Holding

The sale of pledged assets by banks is a transaction in the course of banking business, making banks dealers under Section 2(viii)(g) of the Kerala General Sales Tax Act, 1963 and liable to sales tax.

Summary

Federal Bank Ltd. and other banks challenged notices issued by the Kerala tax department demanding sales tax on the auction sale of gold and other valuables pledged as security for loans. The banks argued that such sales were not "sales" within the meaning of the Kerala General Sales Tax Act, 1963 and that they did not constitute banking business, thus they were not "dealers" under Section 2(viii)(g) as amended by the Kerala Finance Act, 1998. The Supreme Court held that the sale of pledged assets is carried out in the course of banking business, that banks exercise statutory power under the Banking Regulation Act, 1949 to realize security, and that the definition of "sale" in the 1963 Act is broader than under the Sale of Goods Act. Consequently, banks are deemed dealers and liable to sales tax. The Court dismissed the civil appeals, upholding the tax demand.

Issues considered

Whether the sale of gold and other valuables pledged to banks for loan security falls within the course of banking business under the Banking Regulation Act, 1949.
Whether banks qualify as "dealers" under Section 2(viii)(g) of the Kerala General Sales Tax Act, 1963 after its amendment by the Kerala Finance Act, 1998.
Whether the definition of "sale" in Section 2(xxi) of the Kerala General Sales Tax Act, 1963 includes the auction sale of pledged goods.
Whether the Kerala Finance Act, 1998 amendment is constitutionally valid (though not finally decided).

Legislation cited

Banking Regulation Act, 1949s. 29, s. 5(b), s. 6, s. 8
Central Sales Tax Act, 1956s. 2(g)
Indian Contract Act, 1872s. 176
Kerala General Sales Tax Act, 1963s. 2(viii)(g), s. 2(xxi), s. 5
Sale of Goods Act, 1930s. 4

Subjects

sales taxbanking businessdealer definitionpledged assetsKerala General Sales Tax ActBanking Regulation Acttaxabilitysale of pledged goods

Judgment

FEDERAL BANK LTD. AND ORS. A
v.
STATE OF KERALA AND ORS.

MARCH 21, 2007

[S. H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] B

Kera/a General Sales Tax Act, 1963; Section 2(viii)(g) as amended by
Kera/a Finance Act, 1998-Banking Regulation Act, 1949; Sections S(b), 6,
8, & 29-Contract Act, 1872-Section 176-Central Sales Tax Act, 1956;
Section 2(g)-Sale of Goods Act, 1930; Section 4-Sale of pledged goods by C
banks for realisation of defaulted loan-Liability to Sales Tax-Held, sale of
pledged goods fall within the course of banking business and hence, banks
are liable to sales tax under the Sales Tax Act.
By the Kerala Finance Act, 1998, the definition of the word 'dealer' in
section 2(viii) of the Kerala General Sales Tax Act, 1963 was expanded by D
inserting clause (g) to cover 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.
After the amendment, Revenue issued notices to appellant-Bank to furnish
details of turnover relating to pledged gold auction sale and payment of sales
tax on the sales turnover. The appellant contended that it is not a 'dealer'
under the 1963 Act before and after amendment.
The Bank filed an Original Petition before High Court challenging the
validity of section 2(viii) (g) of the 1963 Act and the notices issued by the
Revenue. The High Court dismissed the petition holding that the sale of F
pledged articles are 'goods' and hence the Bank, after the amendment in the
1963 Act, are 'dealers' and thus liable to sales tax.
In appeals to this Court, the appellant-Banks contended that the 'sale'
of pledged ornaments for realisation of security will not fall in the course of
banking business under section 2(xxi) of the 1963 Act and hence such G
transactions are not eligible to tax under the 1963 Act; and that such sale of
pledged goods does not come within the definition of 'banking' under section
S(b) of the Banking Regulation Act, 1949 also.
Dismissing the appeals, the Court
·"
313 H
314 SUPREME COURT REPORTS [2007] 4 S.C.R.

