TMI Blog2006 (8) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case, the learned Commissioner of Income-tax (Appeals), failed to note that though the transaction is veiled as hire purchase agreement, in essence it is a financing transaction 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 Int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. This circular advised that in the case of transactions which are in substance in the nature of hire purchase, the receipts of hire purchase would be in the nature of interest. If the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and includes commitment charges on unutilized portion of any credit sanctioned for being availed of and it has specifically excluded two items out of this scope, i.e., discount on 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"; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer as erroneous and prejudicial to the interests of the Revenue and after considering Circular No. 760 of the Central Board of Direct Taxes (see [1998] 229 ITR (St.) 42) 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 decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buyer of the vehicle takes possession thereof directly from either the manufacturer or the dealer. The role of the assessee is only to finance the transaction. According to the assessee, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company carrying on the business of financing and that the charges accrued or arisen from such transactions are in the nature of interest as defined in section 2(7) of the Interest-tax 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 purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to secure the return of loans advanced to the customer and no real sale of the vehicle was intended by the customer to the assessee. The motor vehicle purchased by the customer was and remained 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 Mishr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-purchase agreement nor financing agreement finds any definition in the Interest-tax Act, 1974. However, recourse cannot be taken to the dictionary meaning in this regard. This is so because of the existence 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 go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mutual Finance (P.) Ltd., the assessee has contended that the matter stands covered in favour of the assessee by the following decisions also (1) Deep Hire Purchase P. Ltd. v. Commissioner of Interest-tax (Appeals) [2005] 274 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n financial charges. It is pointed out that under these instructions, the Board has taken into consideration the definition of interest, as given in e section 2(28A) of the Income-tax Act. This is so, according to the assessees, due to the fact that the agreed amount 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l nature of an agreement, the court has to see the form and not the shape of the agreement. A perusal of each of the hire-purchase agreements before us show that these are hire purchase agreements. The hirer has an option to purchase them in accordance with the terms of the agreement. As to 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 princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low have failed to bring sufficient material on record in support of their contention that hire charges are nothing but interest on loans and advances. Burden cast on the Revenue in this regard was very heavy and onerous. Merely because the words 'amount of loan' are mentioned on the guarantee form, 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 couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vehicle, with fittings, tools and accessories and conditions more particularly described in Schedule No. 2 hereto and hereinafter collectively called "the vehicle" agree to let and the hirer agrees to take on hire the vehicle from the cate hereof, subject to the terms and conditions herein contained and hereto 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not shown the vehicles in its balance-sheet as its stock, the amount earned has been depicted as "current assets". Further, the assessee's auditors, in the TAR, at items 18 on pages 3 thereof, have categorically stated that the assessee-company is a hire-purchase finance company and has complied with all the regulations 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 bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e this, to be termed as owners. We do not find this argument of the Department also to hold any water. As discussed hereinabove, the handing over of the possession/delivery is entirely in keeping with the hire purchase agreement entered into, in accordance with the Hire Purchase Act, 1972. It is immaterial, therefore, that the delivery 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred any appeal against the orders of the learned Commissioner of Income-tax (Appeals), who has decided the issue in favour of the assessee. Likewise, the Department has also not preferred any appeal in the following cases 1. Sekhon Motor Finance Pvt. Ltd., B-52, TP Nagar, Meerut . 2. Sarvesh Automobile Finance Pvt. Ltd., New Dev Puri, Meerut . 3. Shiromani Leasing and Finance Pvt. Ltd., B-45, TP Nagar, Meerut . 55 Reliance on behalf of the assessees has also been placed on an assessment order dated April 7, 1994, for the assessment year 1992-93, in the case of Ananshakt Motor Finance (P.) Ltd. (copy placed on record) where the Assessing Officer has himself considered the charges received by the assessee not be liable to levy of interest-tax under the Interest-tax Act. 56 The Department, therefore, is obliged to keep a consistent stand, as has been held repeatedly by various courts. 57 In view of the above discussion, having considered the matter from all angles, we find that the grievance of the Department is shorn of merit. The learned Commissioner of Income-tax (Appeals) has, in all these cases, correctly decided the is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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