Case Briefs
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Damodar Valley Corporation v State of Bihar


Author: Lakshya Raj Singh Rathore, student at Nirma University.

Citation: 1961 AIR 440, 1961 SCR (2) 522

Date of Decision: 21 November, 1960

Bench: B.P. Sinha, S.J. Imam, A.K. Sarkar, K. Subba Rao and J.C. Shah.

Original Copy: N/A

Statues Involved: Section 25 of Bihar Sales Act 1947

Issues in question: 

  • Whether the transaction involved was covered under the category of a sale?
  • Whether the decision of the superintendent stood a valid ground or not?

Background of the case: 

  • The Damodar Valley Corporation which happened to be a construction firm entered into a contract with Messrs Hind Construction Ltd. and Messrs Patel Engineering Company limited to build a dam in the district Hazaribagh, Bihar. 
  • Later on after inspection the design of the dam had to be changed so the parties substituted a clause 8 of Part 2 of the original agreement. 
  • As per the new clause they agreed that the corporation will provide the constructors with all the required equipment for the construction, for which the price had to be paid inclusive of the freight and custom duty, if any along with the cost of transport and exclusive of the sales tax. 
  • The equipments were basically divided into two groups A (the equipments under these had to be taken back by the corporation from the contractor after the completion of the work at their residual value as per discussed in the agreement) and group B (the equipments under this were to become the property of the contractors after the complete payment to the corporation). 
  • The dispute between the parties arose when the Tax Superintendent of Hazaribagh assessed the corporation for the sales tax for the items under group A, on which the corporation objected that there had been no sale and it was a hiring agreement.
  • The superintendent rejected the plea so the corporation appealed to deputy commission or but again on rejection of appeal they went on to appeal to the board of revenue.  

Judgment:

  • The corporation had further contended three issues:
  • Whether the Superintendent’s assessment under Section 13(5) of the Act is maintainable?
  • Whether the equipment included in Schedule A did pass to the Contractors and the transaction amounted to a sale as per the definition mentioned under the act?
  • Whether as per terms of the agreement with the Contractors of transaction was a hiring or a sale transaction?
  • Of which when they appealed to the high court, the corporation dropped the first and the third contention and referred only the issue of to consider the goods as sale or not before the High Court divisional bench and the bench affirmed the judgment that the transaction did amount to sale as within the meaning of section 2(g) of the Bihar Sales Act 1947. 
  • Thus not satisfied by the decision of the High Court the corporation asked to appeal to Supreme Court under article 132 and article 133(1) of the constitution but because the decision did not have any question of law this request was rejected, so later the corporation decided to file a special Leave Petition (SLP) mentioned under article 136 of the Indian Constitution. 
  • By this SLP the corporation raised the main issue whether the transaction can be called as a sale or not under the section 25 of the act and along with this question the corporation raised additional issues stating that the corporation was not a dealer as per the meaning within the act and the section 2(g) and the whole act as ultra vires the Bihar legislature. But these additional questions were rejected to be heard in the Supreme Court because these have not been raised at any stage before the authorities below the apex court thus the apex court mentioned that the new contentions cannot be taken for hearing even by a SLP.
  • On reading the Clause 8 of the agreement and also the terms and conditions related to the use of machines and equipment mentioned under Group A&B the bench observed that the contract was not an unconditional one and the term of equal installments to pay the price was also a reasonable one as mentioned in the agreement. Thus the case had no doubt of law, just the applicability of law on facts.
  •  Hiring or Sale agreements can be identified if the agreements have a binding obligation to purchase the goods or the rights to return the goods at any time during the contract.
  • As per the definition and tests mentioned, the contractors had no right or return the goods as per their convenience, they also had to adhere to the condition of maintaining of residual value above one-thirds for the return of goods back to the corporation and had to pay two-thirds of the price in equal installments, the contractors even had to bear all the damages to the machinery and arrange for the spare parts and all these conditions clearly not make the agreement to be of a hiring type.
  • The apex court relied on the judgment in Helby v Mathews 1895 defining the rights of a hirer and a purchaser, the bench also relied on the HCs reasoning that said that the stand of the corporation was weak and held the HCs was correct in its judgment. 
  • Thus after understanding of the facts and taking the definitions and tests of both types of agreements the bench held that the agreement was an agreement of sale on deferred payments so the claim of the corporation stands invalid.

Critical Analysis:

  • This case gives a proper view of the Hire and Sale agreements and the apex court mentioned the difference in the best way possible and this judgment is one of the landmark cases.
  • Through this case the bench touched upon Section 25, 13(2), and 2(g) of the act and also the aspect of article 132, 133(1) and 136 of the Indian constitution.
  • The apex court also noted that the new issue cannot be raised through SLPs and it shows the mistake of the corporation’s lawyer to not raise those issues at an earlier stage as that might have given them better points to avoid the tax. 
  • The idea of the bench was to clarify the confusions which might arise from the transactions involving such sales and hire purchase agreements.
  • Also the court mentioned about the role and when can article 132 and article 133 of the Indian Constitution can be used as article 132 gives the powers of the original jurisdiction and article 133 is for the appellate jurisdiction of the court.

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