A HELD: 1.1. Sale of pledged assets takes place in the course of banking
business. The banks, in selling the goods pledged to them, do not act as agents
of the borrowers/pledgors and that their sale was in exercise of statutory
power under the Banking Regulation Act, 1949. If Section 8 is read along
with Third Schedule to the t 949 Act, it is clear that dealing in non-banking
assets is a banking business and the exception made in section 8 of the Act
B which allows banks to realize security and which allows banks to engage in
trade in order to realize security falls within the banking business whenever
undertaken. When a pledged article is sold in an auction, the bank recovers
not only its dues but also recovers interests and its other charges. This
realization falls within the parameters of the Third Schedule to the 1949 Act.
C In the circumstances, the sale of pledged ornaments falls within the course
of banking business under the 1949 Act. Such transactions are taxable under
Section 2(viii) (g) read with Section 5 of the 1963 Act.
(Para 11) (330-B; G-H; 331-A)
1.2 The very object of the Kerala Finance Act, 1998 was to introduce
clause (g) in section 2(viii) in order to get over the judgments of the High
D Court whieh took the view that sale of pledged goods did not fall in the course
of banking business. Clause (g) makes it very clear that even if the sale of
pledged ornaments takes place outside the banking business, the 1963 Act
would cover even such transactions. Therefore, once such transaction fall
under Section 2(viii) (g) of the 1963 Act, banks become "dealers" and they
E are liable to pay>ales tax under the said 1963 Act. (Para 11) (331-B)
1.3 It is true that the definition of the word "sale" under Section 2(xxi)
of the 1963 Act does not include mortgage, hypothecation, charge or pledge,
however, the important point to be noted is that the definition of the word "sale"
under the 1963 Act is not the same as under Section 4 of the Sale of Goods
Act, 1930. The definition of the word "sale" in Section 2 (xxi) in the 1949
F Act is very similar to Section 2 (g) of the Central Sales Tax Act, 1956 which
is held to be having a very wide meaning as compared to the definition of the
word "sale" in Section 4 of the Sale of Goods Act, 1930. Further, when charge
or pledge is enforced that enforcement is by way of sale of the pledged or
hypothecated goods; that sale is for consideration and, therefore, it falls within
G the ambit of Section 2 (xxi) of the 1963 Act. (Para 111 (331-C-E)
State of Maharashtra v. Embee Corporation, Bombay, (1997] 7 SCC
I 90, referred to.
The Deputy Commissioner ofCommercial Taxes v. A.R.S. Thirwneninatha
Nadar Firm, (1968) 21 STC 184 Mad and High Channel Video v. Enclave
H Electronics & Ors., (1999) 116 STC 131 P & H., referred to.
FEDERAL BANK LTD. v. ST ATE OF KERALA [KAPADIA, J.] 315

""' CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6459 of2003. A
From the Final Judgment and Order dated 03.04.2003 of the High Court
ofKerala at Ernakulam in W.A. No. 1841 of2002.
WITH

Civil Appeal No. 6460/2003. B
June G. Chaudhary and S. Ganesh, Manoj Saxena, Rajnish Kr. Singh,
Rahul Shukla, Krishnan Venugopal, A. Raghunath, Romy Chacko and Venkat
Subramaniam, T.R. for the Appellant.

T.L.V. Iyer, G. Prakash and S.N. Bhat for the Respondent.

The Judgment of the Court was delivered by
c
KAPADIA, J. l. A short question which arises in these two civil appeals
is : whether banks are "dealers" under Section 2(viii) read with Explanation
I of the Kerala General Sales Tax Act, 1963.
2. Since common question of law arises in both the civil appeals, they D
are heard together and disposed of by this common judgment. For the sake
>
of convenience, we may refer to the facts in C.A.No.6459 of 2003 filed by
Federal Bank Ltd. and Ors. v. State of Kera/a and Ors.,
3. By the Kerala Finance Act, 1998 a clause (g) was inserted in Section
2(viii) by which the definition of the word "dealer" was expanded to cover E
a bank or a financial institution which, whether in the course of its business
or not, sells any gold or other valuables pledged with it to secure any loan,
for the realization of such loan amount. After the said amendment, the
Department called upon Federal Bank to furnish details of the gold auction
during the year 1998-1999 and 1999-2000. This was vide notice dated 31.8.99
+ issued by the Sales Tax Officer to the assessee. On 1.11.99 the Department F
called upon the bank to furnish details of the turnover relating to the gold
auction sale on and after 1.4.98; the Department also called upon the assessee
to pay tax at 4% on the sale turnover within 15 days. This was vide notice
dated 1.11.99. Federal Bank submitted its reply contending that a scheduled
bank cannot be compared with a pawn broker and, therefore, it was not a G
dealer under the 1963 Act. The Federal Bank refused to file its return on the
ground that there was no sale of ornaments pledged to the bank and that the
position of the bank remained unaltered even after introduction of clause (g)
in Section 2(viii) of the 1963 Act vi de Kerala Finance Act 1998 dated 29 .7 .98.
I
~
4. Ultimately, Federal Bank Ltd. filed O.P.No.1169 of2000 in the Kerala H
,.
316 SUPREME COURT REPORTS [2007] 4 S.C.R.

