TaxTMI 
TaxTMI 
2006 (8) TMI 95
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....ransaction on which interest is earned, though called hire charges. 3. In the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals), failed to note the fact that the mandatory initial deposits by the hirer is by way of securing the interest on the amount financed. 4. In the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals), failed to appreciate the fact that registering the vehicle in the name of hirer indicates that the ownership no longer remains with the assessee-company, which takes the rug out of the company's condition that it is a hire purchase transaction. 5. In the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals), failed to appreciate that the remarks made in the documents of the registering authority do not evidence the ownership of the company but is simply an agreement to secure the amount financed by the company." 3 For convenience, the facts are also being taken from Interest-tax Appeal No. 1(Delhi)/2005. 4 The Assessing Officer passed an order under section 8(2) of the Interest- tax Act, 1974. It was held that hire charges/financing commission was l....
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....transactions are, in substance, in the nature of financing transactions, the hire charges would be treated as interest subject to interest-tax. As to what constitutes a transaction in the nature of hire purchase was clarified, vide paragraphs 3 and 4 of the said circular, which were reproduced by the Tribunal, as follows (page 43) "3 As to what constitutes a transaction in the nature of hire purchase the Assessing Officer should consider the issue on the merits into account, inter alia, the following facts and circumstances: (i) The terms of the agreement; (ii) The nature of the arrangement between the supplier of the asset, the hire purchase company and the end-user of the asset; (iii) The intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of the hire purchase price, etc. When a hirer is the real purchaser of the asset but does not pay the full purchase price and the hire purchase company pays the price or a substantial part thereof on behalf if 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 essentiall....
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....treasury bills and interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act. According to the Assessing Officer, this means that whatever be the amount received as interest, may be under any nomenclature, it would be liable to tax under the Interest-tax Act, other than the mentioned two items. The Assessing Officer was of the view that the modus operandi of the assessee was that the interest charged by the assessee on the amounts advanced for the certain given period and the original amounts advanced were added together and then the amount was divided in the settled number of instalments ; that thus, the hire charges received by the assessee were principal and interest and nothing else; and that the same had been correctly shown in the profit and loss account as hire and purchase financing commission/hire charges. The Assessing Officer further observed that in section 2(5A) of the Interest Act, the definition of "credit institution" included "any other financial company"; that section 2(5B) defined "financial company" and, according to this section, a hire purchase company was treated as a financial company; that as such, a hire purchase company came ....
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....) had set aside the order with the directions to the Assessing Officer to frame the assessment afresh. The Assessing Officer did not consider the explanations of the assessee as acceptable, hence the hire charges were brought to tax under the Interest-tax Act. Likewise, interest income from Government securities were, i.e., IVP, NSC, etc., had also been charged under the Interest-tax Act. Your honour after granting opportunity to the assessee had decided the matter in favour of the assessee-company arid deleted the hire purchase income from interest-tax. Also your honour had decided in favour of the assessee-company that the income from the assessee-company that the income from Government securities is not interest and was not taxable under the Interest-tax Act. The copies of the orders as discussed above for the assessment year 1995-96 and the assessment year 2000-01 are enclosed. The same are relied on by the assessee as your honour have discussed at length each and every circular as well the decisions of the Income -tax Appellate Tribunal Hyderabad Bench in the case of N. K. Leasing and Construction P. Ltd. v. Deputy CIT reported in [2001] 79 ITD 658 (Hyd). The assessee....
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....ee, this transaction is not a financing transaction so as to attract the charge of the interest-tax under the Interest-tax Act. On the other hand, the Department maintains that if such kind of transactions cannot be termed as pure and simple financing transactions, no transaction at all can be brought within the ambit of a financing transaction. All financing transactions, as such, would be only hire purchase transactions and the provisions of the Interest-tax Act would, therefore, be rendered otiose and redundant. 11 To begin with, section 2(7) of the Interest-tax Act, 1974, defines "interest" as follows "2. (7) 'interest' means interest on loans and advances made in India and includes— (a) commitment charges or 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." - 12 Therefore, "interest" in section 2(7) of the Interest-tax Act, 1974, means interest on loans and advances made in India, ot....
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....Act, which interest is chargeable to interest-tax. The dispute was first underlined by the Central Board of Direct Taxes Circular No. 738, dated March 25, 1996, (see [1996] 218 ITR (St.) 131). This led the Assessing Officers to treat all hire purchase transactions as financing transactions. The Board, therefore, was constrained to issue Circular No. 760, dated January 13, 1998 (see [1998] 229 ITR (St.) 42), advising that in the case of hire purchase transactions, the matter of hire charges would not be in the nature of interest, whereas in the case of financing transactions, hire charges should be treated as interest subject to interest-tax. In advising so, the Assessing Officers were required to keep in mind the basis laid down by the hon'ble Supreme Court in the case of Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489; AIR 1966 SC 1178. 20 In Sundaram Finance Ltd. [1966] 17 STC 489 (SC) ; AIR 1966 SC 1178 the assessee-company was carrying on the business of financing the purchases of motor vehicles on the security of those vehicles. The scheme adopted by the assessee-company was that the customer, who purchase the motor vehicle from the dealer directly, paying part o....
