Substance over form in vehicle finance charges: embedded finance charges treated as taxable interest on loans and advances.

Finance charges collected under vehicle financing arrangements styled as hire purchase agreements were treated as interest where the substance of the transaction was a loan for purchase rather than a genuine hire purchase. The vehicles stood in the borrowers' names, the financiers retained only a repossession right on default, and the charges were loaded on the financed sum at a flat annual rate and recovered in instalments. Applying the substance-over-form principle, the Court held that such charges were interest on loans and advances taxable under the Interest-tax Act, 1974. The Tribunal's reliance on an option clause and the Hire Purchase Act, 1972 was rejected, and the assessments were restored.

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Issues: Whether finance charges collected under vehicle financing arrangements styled as hire purchase agreements constitute "interest" chargeable to tax under section 2(7) of the Interest-tax Act, 1974.

Analysis: The decisive inquiry was the true character of the transaction. Although the agreements were in the form of hire purchase, the vehicles were registered in the borrowers' names, the finance companies retained only a right to repossess on default, and the amounts described as finance charges were loaded on to the financed sum at a flat annual rate and recovered in instalments. The Court applied the principle that the substance of the transaction prevails over its form and held that a bona fide hire purchase arrangement is distinguishable from a financing transaction where the customer is in substance borrowing money for purchase. The provisions of section 51(1) of the Motor Vehicles Act, 1988 were also consistent with the conclusion that the borrowers were the owners and the financiers merely held a right of repossession by hypothecation. The Tribunal's reliance on the option clause in the agreement and on the Hire Purchase Act, 1972 was held to be misplaced, and the CBDT circulars did not assist the assessees because they excluded only genuine hire purchase charges, not interest embedded in a financing transaction.

Conclusion: The finance charges were held to be interest on loans and advances and therefore taxable under the Interest-tax Act, 1974. The finding of the Tribunal was reversed and the assessments were restored.

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