TaxTMI 
TaxTMI 
2001 (9) TMI 258
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Auto Finance Limited, Kanpur, against the order of CIT(A), Lucknow, dated 22-1-2001 for the assessment year 1996-97. It may be pointed out that whereas the orders of CIT(A), Kanpur, in the case of Commercial Motors Finance Limited and in the case of M/s. Kailash Motors Finance Limited are of the same date and based on similar reasons, the order of CIT(A) in the case of ITA No. 4/Luck/2001 has been passed after following the orders passed in the case of M/s. Kailash Motors Finance Limited for the AYs. 1992-93 to 1997-98 dated 2nd February, 1999. 4. The assessee-appellants in all the three sets of appeals have taken similar grounds i.e., ground Nos. 1 to 6 for challenging the order of the learned First Appellate Authority. However, in ITA Nos. 6 & 7 to 12/Alld. 99, the appellants have taken the following additional grounds: "7. Because the reassessment proceedings under section 10(a) of the Act cannot be said to have been validly initiated as-- (a) there existed neither any material which could lead to the formation of belief that "chargeable interest" for the assessment year 1994-95 had escaped assessment; (b) nor the related notice dated 27-4-1998 has been validly issued and s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....charged on the loans given towards purchase of vehicles. In support of this conclusion, the Assessing Officer placed reliance on the Board's Circular No. 760 dated 13-1-1998 and also on the decision of the Hon'ble Supreme Court of India in the case of Sundaram Finance Ltd. v. State of Kerala AIR [1966] SC 1178. 6.5 On the basis of above conclusion, the Assessing Officer took the finance charges of Rs.12,91,027 as total chargeable interest and completed the assessment under section 8(2) of the Interest Tax Act, oil the above amount. 6.6 The assessee challenged the action of the Assessing Officer before the CIT(A). The main contention of the assessee was that the "Finance Charges" earned by the assessee were in respect of the business of hire purchase of Light and Heavy Vehicles carried on by the appellant. The assessee also took several pleas in support of this contention raised before the ld. First Appellate Authority. The ld. CIT(A) has reproduced these pleas in paras 4(1) to 4(11) of his order. For the sake of brevity, we are not reproducing these pleas in this order. 6.7 The ld. CIT(A) after considering the scope of sections 5 and 7 of Interest-tax Act and also on examination....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e under section 10 of the Interest-tax Act, required the assessee to submit the return within a period of 30 days and since the notice dated 27-4-1998 issued under section 10 of the Interest-tax Act, required the assessee to deliver a return in the prescribed form before the expiry of seven days from the date of service of notice, the notice cannot be said to be a legal and valid notice, because it unduly curtails the time limit to which the assessee was entitled under the Law. The ld. Sr. DR, on the other hand, submitted that since the assessee had failed to furnish the return under the Interest-tax Act, the ld. Assessing Officer was fully competent to initiate the proceedings for reopening the assessment. The ld. Sr. D.R. also invited our attention to the reasons recorded by the Assessing Officer before reopening the assessment. 11. We have carefully considered the facts and relevant material relating to this issue. A perusal of the order dated 27-4-1998 (Vol. III) filed by the assessee shows that the Assessing Officer has held that the chargeable interest had escaped assessment. We consider it proper to reproduce the reasons for issuing notice under section 10 of the Interest-t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... were reasons to believe that chargeable interest had escaped assessment within the meaning of section 10(a) of the Interest-tax Act. The reasons so recorded by the Assessing Officer are, in our view, very specific and not vague and, in our opinion, these reasons serve it solid basis for reopening the assessment. 13. So far as the contention of the ld. counsel for the assessee that the notice provided only seven days time instead of 30 days time is concerned, we do not find any force in this submission, because no time limit has been provided under section 10 of the Interest-tax Act. It may also be pointed out that time limit of 30 days for filing the return is laid down under section 7 of Interest-tax Act, but the object of that section is different from that of section 10. It may be pointed out that the notice dated 27-4-1998 has been issued under-section 10 of the Interest-tax Act and not under section 10 read with section 7 of the Act. The ld. counsel for the assessee, Shri Garg cited several decisions to canvass the point that the notice under section 10 of the Interest-tax Act being akin to notice under section 148 of the Income-tax Act, 1961, is a jurisdictional notice and,....