A High Court challenging the validity of Section 2(viii)(g) of the 1963 Act as
also the notices issued by the Department pursuant to the Kerala Finance
Act, 1998 directing Federal Bank to file returns and pay tax on sale of pledged
articles.
5. By judgment and order dated 11.4.2002 the Single Judge held that in
B view of Kerala Finance Act, 1998, by which clause (g) stood incorporated
under Section 2(viii) of the 1963 Act, the transaction of sale, whether in the
course of business or not, would cover auction sale or ornaments pledged
with the bank. Therefore, banks, according to the learned Single Judge, came ~

within the definition of the word "dealer" and since the pledged articles were
goods and since the sale was for money consideration, Section·s of the 1963
c was applicable and in the circumstances the leaned Single Judge upheld the
demand notices leaving the question of legislative competence open to
·.challenge.
..
6. Aggrieved by the said decision of the learned Single Judge, Federal
Bank along with other banks carried the matter in appeal. By the impugned
D judgment dated 3.4.03 it was held that in view of the Kerala Finance Act, 1998
under which the definition of the word "dealer" is expanded to cover banks, ..\,
/
the Department was right in seeking to cover the transactions of auction sale
of pledged gold articles. It was further held that amended Section 2(viii)(g)
was intra vires the Constitution of India and that the said section did not
E infringe Articles 14 and 19 of the Constitution. It was further held that even
assuming that the transaction of sale of pledged articles is not a part of the
main business activity still the said transaction would come within the meaning
of incidental or ancillary to the business of banking and in the circumstances
there was no infirmity in the judgment of the learned Single Judge. Accordingly,
the Division Bench dismissed the writ appeals filed by the appellants herein.
F i
Hence, this civil appeal.
7. At the outset, we may point out that before us the constitutional
validity of Section 2(viii)(g) of the 1963 Act was not argued. Before us it was
urged on behalf of banks (appellants) that although by the Kerala Finance
Act, 1998 the definition of the word "dealer" under Section 2(viii) of the 1963
G Act stood expanded so as to include banks, the said Act was still not
applicable to "sale" of pledged ornaments· as the said transaction did not take
place in the course of banking business- in terms of Section 2(xxi). It was
submitted that the word "sale" is defined in the said section to mean every
transfer of the property in goods by one person to another in the course of
trade or business for cash, deferred payment or other valuable consideration
H
'f--
FEDERAL BANK LTD. v. STATE OF KERALA [KAPADIA, J.) 317
--..,,. excluding mortgage, hypothecation charge or pledge. According to the banks A
(appellants) since the auction sale of pledged ornaments did not fall within
the definition of the word "sale" in Section 2(xxi), such transaction are not
exigible to tax under the said Act, even after the insertion of clause (g) to
Section 2(viii). On behalf of the banks it was further submitted that even
under 1949 Act the word "banking" has been defined under Section 5(b) to
mean accepting, for the purpose of lending or investment, of deposits of
B
money from the public, repayable on demand or otherwise. According to the
""' .._ banks (appellants) auction sale of pledged ornaments does not come under
the definition of the word "banking" under Section 5(b) of the 1949 Act and,
therefore, it cannot be said that the banks were in the business of selling
pledged ornaments. On behalf of banks it was further submitted that under c
Section 6 of the 1949 Act, in addition to the business of banking, a banking
company may engage in one of the following forms of business, namely,
borrowing, raising of loans, lending with or without security, drawing of bills,
accepting bills, discounting, buying, selling, collecting and dealing in bills of
exchange. According to the banks (appellants) the "banking business" consists
of accepting deposits from the public. However, under Section 6 a bank is D
j
permitted to engage in the other form of business apart from acceptance of
...... deposits. According to the banks (appellants) Section 6 enables a banking
company if it so desires to engage in other form of business stipulated in
Section 6(l)(a) of the 1949 Act. It was further contended that under Section
8 of the said 1949 Act, banks are prohibited expressly from trading in goods E
except to the extent of buying or selling of goods in realization of security
given to it by the borrower. Under the Explanation to Section 8 of the 1949
"goods" are defined to mean every kind of movable property other than
actionable claims, stocks, shares, money etc. It is submitted that in view of
Section 8 banks cannot sell goods in the course of business and in view of
+ the said prohibition it canriot be said that banks are in the business of selling F
... pledged ornaments. Therefore, according to the banks (appellants) auction
sale of pledged ornaments by banks for realization of security will not fall in
the course of banking business and, therefore, such transactions will not
come within the definition of the word "sale" as defined in Section 2(xxi) of
the 1963 Act.
G
8. We do not find any merit in the above contention. As stated above,
"'
we are not concerned in the present civil appeals with the question of
--1 legislative competence of the State Legislature to insert clause (g) in Section
2(viii) of the 1963 Act. In the present case, we are concerned only with the
limited question argued before us, namely, whether auction sale of pledged
H
318 SUPREME COURT REPORTS [20011 4 s:c.R.

