K L Johar and Co v Deputy Commercial Tax Officer, Coimbatore
Rule established
A hire purchase agreement has a dual character. It is a bailment coupled with an option to purchase, and the sale takes effect only when the option is exercised. Tax on the sale can therefore be levied only at that point and on the value of the goods at that time.
Facts
- The appellants carried on the business of financing the acquisition of motor vehicles on hire purchase terms.
- Under the agreements the hirer took possession of the vehicle and paid periodical instalments.
- The agreements gave the hirer an option to purchase the vehicle, ownership remaining with the appellants until then.
- The taxing authorities treated the hire purchase transactions as sales and assessed sales tax on them.
- The appellants challenged the levy, contending that a hire purchase agreement is not a sale.
Issue
- Whether a hire purchase agreement amounts to a sale, and if so at what point in time and on what value the sale takes place for the purposes of taxation.
Held
- A hire purchase agreement is not a sale when it is made. It has two elements: a bailment, and an element of sale which fructifies only when the option to purchase is exercised. Until then the transaction is one of hire, and the hirer is a bailee who may return the goods and decline to buy. Consequently the sale, and any tax on it, can be referred only to the date on which the option is exercised, and the taxable value is the value of the goods on that date, not the aggregate of the instalments.
Ratio Decidendi
Sale requires a transfer of the general property in goods for a price. In a genuine hire purchase agreement the hirer is under no obligation to buy; he has a right to elect. Since the essence of a sale is a transfer of ownership and none occurs while the option remains unexercised, the transaction cannot be treated as a sale from the outset merely because it is likely to end in one. The bailment and the prospective sale are legally separate, and the law attaches consequences to each in its own time.
How to use it in an exam
- The leading Indian authority on the dual character of hire purchase. Use it wherever a problem asks when property passes or when a sale occurs under such an agreement.
- Pair with Helby v Matthews 1895, where the hirer had an option and so could pass no title, and Lee v Butler 1893, where the hirer was bound to buy so the agreement was an agreement to buy and a bona fide purchaser from him got a good title. The distinction turns on option versus obligation.
- Use to distinguish hire purchase from sale and from instalment sale: in a sale property passes at once and the buyer is bound to pay the price; in hire purchase property remains with the owner and the hirer may terminate and return the goods.
- Note the practical consequences of the hirer being a bailee: he cannot pass title, the owner can repossess on default, and the hirer's duties are those under the bailment provisions of the Indian Contract Act 1872.
- Also relevant to S.2(7) and S.4 of the Sale of Goods Act 1930 on what constitutes a sale and an agreement to sell.
Source
Source: AIR 1965 SC 1082; (1965) 2 SCR 112; leading Supreme Court authority on the dual character of a hire purchase agreement; citation and bench checked against Indian Kanoon and reported sources, audit of 12 August 2026
This is an educational summary, not the judgment itself. Cite the reported version in professional or academic work.