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.... at all material times, registered in his name. The so-called "sale letter" was merely a formal document which was not made effective by registering the vehicle in the name of the assessee. The assessees right to seize the vehicle was merely a licence to ensure compliance with the terms of the hire-purchase agreement. The transaction was merely a financing transaction and there was no sale when the rights of the assessee under the agreement were extinguished by operation of clause (6) of the agreement. 21 Before us, the arguments of the Department, as made by the learned Departmental representative, Shri Mishra, have largely been based on the above decision of the hon'ble Supreme Court, as advised by the Central Board of Direct Taxes, vide Circular No. 760, dated January 13, 1998 (see [1998] 229 ITR (St.) 42), to be followed by the Assessing Officers, in distinguishing between hire-purchase equipment and financing agreement for the purpose of the Interest-tax Act, 1974. 22 Shri Mishra has vehemently argued that the agreements under consideration before us are merely sham agreements. The transactions them selves are nothing else, but a financing act. They can, in no manner, be....
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....e of a special enactment, known as the Hire Purchase Act, 1972. This, as per learned counsel for the assessee, is the Act/enactment governing the agreements under consideration. These agreements have been termed in accordance with the said Hire Purchase Act of 1972. It is well-settled that a special enactment overrides the general law. In the present case, the provisions of the Hire Purchase Act are clearly in operation. The decision of the hon'ble Supreme Court in the case of Sundaram Finance Ltd. [1966] 17 STC 489 ; AIR 1966 SC 1178 has no application. This judgment was delivered on November 30, 1965. The Hire Purchase Act, on the other hand, came into force with effect from June 1, 1973. Section 2(c) of the Hire Purchase Act defines "hire purchase agreement" to mean the agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which possession of the goods is delivered by the owner thereof to a person on a condition that such person pays the agreed amount in periodical instalments and the property in which the goods is to pass to such person on the payment of ....
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....4 ITR 69 (P & H) (2) Muthoot Leasing and Finance Ltd. v. Joint CIT [2003] 84 ITD 477 (Cochin) (3) Delhi Bench decision dated March 31, 2005, in Interest-tax Appeal No. 61(Delhi)/2003 for the assessment year 1995-96 in the case of Deputy CIT v. Sargodha Finance Co. Ltd. (4) Decision of the Delhi Bench of the Tribunal, camp at Meerut, passed on March 28, 2005, in Interest-tax Appeals Nos. 4 to 6 (Delhi)/2003, for the assessment years 1997-98 to 1999-2000 in the case of Asst. CIT v. Manisha Motor General Finance (P.) Ltd. 28 In Interest-tax Appeals Nos. 4 and 5(Delhi)/2005, a further argument has been taken by the assessee, that the amounts received have been, in the past as well as in the subsequent years, treated as financing charges and not as interest. It has been pointed out that in the assessee's own case, for the assessment year 1995-96, the learned Commissioner of Income-tax (Appeals), vide order dated June 26, 2003, following the decision in N. K. Leasing and Construction P. Ltd. v. Deputy CIT [2001] 79 ITD 658 (Hyd), decided the matter in favour of the assessee. It has been pointed out that the Tribunal has repeatedly decided this issue in favour of the assessee ....
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....ount payable by the hirer in periodical instalments cannot be characterized as interest payable in any manner, within the meaning of section 2(28A) of the Income-tax Act, as it is not in respect of any money borrowed or debt incurred. 34 It is then contended on behalf of the assessees that the Department should maintain a consistent stand rather than adopting vacillating ones. 35 In his counter, the learned Departmental representative has broadly reiterated the arguments initially made. It has been stressed that in these matters, the Department has challenged the very agreement and, therefore, none of the case law relied on by the assessees is applicable and that there fore, the orders of the Assessing Officer are entitled to be revived, while quashing the orders of the learned Commissioner of Income-tax (Appeals). 36 The Department has placed heavy reliance on the decision of the hon'ble Supreme Court in the case of Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489 ; AIR 1966 SC 1178. In this case, the majority decision was that the intention of the assessees in obtaining the hire-purchase and the allied agreements was to secure the return of loans advanced to th....