A goods by scheduled banks is a "transaction" which takes place in the course
of banking business in terms of the 1949 Act. In the present case, we are
concerned with the situation which arose after enactment of the Kerala Finance
Act, 1998. By that amendment the definition of the word "dealer" in Section
2(viii) was expressly amended to mean any person who carries on business
of buying, selling, supplying or distributing goods for cash or deferred
B payment or for any other valuable consideration. It is important to note that
prior to Kerala Finance Act, 1998 there was litigation. The result of that
litigation was that the High Court had taken the view in the earlier rounds that
sale of pledged ornaments did not fall "in the course of banking business"
and in order to get over the judgments, the Kerala Legislature introduced
C clause (g) to Section 2(viii) by making it clear that even ifthe sale of pledged
ornaments took place, not in the course of business, still such a transaction
would make the person (banks/financial institutions) a "dealer" under Section
2( viii) of the 1963 Act. Therefore, in deciding the matter we have to keep in
· ., mind the object behind the Kerala Finance Act, 1998.
D 9. In order to answer the controversy in hand we quote hereinbelow the
relevant sections of the 1963 Act:
"Section 2. Definitions. In this Act, unless the context otherwise
requires:
(vi) "Business" includes
E
(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
F or concern; and
(b) any transaction in connection with, or incidental or ancillary to
such trade, commerce, manufacture, adventure or concern.
(viii) "dealer" means any person who carries on the business of
buying, selling, supplying or distributing goods, executing works
G 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:-

(a)xxx
H
i
FEDERAL BANK LTD. v. ST ATE OF KERALA [KAPADIA, J.] 319
~ ...... (b) a casual trader; A
(c) commission agent, a broker or a delcredere agent or an
auctioneer or any other mercantile agent, by whatever name
called, who carried on the business of buying, selling, supplying
or distributing goods [executing works contract, transferring right
to use any goods or supplying by way of or as part of any B
service, any goods] on behalf of any principal;
(d) a non-resident dealer or an agent of a non-resident dealer, or
..J_
a local branch of a firm or company of [association of body of
persons whether incorporated or not] situated outside the State;
(e) a person who, whether in the course of business or not, sells;
c
(i) goods produced by him by manufacture, agriculture,
horticulture or otherwise; or
(ii) trees which grow spontaneously and which are agreed to be
severed before sale or under the contract of sale; D
(f) a person who whether ,in the course of business or not: -
>-
.,.,. (1) transfers any goods, including controlled goods whether in
pursuance of a contract or not, for cash or deferred payment
or other valuable consideration;
.... E
(2) transfers property in goods (whether as goods or in some
other form) involved in the execution of a works contract;
(3) delivers any goods on hire-purchase or any system of
payment by instalments;
F
(4) transfers the right to use any goods for any purpose (whether
~

.. or not for a specifi~d period) for cash, deferred payment or
other valuable consideration;
(5) supplies, by way of or as part of any service or in any other
manner whatsoever, goods, being food or any other articles G
for human consumption or any drink (whether or not
intoxicating), where such supply or service is for cash,
deferred payment or other valuable consideration);
Explanation.-(/) A society (including a co-operative society, club or
.
.....,~

firm or an association or body of persons, whether incorporated
.
or H
;"not) which whether or not in the course of business, buys, sells,
320 SUPREME COURT REPORTS [2007] 4 S.C.R.

·A supplies or distributes goods from or to its members for cash or for ·
deferred payment, or for commission, remuneration or other valuable
consideration, shall be deemed to be a dealer for the purposes of this
Act;
Explanation.-(2) The Central Government or a State Government,
B which, whether or not in the course of business, buy, sell, supply or
distribute goods, directly or otherwise, for cash or for deferred payment,
or for commission, remuneration or other valuable consideration, shall
be deemed to be a dealer for the purposes of this Act.
(g) a bank or a financing institution which, whether in the course of
C its business or not, sells any gold or other valuable article pledged
with it to secure any loan, for the realization of such loan amount;
Explanation /.-Bank for the purposes of this clause includes a
Nationalised Bank or a Scheduled Bank or a Co-operative Bank;
Explanation II.- Financing Institution means a financing institution
D
other than a bank.
(xii) "goods" means all kind of movable property (other than ..,
newspapers, actionable claims, electricity, stocks and shares and I.;

securities) and includes live stock, all materials, commodities and
E articles (including those to be used in the constru~tion, fitting out,
f
improvement or repair of immovable property or used in the fitting
out, improvement or repair of movable property) and every kind of
property (whether as goods or in some other form) involved in the
execution of a works contract, and all growing crops, grass or things
attached to, or forming part of the land which are agreed to be severed
F before sale or under the contract of sale.
~
(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
G consideration, but does not include a mortgage, hypothecation charge
or pledge.
(xxv) "taxable turnover" means the turnover on which a dealer shall ·· -
be liable to pay tax as determined after making such deductions from .,.,.
his total turnover of purchase or sale in the course of inter-state trade
H or commerce or in the course of export of the goods out of the
FEDERAL BANK LTD. v. STATEOFKERALA [KAPADIA,J.] 321

