TMI Blog2005 (1) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... ee to the owner of the assets. The ownership of the asset is also with the customers of the assessee and not with the assessee. The true nature of the transaction was only a loan transaction. The hire charges shown in the P L a/c are in reality interest received by the assessee in respect of a loan given to its customers and are chargeable interest. The AO, therefore, brought to tax the hire purchase charges shown in the P L a/c also to tax. The AO has made a reference to a reply filed by the assessee in the assessment proceedings but the contents of this reply are not set out in the order of assessment. The AO however has, observed that the reply of the assessee is not acceptable. 3. Aggrieved by the order of the AO, the assessee preferred appeal before CIT(A). Before CIT(A), the assessee contended that the ownership of the asset was always with the assessee. The assessee contended that under the HP Agreement, the assessee is the owner of the vehicle and that its customer is only a hirer, entitled to be in possession and enjoyment of the asset leased subject to fulfilment of conditions laid down in the hire purchase agreement. Reliance was placed on Circular No. 758 760 dt. 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the various agreement between the two. 5. The interest tax is leviable on the interest earned by the credit institutions as defined in the Interest-tax Act. A finance company has been defined as a credit institution and as per sub-cl. (I) of s. 2(VB), the finance company includes hire purchase finance company which carries on its principal business of hire purchase transactions or the financing of such transactions. It is thus evident that the hire purchase companies have been defined as a finance company and naturally the rental income earned from the hire purchase transactions are includable as interest income. When the hire purchase companies having the hire purchase transactions, It has been considered as a finance company with the inclusion of hire purchase finance company as of credit institution. It is implied that the income earned by the hire purchase finance company has to be included in the chargeable interest. 6. As far as the circulars of Board are concerned, the Circular No. 738 dt.25th March, 1996was initially issued by the CBDT clarifying that the hire purchase income of the hire purchase finance companies is in the nature of interest under the Interest-tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est income chargeable under Interest-tax Act. It is, therefore, held that the AO is justified in including the amount of Rs. 1,11,08,265 as chargeable interest." 4. Aggrieved by the order of the CIT(A), the assessee is in appeal before us. The grounds of appeal of the assessee read as follows: "1. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in confirming the order of the AO in levying interest tax on hire purchase rental charges. 2. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in holding that the hire purchase rental charges received by the assessee are in the nature of interest. 3. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in ignoring evidences filed by the assessee in support of its contention that hire charges earned by it are in substance in the nature of hire purchase charges. 4. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in not appreciating the assessee's contention that the hire purchase transaction entered into by the assessee is covered by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to the customer only subject to the right of ownership of the assessee over the asset hired. He also drew attention to cl. 14(b) which empowers the assessee to alienate the assets and cl. 18(a) whereunder the assessee has a right to repossess the vehicle and sell the same for realisation of its dues where the customer defaults in making payment. According to the learned counsel for the assessee, all these clauses in the agreement clearly go to show that notwithstanding the registration of the vehicle/asset in the name of the customer with the regional transport office under the Motor Vehicles Act, the real owner is the assessee. He submitted that, since, hire charges are not in the nature of interest, the action of the Revenue authorities in bringing to tax the hire charges as chargeable interest cannot be sustained. He placed strong reliance on the order of the Cochin Bench of the Tribunal in the case of Muthoot Leasing Finance Ltd. vs. Jt. CIT (2003) 79 TTJ (Coch) 773 : (2003) 84 ITD 477 (Coch). The learned Departmental Representative relied on the orders of the Revenue authorities. 6. We have considered the rival submissions. The real question for consideration before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to in sub-s. (1B) of s. 42 of the Reserve Bank ofIndiaAct, 1934 (2 of 1934); (ii) discount on treasury bills." 7. The above makes it clear that, only interest on loans and advances made inIndiais exigible to interest tax. Now the question is, whether the sum received by the assessee described as hire charges can be considered as interest within the meaning of s. 2(7) for the purpose of interest tax. 8. Though inIndia, Parliament has passed the Hire Purchase Act, 1972, the same has not been notified in the Official Gazette by the Central Government so far. An initial notification was issued and the same was withdrawn later. The rules relating to hire-purchase agreements are delineated by the decisions of higher Courts. There are a series of decisions ofHon ble High Courts/Supreme Courtexplaining the nature of the hire-purchase agreement and mostly these decisions were rendered when the question arose whether, there was a sale so as to attract payment of tax under the Sales-tax Act. The decision of the Hon ble Supreme Court in the case of Sundaram Finance Ltd. vs. State ofKerala AIR1966 SC 1178, is the leading case on this point and still is regarded as laying down t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-purchase agreement, the rights of the appellants are extinguished, there results a sale in favour of the customer which is taxable under the Act. The question was with regard to exigibility to tax of what the State ofKeralacontended is a sale resulting from the payment of all the instalments under the hire-purchase agreement. The company submitted that execution of a "sale letter" by the customer acknowledging sale of the vehicle to them does not create in them any right of ownership, the "sale letter" being merely one of a set of documents under which arrangement for granting a loan and for ensuring repayment of the money advanced by the appellants is made. The company contended that they do not become owners of the vehicle under the "sale letter", that the true effect of the transaction on the execution of the nine documents is to hypothecate the vehicle in favour of the appellants, that the vehicle continues to remain in the ownership of the customer, and that under cl. 6 of the hire-purchase agreement there is extinction of encumbrance and not a transfer of title which may be called a sale taxable under the Travancore-Cochin General Tax Act. The Court elaborated as to what is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterior 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 and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transaction would be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of goods. But a hire-purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to ..... 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