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... V. Doshi v. CIT [1978] 113 ITR 22 (Guj.). (iv) Mariam Aysha v. CAIT [1976] 104 ITR 381 (Mad.). He has also made reference to the decisions reported in- Hansraj Dhingra v. Union of India [1975] 98 ITR 397 (Cal.). Smt. Sohani Devi Jain v. ITO [1977] 109 ITR 130 (Gau.). Bhagwan Devi Saraogi v. ITO [1979] 118 ITR 906 (Cal.). CIT v. Ramsukh Motilal [1955] 27 ITR 54 (Bom.); 1907 ILR 36 (Cal.) 193; and Supdt. of Taxes v. Onkarmal Nathmal Trust AIR 1975 SC 2065. 16. The ld. Sr. DR, on the other hand, submitted that the objection relating to service of notice was neither taken by the assessee before the Assessing Officer nor before the CIT(A). According to him, the assessee even filed return in response and in compliance to the notice issued to it. The ld. Sr. DR further pointed out that the notice was validly served upon the representative of the assessee. In support of his contention, he placed reliance on the report of ITO dated 30-1-2001, a copy of which has been filed by the Department with the paper book dated 19-3-2001. The Department has also filed documents/ report in rebuttal to the affidavit of Shri Ishwar Chand. 17. We have carefully considered the facts and circumstan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ply dated 1-6-1998 and 2-6-1998, but in these replies, no objection has been taken about the improper service of notice. The appeal was filed by the assessee and in the appeal also no ground was taken to challenge the validity of notice. It was only on 12-10-2000 that the ground was taken for the first time before the Tribunal and subsequent to that the documents/evidences in support of this ground was adduced. This conduct of the assessee shows that the additional ground has been taken as an after thought. 18. So far as the affidavit of Shri Ishwar Chand, Director of the assessee company is concerned, it is true that no affidavit has been filed by the Department in rebuttal to this affidavit, but it may be very difficult for the Department to ascertain and depose about the authority of the person, who received the notice. However, the reports of the Department, against this affidavit controverts the contents of the notice. Under these circumstances, we are of the view that the assessee had fully acquiesced by its conduct in acknowledging the receipt of notice through its employee and, thus, the service should be deemed to be a proper service. 19. So far as the authorities filed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as the assumption of jurisdiction on the basis of issuance and service of notice is concerned, in view of the above, narrated facts, we find that the service was proper and sufficient and, therefore, the jurisdiction was properly exercised. 20. The above view is fully fortified by the following decisions:-- (1) CIT v. Bhanji Kanjis Shop [1968] 68 ITR 416 (Guj.). (2) Agricultural Co. v. CIT [1974] 93 ITR 353 (Delhi). (3) Mahendra Kumar Agrawalla v. ITO [1976] 103 ITR 688 (Pat.). (4) Dr. H.R. Rai v. CIT [1984] 145 ITR 809 (MP). (5) A.K.M. Govinda Swamy Chettiar v. ITO [2000] 244 ITR 559 (Mad.). In the case of Bhanji Kanji's Shop, the notice was served on a person, named, as Kumbhar Nameri, who was neither accredit agent of the assessee nor an authorized agent for receiving the notice, but it was found that the assessee filed return in pursuance to that notice, the ITAT held that the notice must have been received by the assessee. The Hon'ble High Court upheld the approach of ITAT and further held that it would be taking to hyper-technically a view to hold that the notice served on the employee like Kumbhar Nameri, which is ultimately received by the assessee himself could not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egularity in the service of a notice of reassessment, if the assessee admits that he had received the notice, or from the facts it can be found that he must have received the notice, the contention on behalf of such an assessee that the notice was improperly served must be rejected". The case of the Gujarat High Court was followed by the Patna High Court in Mahendra Kr. Agrawalla v. ITO [1976] 103 ITR 688. We respectfully agree with the view taken in these cases. The issue also came before the Hon'ble Madras High Court in the case of A.K.M. Govindaswamy Chettiar, and the Hon'ble Court after placing reliance on the cases mentioned above, held as under:-- "The assessee in the instant case did not raise any objection at any time before the Income-tax Officer that the notice was not served on the assessee personally or was not served on the agent who was empowered to receive notices. The objection raised regarding the validity of service of notice has lost its significance when the assessee acted upon the notice, filed the return in pursuance