territory of India or in the course of import of the goods into territory A
of India;
(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 inter-state trade or commerce or B
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.
Section 5 Levy of tax on sale of goods.-
(!) Every dealer (other than a casual trader or agent of a non-resident
dealer or the Central Government, or Government of Kerala or the C
Government of any other State or of any Union Territory, or any local
authority) whose total turnover for a year is not less than two lakh
rupees· and every casual trader or agent of a non-resident dealer, the
Central Government, the Government of Kerala, the Government of
any other State or of any Union Territory or any local authority, D
whatever be its total turnover for the year, shall pay tax on his taxable
turnover for that year in respect of goods included in the Schedule
at the rate mentioned against such goods."
10. We also quote hereinbelow the relevant provisions of the 1949 Act:
"Section 5. Interpretation.- In this Act, unless there is anything E
repugnant in the subject or context,-
(b) "banking" 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 F
or otherwise .
• Section 6. Forms of business in which banking companies may
t
engaged.-(1) In addition to the business of banking, a banking
company may engage in any one or more of the following forms of
business, namely:-
G
(a) the borrowing, raising, or taking up of money; the lending or
·- advancing of money either upon or without security; the drawing,
making, accepting, discounting, buying, selling, collecting and dealing
in bills of exchange, hoondees, promissory notes, coupons, drafts,
bills of lading, railway receipts, warrants, debentures, certificates, scrips H
and other instruments, and securities whether transferable or negotiable
.--{·

322 SUPREME COURT REPORTS [2007] 4 S.C.R.

A or not; the granting and issuing of letters of credit, traveller's cheques
and circular notes; the buying, selling and dealing in bullion and
specie; the buying and selling of foreign exchange including foreign
bank notes; the acquiring, holding, issuing on commission,
underwriting and dealing in stock, funds, shares, debentures, debenture
stock, bonds, obligations, securities and investments of all kinds; the
B
purchase and selling of bonds, scrips or other forms of securities on
behalf of constituents or others, the negotiating of loans and advances;
the receiving of all kinds of bonds, scrips or valuables on deposit or
for safe custody or otherwise; the providing of safe deposit vaults;
the collecting and transmitting of money and securities;
c (b) acting as agents for any Government or local authority or any
other person or persons; the carrying on of agency business of any
description including the clearing and forwarding of goods, giving of
receipts and discharges and otherwise acting as an attorney on behalf
of customers, but excluding the business of a (managing agent or
D secretary and treasurer) of a company;
(c) contracting for public and private Icms and negotiating and issuing
the same;
(d) the effecting, insuring, guaranteeing, underwriting, participating in
E managing and carrying out of any issue, public or private, of State,
municipal or other loans or of shares, stock, debentures, or debenture
stock of any company, corporation or association and the lending of
money for the purpose of any such issue;
(e) carrying on and transacting every kind of guarantee and indemnity
F business;
-\
(f) managing, selling and realizing any property which may come into •
the possession of the company in satisfaction or part satisfaction of ~
any of its claims;
(g)acquiring and holding and generally dealing with any property or
G 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; -'

(h) undertaking and executing trusts;
\--"'
H (i) undertaking the administration of estates as executor, trustee or
otherwise;
~I

FEDERAL BANK LTD. v. ST ATE OF KERALA [KAPADIA, J.) 323

G) establishing and supporting or aiding in the establishment and A
support of associations, institutions, funds, trusts and conveniences
· calculated to benefit employees or ex-employees of the company or
the dependents or connections of such persons; granting pensions
and allowances and making payments towards insurance; subscribing
to or guaranteeing moneys for charitable or benevolent objects or for B
any exhibition or for any public, general or useful object;
(k) the acquisition, construction, maintenance and alteration of any
building or works necessary or convenient for the purposes of the
company;
"
(1) selling, improving, managing, developing, exchanging, leasing, C
mortgaging, disposing of or turning into account or otherwise dealing
with all or any part of the property and rights of the company;
(m) acquiring and undertaking the whole or any part of the business
of any person or company, when such business is of a nature
enumerated or described in this sub-section; D
.... ,,
(n) doing all such other things as are incidental or conducive to the
).
promotion or advancement of the business of the company;
(o) any other form of business which the Central Government may, by
notification in the Official Gazette, specify as a form of business in
which it is lawful for a banking company to engage. E
(2) No banking company shall engage in any form of business other
than those referred to in sub-section (I).

Section 8. Prohibition oftrading.- Notwithstanding anything contained
in section 6 or in any contract, no banking company shall directly or F
indirectly deal in the buying or selling or bartering of goods, except
in connection with the realization 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 (I) of Section 6. G
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.
H
Section 29. Accounts and balance-sheet.-

,.
,,'
_,
324 SUPREME COURT REPORTS (2007] 4 S.C.R.