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....the nature of the agreements, the agreements are elaborate and self-speaking. They constitute none other than hire purchase agreements within the meaning of section 2(c) of the Hire Purchase Act, 1972. Apropos the contents of the agreements, as rightly pointed out by learned counsel for the assessee, this matter has been considered at length in N. K. Leasing and Construction P. Ltd. v. Deputy CIT [2001] 79 ITD 658 (Hyd). Therein, the Tribunal observed as follows (relevant portion at page 671 of the report) "16…. Hire purchase thus, has an element of sale in it, but not a concluded elements of sale. It merely provides the hirer with an option to buy but does not cast an obligation to buy. (Kasal Narayan v. Laxmi Narsimmam, AIR 1955 Hyd 104 [FB] Therefore, if we see and scan the hire purchase agreement so entered into by the appellant with the hirers in the light of the above principles emerging out from the characteristics of a typical hire purchase transaction, the inescapable conclusion that emerges is that it contains all the attributes of a hire purchase agreement and it cannot be said to be an agreement for the repayment of loan with the security of vehicle as contended by....
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.... by itself is not enough to conclude that it was not hire purchase transaction but was a loan. Words have not to be read in isolation but documents as a whole will have to be read to arrive at the true construction. Case law relied on by the Revenue has no application in the instant case. Therefore, in our considered opinion, hire purchase transactions entered into by the appellant-company, are the hire purchase transactions resulting into hire charges to the appellant-company, which are not covered within the meaning of the word 'interest' under the Interest-tax Act. Therefore, we uphold the plea of the assessee that the hire charges earned by it in the three years involved before us i.e., Rs. 6,10,044, Rs. 13,02,480, Rs. 11,59,216 are not interest within the meaning of section 2(7) of the Interest-tax Act, 1974, and cannot be accordingly subjected to interest-tax." 39 Learned counsel for the assessees have argued that it is the Hire Purchase Act, 1972, which is the governing piece of legislation qua the present agreements, and that being so, Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489 (SC) ; AIR 1966 SC 1178, decision is not applicable, since it pertained to the....
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....o annexed and which shall be taken and read as integral part of this agreement." 43 It is thus abundantly clear that by the very first clause, the agreement under consideration provides that the assessees agree to let the vehicle, from the very day of the agreement, to the hirer. Added to this and in juxtaposition thereto, as per section 2(e), "hirer" means the person who obtains or has obtained possession of goods from an owner under a hire- purchase agreement. The above quoted clause No. (1) of the agreement envisages to transfer of the possession from the owner to the hirer. It also envisages, simultaneously, the acceptance of such transfer by the hirer. That being the position, it cannot be said, by any means, that the assessees are not "owner" within the meaning of section 2(f) of the Hire Purchase Act, 1972. 44 Furthermore, in view of the express provisions of the Interest-tax Act, 1974, as considered at length in N. K. Leasing [2001] 79 ITD 658 (Hyd), it cannot be said that the agreements under consideration are financing agreements and not hire purchase agreements. Contrary to the learned Departmental representative's argument that in the absence of the definition of ....
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.... of hire purchase business. 46 Then, uncontrovertedly, according to directions 2(1)(e) of the Non- Banking Financial Companies (Reserve Bank) Directions, 1977, a non- banking financial company has been defined as any hire-purchase, finance, housing finance, investment, loan or mutual benefit financial company and equipment leasing company but does not include an insurance company or a stock exchange or stock broking company. As such, a hire purchase company, like the assessees before us, is, as per the above directions, a non- banking financial company. This is distinguished from a loan company, which has been defined in directions 2(1)(i) of the above Directions to tat mean any company which is a financial institution carrying on as its principal business providing of finance whether by making loans or advance or otherwise for any activity other than its own but does not include equipment leasing company or housing finance company. Evidently, therefore, as per the above Directions, a non-banking financial company which in includes a hire purchase company, is entirely different from a loan company. Incidentally, a hire purchase financing company has been defined in direction 2(1....
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....livery proceeded directly from the manufacturer/dealer to the hirer rather than via the assessee. The fact remains that as per the agreement, it is these assessees, who are the owners and not the hirers. Reading the observations of the hon'ble Supreme Court i the case of Instalment Supply Ltd. v. STO [1974] 34 STC 65 alongside this discussion, the out come is that the agreements at hand are nothing other than hire purchase agreements. 51 In K. L. Johar and Co. v. Deputy CTO [1965] 16 STC 213, the hon'ble Supreme Court has held that when all the terms of the agreement are satisfied and the option is exercised, a sale of the goods takes place, which till then had been hired. This, we find, is entirely in consonance with the provisions of the Hire Purchase Act, 1972, which, to reiterate, is the Act governing the agreements at hand. 52 A propos Sundaram Finance Ltd. [1966] 17 STC 489 ; AIR 1966 SC 1178, it has rightly been pointed out that this decision was rendered in the backdrop of an entirely different dispute from the one presently before us. There, firstly, the Hire Purchase Act, 1972, was not in operation. Further, in that case, the hon'ble Supreme Court was in seizin of a....