the principal activity of the carriage of goods by the Railways and consequently, the activity can be regarded as necessarily incidental or ancillary to the business as carrier of the goods. The reference was made to the earlier decision in the case of Northern Railway . The reliance on the two decisions of the Supreme Court in support of the claim that the appellant-bank is a "dealer", is not correct. The Indian Railways Act, 1890, did not contain any provision, like section 8 of the Banking Regulation Act, but, on the other hand, section 56-C of the said Act specifically conferred power on the Railways to dispose of unremoved goods and credit the amount. In the absence of any prohibition of trading as contemplated under section 8 of the Banking Regulation Act, the two decisions of the Supreme Court (District Controller of Stores, Northern Railway v. Assistant Commercial Taxation Officer and Member, Board of Revenue, West Bengal v. Controller of Stores, Eastern Railway ) holding that the railways, while disposing of the scrap material and unclaimed goods, was carrying on business or an activity which is incidental to the business of carriers of goods, will have no application. The activity of the Railways as carriers of goods is the business activity and disposal of unclaimed goods can well be said to be an activity incidental or ancillary to the said business. It is not possible in the case of banking companies to hold that advancing of loans by obtaining securities is the business or the trade of the bank and the disposal of the securities for realization of the loans is an activity incidental or ancillary to the business. To accede to the submission urged on behalf of the respondents would nullify the prohibition of trading prescribed by section 8 of the Banking Regulation Act.
7. Reference was made to the decision of a learned single Judge of this Court in Syndicate Bank v. Commercial Tax Officer . A nationalized bank had extended certain facility to a company and the company had hypothecated certain goods in favour of the bank. The goods were sold by the bank in enforcement of right under the hypothecation agreement and before the purchaser could take away the goods outside the State of Karnataka, the sales tax authority issued notice calling upon the bank not to deliver the goods unless the sales tax liability was determined and cleared. The bank challenged the notice and claimed that the provisions of the Sales Tax Act are not attracted. The learned Judge relied upon the decision in Karnataka Pawan Brokers' Association's case , and referred to the two decisions of the Supreme Court cited hereinabove. The attention of the learned single Judge was specifically invited to the provisions of section 8 of the Banking Regulation Act and the learned Judge felt that while there is a general prohibition restraining the bank from carrying on the activity of buying and selling, the exception carved out of the section establishes that the prohibition contained in section 8 has no application when the bank sells the hypothecated goods for realisation of the loans advanced. We are afraid, we cannot share the view of the learned single judge for the reasons recorded hereinabove. Another decision recorded by a learned single Judge on September 12, 1995, in Writ Petition No. 18249 of 1989 (Vijaya Bank v. C.T.O. [Reported in [1997] 107 STC 472 supra]) taking an identical view relying upon the earlier decisions, was referred to. In our judgment, the decisions recorded by the learned single Judges are not correct and stand overruled. A Division Bench of the Andhra Pradesh High Court in the judgment reported in [1988] 70 STC 203 (State of Andhra Pradesh v. A.P. Housing Board) has taken the view which has found favour with us. The banking companies cannot be treated as "dealers" under section 2(1)(k) of the Sales Tax Act while disposing of the securities for realisation of the loans advanced. The action of the Commercial Tax Officer in serving notice upon the appellant-bank directing to furnish information of the disposal of securities, was without any jurisdiction and is required to be quashed.
8. Accordingly, the appeal is allowed and impugned order dated July 24, 1992, delivered by the learned single Judge in Writ Petition No. 18751 of 1988 is set aside and the notice issued by respondent 1 stands quashed. In the circumstances of the case, there will be no order as to costs.
9. Appeal allowed.