of the reassessment notice and participated in the reassessment proceedings. We, therefore, hold that the Tribunal has come to the correct conc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en placed in the paper book of the assessee. He further submitted that the assessee, who was operating from Jabalpur, Madhya Pradesh, purchased vehicles from Authorized Dealers of Telco and gave the same on hire purchase agreement to the hirers. According to him, a transaction of hire purchase is transaction of bailment and eventually a transaction of sale at the option of the hirer. The ld. counsel, in support of his arguments made reference to the terms of hire purchase agreement, a copy of which has also been placed in the paper book at pages 22 to 28. Auditors Report alongwith enclosures, copies of which are available at pages 29-34 on the paper book, the provisions of Interest-tax Act, the provisions of Hire Purchase Act, 1972, copy available at pages 82-95 of the paper book, and the various other documents filed in the paper book of the assessee. The ld. counsel also made reference to the various Circulars of C.B.D.T. Instruction No. 1425 of C.B.D.T. dated 16-11-1981 on TDS under section 194A and various other documents. He also placed reliance on the following decisions:-- (i) Instalment Supply Ltd. v. STO, Ahmedabad AIR 1974 SC 1105. (ii) Kunnuk Nooruddin v. Jai Bharat Cr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cial Company. Section 2(7) of the Act defines the term "interest" as follows: "2(7) 'interest' means interest on loans and advances made in India and includes-- (a) commitment charges on unutilized portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India. but does not include- (i) interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills." 30. The Central Board of Direct Taxes issued a Circular No. 738 dated 25th March, 1996, and clarified that the finance charges accruing or arising to hire purchases finance company are in the nature of interest as defined in section 2(7) of the Interest-tax Act, and, therefore, chargeable to Interest-tax Act. However, by another Circular No. 760 dated 13th January, 1998, the CBDT again clarified the position:-- 2. The Board have since considered the issue and are advised that in the case of transactions which are, in substance, in the nature of hire purchase, the receipts of hire charges would not be in the nature of interest. On the other hand, if the transactions are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f relevant material, the transaction is found to be in the nature of finance transactions, then interest on such financing transactions shall be chargeable to Interest-tax Act. Hence for proper examination of the nature of transaction involved, we have to study the relevant agreements and other connected circumstances. 32. So far as the hire purchase agreements entered into between the assessee-company and the hirer are concerned, on a careful and close examination of various clauses, we find that the intention of the parties in executing the agreement is not to advance or take loan, but to give and take the vehicle on lease on certain conditions including the conditions that on total payment of charges, the hirer shall have the option to get the vehicle transferred in his name. The examination of various clauses of the hire purchases agreement goes to show that the ownership of the vehicle remains with the hire purchase trader and not with the hirer, although, on certain terms and conditions, the hirer is allowed to retain the possession of the vehicle and to use the same. It may be specifically pointed out that the assessee-company has not advanced loan for the purchase of the v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dy has been built by him. (f) The owners hereby agree to let, and hirer hereby agrees to take on hire the Motor Vehicle, particularly described in the Schedule A hereto subject to the terms and conditions hereinafter contained, which shall be part and parcel of this Agreement. (g) Clause IV: If the Hirer shall duly perform and observe at the terms and conditions of this agreement and shall have paid to the owners the total amount by way of hire as stipulated in the Schedule B and earlier and has also paid all other dues and expenses due to the owners, under the terms and conditions of this agreement, the Hirer will have the option to purchase the said Motor vehicle on payment of Re. 1 and on such payment the hiring will come to an end. The owner will then make over all their rights, title and interest in the Motor Vehicle to the Hirer and until the owners transfer the Motor vehicle to the Hirer shall remain the absolute property of the Owners. (h) The hirer shall be at liberty at any time during the continuance of this Agreement to terminate the hiring by returning the Motor Vehicle to the Owners in Jabalpur in the order and condition in which it was delivered to the Hirer (fair....