A ( 1) At the expiration of each calendar year (or at the expiration of a :...... --......
period of twelve months ending with such date as the Central
Government may, by notification in the Official Gazette, specify in this
behalf,) every banking company incorporated (in India), in respect of
all business transacted by it, and every banking company incorporated c
(outside India), in respect of all business transacted through its
B branches (in India), shall prepare with reference to (that year or period,
as the case may be,) a balance-sheet and profit and loss account as
on the last working day of (that year or the period, as the case may ,...
\
be) in the Forms set out in the Third Schedule or as near thereto as -+
circumstances admit: ~-

c Provided that with a view to facilitating the transition from one
period, of accounting to another period of accounting under this sub-
section, the Central Government may, by order published in the Official
Gazette, make such provisions as it considers necessary or expedient
for the preparation of, or for other matters relating to, the .balance-
D sheet or profit and loss account in respect of the concerned year or t:
period, as the case may be.
;,
(2) The balance-sheet and profit and loss account shall be signed,-
~
(a) in the case of a banking company incorporated (in India), by the
manager or the principal officer of the company and where there ~
E are more than three directors of the company, by at least three
of those directors, or where there are not more than three directors,
'-....
by all the directors, and

(b) in the case of a banking company incorporated (outside India) by
the manager or agent of the principal office of the company (in
F India). -4. \

)-
(3) Notwithstanding that the balance-sheet of banking company is
)==
under sub-section (l) required to be prepared in a form other than the
form (set out in Part I of Schedule VI to the Companies Act, 1956 (1
of 1956), the requirements of that relating to the balance-sheet and
G profit and loss account of a company shall, insofar as they are not i\-
;~
inconsistent with this Act, apply to the balance-sheet or profit and
loss account, as the case may be, of a banking company.

(3-A) Notwithstanding anything to the contrary contained in sub-
section (3) of Section 210 of the Companies Act, 1956 (1 of 1956), the
,,_,.
;
-
f-
I

H period to which the profit and loss account relates shall, in the case
FEDERAL BANK LTD. v. STATE OF KERALA [KAPADIA, I.] 325
ofa banking company, be the period ending with the last working day A
of the year immediately preceding the year in which the annual general
meeting is held.

Exp/anation.-In sub-section (3-A), "year" means the year or, as the
case may be, the period referred to in sub-section ( 1).

(4) The Central Government, after giving not less than three months' B
notice of its intention so to do by a notification in the Official Gazette,
may from time to time by a like notification amend the Form set out
in the Third Schedule.

''THE THIRD SCHEDULE
c
(see section 29)
FORM A

Form of Balance-sheet
CAPITAL AND LIABILITIES PROPERTY AND ASSETS D
Rs. P. Rs. P. Rs. P. Rs. P.

- I. CAPITAL:

(i) Authorised Capital
1. CASH:

In hand and with Reserve Bank
31
..... shares of Rs ..... each [National Bank] State Bank of India,
.. ... shares of Rs. ... . each State Co-operative Bank and Central Co- E
operative Bank

(ii) Subscribed Capital 2. BALANCES WITH OTHER BANKS:
<· ..... shares of Rs. .... each (i) Current deposits
' ..... shares of Rs. .... each (ii) Savings bank deposits F
- - - - - - ( i i i ) Fixed deposits

(iii) Amount called up 3. MONEY AT CALL AND SHORT
On ..... shares of Rs..... each NOTICE:
less class unpaid 4. Investments:
On..... shares of Rs ..... (i) In Central and State Government
each less calls unpaid Securities (at book value) G
of (iii) above, held by Face value Rs.
(a) Individuals Market value Rs.
(b) Co-operative institutions (ii) Other Tmstee securities
(c) State Government (iii) Shares in cocoperative institutions
- - - - - - o t h e r than in item (5) below
- - - - - - ( i v ) other investments G
326 SUPREME COURT REPORTS [2007] 4 S.C.R.

A (to be specified)

2. RESERVE FUND AND OTHER 5. INVESTMENT OUT OF THE
RESERVES PRINCIPAL SUBSIDIARY STATE
(i) Statutory Reserve PARTNERSHIP FUNDS
(ii) Agricultural (Credit stabilization In shares of:
B fund) (i) Central Co-operative Banks
(iii) Building Fund (ii) Primary agricultural credit societies
(iv) Dividend Equalization Fund (iii) Other societies
(v) Special Bad Debts Reserve
(vi) Bad and Doubtful Debts
Reserve
+
(vii) Investment and Depreciation 6. ADVANCES:
c Reserve (i) Short-term loans, cash credits,
(viii) Other Funds and Reserves (to overdrafts and bills discounted
be specified) Of which secured against:
(a) Government and other
3. PRINCIPAL/SUBSIDIARY approved securities
(b) Other tangible securities @
STATE PARTNERSHIP FUND of the advances, amount due from
D ACCOUNT: Individuals Of the advances,
For share capital of: amount overdue Considered

E
(i) Central co-operative banks
(ii) Primary agricultural credit
societies
(iii) other societies
bad and doubtful
of recovery
(ii) Medium-term loans
Of which secured against:
~

