The sale of unredeemed pledged goods by pawn brokers constitutes a business activity, making them liable to pay taxes under the K. S. T. Act.

( 1 ) IN these two Cases the first petitioner is the Karnataka Pawn Brokers association and the second petitioner is a firm engaged in pawnbroker's business. They are calling in question the validity of a clarification issued by the Commissioner of Commercial Taxes. The clarification is to the following effect:"i) Pawn Broker is a dealer under the provisions of the K. S. T. Act 1957 and ii) Pawn Broker is liable to pay tax on the sale of unredeemed goods effected through auction if his annual turnover in such goods is not less than the minimum prescribed under section 5 (5) of the K. S. T. Act 1957. "

( 2 ) IT is contended on behalf of the petitioners that the State of Karnataka has enacted the Karnataka Pawn Brokers Act 1961 (hereinafter referred to as the Act) which provides for the regulations and control of the business of pawn brokers in the State of Karnataka; that in regard to unredeemed pledged articles the pawn broker has an option either to sue for the recovery of money in respect of which the goods were pledged or to sell the same as provided in Section 176 of the Contract Act. However, Section 12 of the Act controls the sale of pledged articles. The relevant provision thereof reads as follows:"12. SALE OF PLEDGE AND INSPECTION OF SALE BOOK.- (1) A pledge pawned for a sum exceeding ten rupees shall, when disposed of by the pawn broker, be disposed of by sale by auction and not otherwise, and the sale shall be conducted in accordance with such rules as may be prescribed. "rule 20 of the Rules framed under the Act provides for procedure in auction of pledged goods. It is contended therefore that the sale of pledged articles is made by the pawn brokers not as owners of the goods, nor as agents of the pawner but under the authority of the statute and therefore when the goods in the same do not vest in them there cannot be a sale for the purpose of the Karnataka Sales Tax Act so as to attract tax in their hands. A pawn broker becomes owner of the goods only in the circumstances mentioned in Section 12 (2) of the act and in no other circumstances. The position of a pawn broker in regard to the pledged goods is in the nature of a bailee and not as an owner or agent. Consequently, it is submitted that neither Section 11 of the Karnataka Sales Tax Act is attracted nor any other provision under which any tax could be levied upon pawn brokers in relation to sale effected by them of the unredeemed pledged articles.

( 3 ) THE learned Counsel appearing for the petitioners referred me to various provisions of the Act, the Contract Act and the Karnataka Sales tax Act to impress upon me the force of his submissions made on behalf of them. However, in my view, no detailed reference of the same is required.

( 4 ) EXPLAINING the rights available under Section 176 of the Contract Act the Supreme Court in LALLAN PRASAD vs RAHMAT ALI and another stated as follows:"that Section 176 deals with the rights of a pawnee and provides that in case of default by the pawner the pawnee has (1) the right to sue upon the debt and to retain the goods as collateral security, and (2) to sell the goods after reasonable notice of the intended sale to the pawner. Once the pawnee by virtue of his right under Section 176 sells the goods the right of the pawner to redeem them is of course extinguished. But the pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawner. So long however the sale does not take place the pawner is entitled to redeem the goods on payment of the debt. "in THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES, madurai DIVISION, MADURAI vs A. R. S. THIRUMENINATHA nadar FIRM, TUTICORIN Madras High Court noticed the scope of section 176 of the Contract Act. It was stated therein that a pawnee had a right to sell the goods under Section 176 of the Contract Act and the sale was an exercise of the statutory power and not as an agent. It was also noticed that the sales were