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eatment of the accounts. The assessee-company has prepared balance sheet and Profit & Loss Account. In Schedule 'D', which is hire purchase trading account, cost of article in stock is shown at commencement to, which is added the cost of the article purchased in the year of account, and from the total of this, the cost of article realized in the year of account is deducted and closing stock of articles on hire is carried forward. Thus, only profit on hire purchase is credited to Profit & Loss Account by the Company on hire purchase trading account. Thus, it will not be correct approach to say that profit on hire purchase trading is 'Interest on Loans & Advances' within the meaning of section 2(7) of the Interest-tax Act. 35. In the case of Instalment Supply Ltd. the Hon'ble Supreme Court of India has made the following observations after considering the nature of these transactions: "The person desiring to purchase a motor vehicle enters into a hire purchase agreement with the petitioner-company. It may be useful to give within a short compass the terms of the agreement. The company charges the hirer an initial deposit by way of premium as a consideration for granting the lease o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of the Bombay Money Lenders Act, 1946." 35.2 The issue also came for the consideration of the Hon'ble Supreme Court of India though in the different context in the case of K.L. Johar & Co. In that case also, the Hon'ble Supreme Court of India made the following observations:-- "Hire-purchase agreements are not conditional sales. A hire-purchase agreement has two elements: (1) element of bailment, and (2) element of sale, in the sense that it contemplates as eventual sale, The element of sale fructifies when the option is exercised by the intending purchaser after fulfilling the terms of the agreement. The taxable event under the Act is the sale of goods and until that taxable event takes place there can be no liability to pay tax. Therefore, though eventually most cases of hire-purchase may result in sales by the exercise of the option and the fulfilment of the terms of the agreement, tax is not eligible at the time when the hire-purchase agreement is made, for at that time the taxable event has not taken place; it can only be regular when the option has been exercised and all the terms of the agreement fulfilled and the sale actually takes place." 35.3 The case of K.L. Johar ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n obtaining the Hire purchase and the allied agreement was found to secure the return of loans advanced to their customers. It was also found that no sale of vehicle was intended by the customer to the appellants. On this basis, it was held that the transactions were merely financing transaction. 37. In that case, the Hon'ble Supreme Court considered the nature of various hire purchase agreements. One class of such transactions was of hire, where the owner was unwilling to look to the purchaser of the goods to recover the balance of the price and the financier, who paid the amount undertook the recovery. In this form, the goods were purchased by the financier from the Dealer and the Financier obtained a hire purchase agreement from the customer under which a fax latter became the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The other class of such transactions was when a person, desiring to purchase goods and not having sufficient money on hand, borrowed the amount needed from the third person and paid it over to the vendor. This transaction, according to the Hon'ble Supre....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... registered in his name as owner. Thus, the transaction of sale was first transaction between the assessee-company and the vendor, The Hire Purchase Transaction is subsequent to that. Thus, these facts distinguished the present case from the facts in the case of Sundaram Finance Ltd. and, therefore, on the facts of this case, it cannot be said that in substance hire purchase transaction in the present case is merely a loan transaction. 39. The nature of hire purchase transaction was considered in depth in the context of the provisions of Interest-tax Act in the case of Harita Finance Ltd by the ITAT, Madras Bench, and the Bench after examining the agreement, the circulars of the Board and relevant case laws held that the term "chargeable interest" as defined in sub-section (5) of section 2 was though enlarged by the Finance Act (No. 2) of 1991, so as to include the financial institutions in its ambit, but no amendment was made in the definition of term "Interest" as given in sub-section (7) of section 2 of Interest-tax Act, which meant that the term "Interest" will continue to have the same meaning as was assigned to its earlier before the said amendment. According to the Bench, t....