- .~

4. DEPOSITS AND OTHER (a) Government and other
ACCOUNTS: approved securities
(i) Fixed deposits* (b) Other tangible securities @ ~
(a) Individuals** Of the advances, amount dee from "
(b) Central co-operative banks individuals
F (c) Other societies Of the advances, amount overdue _.... /

(ii) Savings Bank Deposits considered bad and doubtful
(a) Individuals** of recovery
(b) Central co-operative banks (ii) Long-term loans
(c) Other societies Of which secured against
(iii) Current deposits (a) Government and other approved
G (a) individuals** securities
(b) Central co-operative ban.k
(c) Other societies
(iv) Money at call and short notice
(b) Other tangible securities @

-
.\

...,. ·t=
5. BORROWINGS: Of the advances, amot.nt
H (i) From the Reserve Bank of due from individuals
·,
.'
i-

FEDERAL BANK LTD. v. ST ATE OF KERALA [KAPADIA, J.] 327
- 4
India 32 [the National Bank] Of the advances, amount over due A
State/Central co-operative Bank: Considered bad and doubtful of recovery
(a) Short-term loans, cash, credits and
overdrafts
(A) Government and other approved
securities
(B) Other tangible securities @
(b) Medium term loans B
Of which secured against 7. INTEREST RECEIVABLE
(A) Government and other approved Of which overdue
+- securities Considered bad and doubtful of recovery
(B) Other tangible Securities @

(c) Long-term loans:
Of which secured against: Government
8. BILLS RECEIVABLE BEING BILLS
FOR COLLECTION
c
and other approved securities Other As per contra
tangible securities @ From the State
Bank of India
(a) Short-term loans cash- 9. BRANCH ADJUSTMENT
credits and over drafts
Of which secured against: Government D
> and other approved securities Other 10. PREMISES LESS DEPRECIATION
....- tangible securities @
(b) Medium term loans Of which
secured against: Government and other 11. FURNITURE AND FIXTURES LESS
approved securities DEPRECIATION
Other tangible securities @ E
(c) Long-term loans:
Of which secured against: 12. OTHER ASSETS
Government and other approved (to be specified)
securities
13. NON-BANKING ASSETS
Other tangible securities @
>- ACQUIRED IN SATISFACTION OF
From the State Government
... (a) Short-term loans:
CLAIMS F
(standing mode of valuation)
Of which secured against:
Government and other
approved securities
Other tangible securities @
(d) Medium-term loans
14. PROFIT AND LOSS
Of which secured against: G
Government and other approved
ti.• securities
'-f Other tangible securities @
(c) Long-term loans:
Of which secured against:
H
328 SUPREME COURT REPORTS (2007] 4 S.C.R.

A Government and other
approved securities
'· -
Other tangible securities @
Loans from other sources
(sources and security to be
specified rule)
B
6. BILL FOR COLLECTION BEING
BILLS RECEIVABLE
As per contra

7. BRANCH ADJUSTMENTS
c
8. OVERDUE INTEREST RESERVE

9. INTEREST PAYABLE

I 0. OTHER LIABILITIES
D
(i) Bills payable
(ii) Undaimed dividends
(iii) Suspense
(iv) Sundries

11. PROFIT AND LOSS
E Profit as per last balance-sheet Less
appropriations Add profit for the
year brought from the Profit and
Loss Account
Total Total
F CONTINGENT LIABILITIES
(i) Outstanding liabilities for
guarantees issued
(ii) Others

G Total Total

H
FEDERAL BANK LTD. v. STATEOFKERALA [KAPADIA,J.) 329
FORMB A
Form of Profit and Loss Account
Profit and Loss Account for the year ended-

EXPENDITURE INCOME
B
Rs. P. Rs. P. Rs. P. Rs. P.

1. Interest on deposits, 1. Interest and discount
borrowings, etc.
2. Salaries and allowances and 2. Commission, exchange and brokerage
provident fund
3. Directors and local committee
c
3. Subsidies and donations
members' fees and allowances
4. Rent, taxes, insurance, lighting, etc. 4. Income from non-banking Assets
S. Law charges and profit from sale of or dealing
6: P.ostage, telegrams and telephonic with such assets
,. charges
7. Auditor's fees 5. Other receipts D
8. Depreciation on and repairs in 6. Loss (if any)

- property
9. Stationery, printing and
advertisement, etc.
10. Loss from sale of or dealing with
non-banking assets
11. Other expenditure E
12. Balance of profit

Total Total

General Instructions-The corresponding figures (to the nearest rupee,
if so desired for the year immediately preceding the year to which the F
profit and loss account relates should be shown in separate columns."

11. In order to answer the contentions raised on behalf of the banks
(appellants) it is important to note that we are concerned with the 1963 Act.
The said Act is enacted to consolidate and amend the law relating to the levy
of tax on sale or purchase of goods in State of Kerala. In our opinion, the G
word "sale" in Section 2(xxi) of the 1963 is very important. The word "sale"
is defined to mean transfer of the property in goods in the course of trade
or business for cash, deferred payment or for any other valuable consideration.
This definition is different from the definition of the word "sale" under the
Sale of Goods Act, 1930. When the pledged article is put to auction it is no
doubt for satisfaction of claims. It also results in an income from non-banking H
330 SUPREME COURT REPORTS (2007) 4 S.C ..R.

