Bank can be treated ‘Dealer’ for acting as Financier and Selling Hypothecated Goods: Kerala HC [Read Judgment]

The Kerala High Court in the case of H.D.F.C Bank Ltd, Kochi held that the appellant, financier Bank is liable to include sale consideration from the transaction of re-possession of hypothecated vehicle and effecting transfer and delivery of vehicle via sale letter executed by the registered/original owner of the vehicle for KVAT purpose.

The Kerala High Court also upheld the general principle that no penalty can be levied in case of debatable issues in the facts of present case.

H.D.F.C Bank Ltd being a revision petitioner as it took over Centurion Bank of Punjab Ltd had filed petition with respect to vehicle hypothecated by the original owner who had availed finance from the appellant for financing the purchase of vehicle. Further, original owner had also executed the sale letter so as to enable the appellant to re-possess the vehicle and transfer the same on default of payment by the original owner/loanee. Accordingly, on default by the loanee, appellant as per the terms of loan agreement re-possessed the vehicle and effected transfer and delivery of the same through sale letter executed by original owner. Appellant was of the view that sale of such hypothecated vehicle whose possession remained with loanee through sale letter of original owner itself, cannot be treated as turnover of the appellant to be exigible to KVAT. Appellant contended that appellant is not dealer for the purpose of KVAT and is merely facilitating such sale and adjusted the proceeds against liability of loanee. Appellant also attempted to draw a distinction between pledge and hypothecation as the unfavourable precedence is available in the case of pledged ornaments wherein apex court held that sale consideration on pledged ornaments to be included in turnover exigible to tax on sale of goods in the case of Federal Bank Limited v State of Kerala [2007] 6 VST 736 (SC).

Kerala HC affirmed the decision of appellate authorities on inclusion of sale consideration for KVAT purpose and held the following:

• Right of financier bank to re-possess the hypothecated vehicle and effecting the transfer through sale letter is recognized by Motor Vehicles Act and Bank becomes the owner and property in the vehicle is also with the Bank during sale
• Appellant acting as financier and selling hypothecated goods would come within the definition of ‘dealer’
• There is no distinction between ‘pledge’ and ‘hypothecation’ and even in hypothecation financier has the right over hypothecated vehicle flowing from terms of agreement and is also recognized by statue whose provisions enable transfer of ownership and registration in favour of financier. Financier not exercising the option of first transfer of ownership, registration in their name and subsequent sale (which is allowed by the statute) but choosing to directly sell the vehicle through sale letter executed by original owner does not absolve them from including sale consideration as part of turnover liable for KVAT.

The division bench comprising of Justice Vinod K Chandran and Justice Ashok Menon also upheld the principle of no penalty where the matter is debatable and rejected the contention of Government pleader that precedence was already available in the matter of pledge of ornaments. HC held that as far as penalty is concerned an issue of the pledge of ornaments and the hypothecated vehicle whose possession remains with loanee are not same and distinction claimed by appellant is bonafide and debatable.