TaxTMI 
TaxTMI 
2008 (3) TMI 676
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....talments and therefore, the same is assessable under the Act. The case of the respondents on the other hand is that hire purchase transactions are outside the scope of the Interest-tax Act and so much so, finance charges collected cannot be assessed as interest. We have heard Senior counsel Sri P.K.R. Menon appearing for the appellant and Senior counsel Sri P. Balachandran and other counsel appearing for the respondents. 2. Admittedly respondents being hire purchase finance companies are specifically covered by the definition "credit institution" which are liable to pay interest tax on interest covered by section 2(7) of the Act. In fact, at least some of the respondents have paid tax on certain other receipts of interest and consequently have no dispute that they are not assessable under the Act. The short question arising for consideration is whether "finance charges" recovered by them from motor vehicle financing business is interest as defined under section 2(7) of the Act. For easy reference, "interest" as defined under section 2(7) is extracted hereunder : "(7) 'Interest' means interest on loans and advances made in India and includes- (a....
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....ial payment, i.e., margin money, determination to finance charges and determination of hire purchase price followed by the assessee also clearly show that the hire purchase transactions entered into by it are in substance financial transactions. The margin money is the cost of the asset as reduced by the hire purchase finance sanctioned to the hirer at his request. It has no relation to the cost of the asset. If a hirer seeks 90 per cent of the cost of the asset as hire purchase finance, margin money will be the balance 10 per cent only. For the same asset if a hirer is sanctioned 75 per cent of the cost as hire purchase finance the margin money will be 25 per cent only. This shows that the hire purchase advance is a loan, pure and simple granted by the assessee according to the needs of the hirer. Similarly finance charges are also calculated at a flat rate of 11 per cent per annum on the net amount financed and this is nothing but calculation of interest at the rate of 11 per cent p.a. at flat rate for the period of hire purchase. The hire purchase price is also fixed by adding the finance charges to the net amount financed. The hire purchase price so fixed is payable in equal mo....
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....hat flat rate of interest for the whole loan period is loaded to the loan amount and the hire charges collected in instalments include such interest loaded to the loan amount advanced by the finance company. Besides enodrsement of hypothecation in the RC book of the vehicle, the respondents take promissory notes, cheques etc., from the borrowers towards security. The Supreme Court has considered the distinction between hire purchase arrangement and loan transaction in the following words in the decision in Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178 :- ". . .If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into was to raise money. If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostensibly passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer's title, and confer a licence to seize. When a person desiring to purchase goods ....
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....t ownership, respondents have to apply for change of registration in their name under the provisions of the Motor Vehicles Act abovereferred. Besides this, we have already noticed the salient features of the so-called hire purchase agreement, whereunder the loan amount is recovered in instalments along with flat rate of interest charged for loan period and loaded to the instalments. Respondents have taken cheques, promissory notes, etc., towards security for the loan, in addition to hypothecation noticed in the RC book. It is clear from the terms of transaction that the vehicle financing covered by so-called hire purchase agreements is only in the nature of loan and contrary to hire-purchases conceived under the Hire Purchase Act, respondents have only a licence to repossess the vehicle and get the vehicle registered in their name and that too under orders of Registering Authority under the Motor Vehicles Act after default is committed by the hire purchasers. We are of the view that the Tribunal mis-directed itself and reached a wrong conclusion only because of their failure to appreciate the facts pertaining to transaction properly and without reference to the provisions of the Mo....