A assets. The first question which, therefore, arises is : whether sale of pledged
ornaments for consideration falls in the course of trade or business of the
bank. It is no doubt true that banks have to act on instructions of the
borrower. In the present case, we are not concerned with the provisions of
Section 176 of the Contract Act, 1872. We are concerned with the definition
of the word "sale" under the 1963 Act. When a bank sells the pledged
B ornaments it is not acting as an agent of the borrower even under the 1949
Act. When the bank sells the goods pledged to them they do not act as the
agents of the borrower. As pledgees, the banks, acting under Section 176 of
the Contract Act, 1872 have a right to sell the goods. That sale is not as
agents but that sale is in exercise of the statutory power under the 1949 Act.
C No doubt the sale is on behalf of the pledgor, however, the sale is in exercise
of the statutory power [See: The Deputy Commissioner of Commercial Taxes
v. A.RS. Thirumeninatha Nadar Firm, (1968) 21 STC 184 (Mad)]. To the same
effect is the judgment of the Punjab and Haryana High Court in the case of
High Channel Video v. Enclave Electronics and Ors., (1999) 116 STC 131 (P.
& H.)] Further on reading the provisions of the 1949 Act, one finds that every
D bank is required to maintain its balance-sheet in Form 'A" of the Third
Schedule, quoted above. The prescribed form indicates that non-banking
assets acquired by the banks even in satisfaction of claims, are required to
declare their holdings. The prescribed form of balance-sheet indicates that
/
banks are required to show on the asset side non-banking assets acquired )

E by them in satisfaction of claims. Similarly, in Form 'B' of the Third Schedule
under Profit and Loss Account, banks are required to show income from non-
banking assets and profit from sale of such assets. In our view, therefore, sale
of pledged assets takes place in the course of banking business. Therefore,
as stated above, the banks, in selling the goods pledged to them, did not act
as agents of the borrowers/pledgors and that their sale was in exercise of
F statutory power under the 1949 Act. Further, in our view it is no doubt true
that under Section 8 of the 1949 Act banks are prohibited from trading in
goods. However, if one reads Section 8 along with Third Schedule to the 1949
Act it is clear that dealing in non-banking assets is a banking business and
the exception made in Section 8 which allows banks to realize security and
G which allows banks to engage in trade in order to realize security, falls within
the banking business whenever· undertaken. When a pledged article is sold
in an auction, the bank recovers not only its dues but also recovers interests
and its other charges. This realization falls within the parameters of the Third
Schedule to the 1949 Act. In the circumstances, we are of the view that sale
of pledged ornaments falls within the course of banking business under the
H
j-
FEDERAL BANK LTD. v. STATE OF KERALA [KAPADIA, J.] 331
....
' 1949 Act. In the circumstances, such transactions are taxable under Section A
2(viii)(g) read with Section 5 of the 1963 Act. We also find merit in the
contention advanced on behalf of the Department (respondents herein) that
the very object of the Kerala Finance Act, 1998 was to introduce clause (g)
in Section 2(viii) in order to get over the judgments of the High Court which
took the view that sale of pledged goods did not fall in the course of banking
B

.. ~
business. We have quoted clause (g). That clause makes it very clear that
even if the sale of pledged ornaments takes place outside the banking business,
the 1963 Act would cover even such transactions. Therefore, once such
transaction fall under Section 2(viii)(g) of the 1963 Act, banks become "dealers"
and they are liable to pay sales tax under the said 1963 Act. It is true that
the definition of the word "sale" under Section 2(xxi) of the 1963 Act does c
not include mortgage, hypothecation charge or pledge, however, the important
point to be noted is that the definition of the word "sale" under the 1963 Act
is not the same as under Section 4 of the Sale of Goods Act, 1930. The
definition of the word "sale" in Section 2(xxi) in the 1949 is very similar to
• Section 2(g) of the Central Sales Tax Act, 1956 which is held to be having a
very wide meaning as compared to the definition of the word "sale" in Section D
4 of the Sale of Goods Act, 1930 [See: State of Maharashtra v. Em bee
Corporation, Bombay, [ 1997] 7 SCC 190]. Further, when charge or pledge is
enforced that enforcement is by way of sale of the pledged or hypothecated
goods; that sale is for consideration and, therefore, it falls within the ambit
of Section 2(xxi) of the 1963 Act. E
12. In the circumstances, there is no infirmity in the impugned judgments
of the Division Bench of the Kerala High Court.

. 13. Accordingly, the above civil appeals have no merit and they are
dismissed with no order as to costs. F
B.S. Appeals dismissed.

'