Bank as dealer under VAT law for auction sale of repossessed hypothecated vehicles, court holds

A bank that repossesses hypothecated vehicles on default and sells them by auction can be treated as a dealer under Section 2(15) of the Tamil Nadu Value Added Tax Act, 2006 for those disposals. The Court reasoned that the hypothecation agreement authorises repossession and sale for recovery of dues, so the auction is not a voluntary sale by a willing owner but a compulsory realisation mechanism. It also held that Explanation III to Section 2(15) is sufficient to deem banks dealers when they dispose of goods by auction or otherwise for consideration, even where ownership is disputed or the goods are not transferable in the ordinary sense. The issue was decided against the assessee.

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Issues: Whether a bank that repossesses hypothecated vehicles and sells them by auction becomes a dealer within the meaning of Section 2(15) of the Tamil Nadu Value Added Tax Act, 2006 and is liable to tax on such disposals.

Analysis: The bank contended that in hypothecation the ownership remains with the borrower and that the bank merely facilitates sale as an agent, relying on the distinction between hypothecation and pledge and on the requirement of transfer formalities under motor vehicle law. The Court held that the hypothecation agreement itself empowers the bank to repossess and sell the vehicle on default, and such sales are not voluntary sales on behalf of a willing owner but compulsory sales for recovery of dues. The Court further held that Explanation III to Section 2(15) is enough to deem banks dealers when they dispose of goods by auction or otherwise for consideration, including goods whose ownership is not claimed or may not be transferable in the ordinary sense.

Conclusion: The question was answered against the assessee and the bank was held to fall within the definition of dealer for the disputed disposals.

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