Decided on April 03,2003



- (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 S.2(viii) of the Act and are liable to pay tax under S.5 of the Act. It was also held that S.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 another v. Assistant Commissioner (Assessment), Sales Tax Office, Special Circle, Trichur and another ( 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 investment of 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 as follows: 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 S.2(viii) of the Act. In S.2(viii) a new clause - Cl.(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 others ( 1999 (115) STC 563 ). The amendment to S.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 cl.(g) of Cl.(viii) of S.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, P11, P12 to P15 and P17 and P18 and further consequential reliefs.;

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