CLARIFICATION ON APPLICABILITY OF INTEREST-TAX

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....their principal business as hire purchase transactions or the financing of such transactions. 3. Hire purchase transactions are generally in the nature of finance transactions entered into by the companies engaged in the business of financing. 4. The Board are of the view that the finance charges accruing or arising to hire purchase finance companies are in the nature of interest as defined in section 2(7) of Interest-tax Act and, therefore, chargeable to interest-tax. 5. The above clarification may be brought to the notice of all the officers concerned. Circular No. 738, dated 25-3-1996. CLARIFICATION I In Board's Circular No. 738, dated 25-3-1996 it was stated that hire-purchase transactions entered into by the hire-purc....

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....asset but does not pay the full purchase price and the hire-purchase company pays the price or a substantial part thereof on behalf of such hirer, and a hire-purchase agreement is entered into merely as an arrangement, then such agreement is a security for repayment of the loan and is essentially a loan transaction. 4. In this connection, the Assessing Officer should keep in mind the tests laid down by the Supreme Court in the case of Sundaram Finance v. State of Kerala  AIR 1996 SC 1178 wherein it has been held as under— "If there is a bona fide and completed sale of goods evidenced by documents, anterior to and independent of subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transacti....

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....inion that it is necessary and expedient so to do having regard to the peculiar circumstances of the case and in public interest, hereby exempts the banking companies to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act) from the levy of interest-tax in respect of their income from interest on securities with effect from the financial year 1995-96.  Notification No. 9858 [F. No. 160/2/94-IT(A)], dated 11-9-1995.  III  In exercise of the powers conferred by section 28 of the Interest-tax Act, 1974 (45 of 1974), the Central Government, on the recommendation of the Reserve Bank of India, being of the opinion that it is necessary a....