TMI Blog2001 (9) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... uto Finance Limited, Kanpur, against the order of CIT(A), Lucknow, dated 22-1-2001 for the assessment year 1996-97. It may be pointed out that whereas the orders of CIT(A), Kanpur, in the case of Commercial Motors Finance Limited and in the case of M/s. Kailash Motors Finance Limited are of the same date and based on similar reasons, the order of CIT(A) in the case of ITA No. 4/Luck/2001 has been passed after following the orders passed in the case of M/s. Kailash Motors Finance Limited for the AYs. 1992-93 to 1997-98 dated 2nd February, 1999. 4. The assessee-appellants in all the three sets of appeals have taken similar grounds i.e., ground Nos. 1 to 6 for challenging the order of the learned First Appellate Authority. However, in ITA Nos. 6 7 to 12/Alld. 99, the appellants have taken the following additional grounds: "7. Because the reassessment proceedings under section 10(a) of the Act cannot be said to have been validly initiated as-- (a) there existed neither any material which could lead to the formation of belief that "chargeable interest" for the assessment year 1994-95 had escaped assessment; (b) nor the related notice dated 27-4-1998 has been validly issued and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest charged on the loans given towards purchase of vehicles. In support of this conclusion, the Assessing Officer placed reliance on the Board's Circular No. 760 dated 13-1-1998 and also on the decision of the Hon'ble Supreme Court of India in the case of Sundaram Finance Ltd. v. State of Kerala AIR [1966] SC 1178. 6.5 On the basis of above conclusion, the Assessing Officer took the finance charges of Rs.12,91,027 as total chargeable interest and completed the assessment under section 8(2) of the Interest Tax Act, oil the above amount. 6.6 The assessee challenged the action of the Assessing Officer before the CIT(A). The main contention of the assessee was that the "Finance Charges" earned by the assessee were in respect of the business of hire purchase of Light and Heavy Vehicles carried on by the appellant. The assessee also took several pleas in support of this contention raised before the ld. First Appellate Authority. The ld. CIT(A) has reproduced these pleas in paras 4(1) to 4(11) of his order. For the sake of brevity, we are not reproducing these pleas in this order. 6.7 The ld. CIT(A) after considering the scope of sections 5 and 7 of Interest-tax Act and also o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that the notice under section 10 of the Interest-tax Act, required the assessee to submit the return within a period of 30 days and since the notice dated 27-4-1998 issued under section 10 of the Interest-tax Act, required the assessee to deliver a return in the prescribed form before the expiry of seven days from the date of service of notice, the notice cannot be said to be a legal and valid notice, because it unduly curtails the time limit to which the assessee was entitled under the Law. The ld. Sr. DR, on the other hand, submitted that since the assessee had failed to furnish the return under the Interest-tax Act, the ld. Assessing Officer was fully competent to initiate the proceedings for reopening the assessment. The ld. Sr. D.R. also invited our attention to the reasons recorded by the Assessing Officer before reopening the assessment. 11. We have carefully considered the facts and relevant material relating to this issue. A perusal of the order dated 27-4-1998 (Vol. III) filed by the assessee shows that the Assessing Officer has held that the chargeable interest had escaped assessment. We consider it proper to reproduce the reasons for issuing notice under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject of that section is different from that of section 10. It may be pointed out that the notice dated 27-4-1998 has been issued under-section 10 of the Interest-tax Act and not under section 10 read with section 7 of the Act. The ld. counsel for the assessee, Shri Garg cited several decisions to canvass the point that the notice under section 10 of the Interest-tax Act being akin to notice under section 148 of the Income-tax Act, 1961, is a jurisdictional notice and, therefore, if the notice is invalid, the entire assessment order and proceedings of assessment stand vitiated. So far as this legal position is concerned, there cannot be any dispute. However, the situation is different. Under the Income-tax Act, 1961, the provisions of section 148, before 1989, contained a clause in accordance with which the notice was to be issued requiring the assessee to file the return "within the period not being less than 30 days". By the Finance Act (No. 2) of 1996, these words have been omitted and the amended provisions of section 148 as it stands now does not contain this time limitations So far as, section 10 of Interest-tax Act, is concerned, unlike unamended section 148, it does not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in compliance to the notice issued to it. The ld. Sr. DR further pointed out that the notice was validly served upon the representative of the assessee. In support of his contention, he placed reliance on the report of ITO dated 30-1-2001, a copy of which has been filed by the Department with the paper book dated 19-3-2001. The Department has also filed documents/ report in rebuttal to the affidavit of Shri Ishwar Chand. 17. We have carefully considered the facts and circumstances relating to this issue. In view of the provisions contained under section 10 of the Interest-tax Act, the notice is to be served on the 'assessee'. The service has to be, of course, on the assessee itself or on its representative or Agent or its employee as revealed out on scrutiny of Notice dated 27-4-1998, the notice was received on behalf of the assessee on 5-5-1998. The signatures of the recipients have also been made below the endorsement of receipt as is clear from paper No. 3 of the paper book. The person, who received the notice has neither disclosed the full name nor has indicated his designation. However, the fact remains that he received the notice on behalf of the assessee. Not only thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be very difficult for the Department to ascertain and depose about the authority of the person, who received the notice. However, the reports of the Department, against this affidavit controverts the contents of the notice. Under these circumstances, we are of the view that the assessee had fully acquiesced by its conduct in acknowledging the receipt of notice through its employee and, thus, the service should be deemed to be a proper service. 19. So far as the authorities filed by the Id. counsel for the assessee on this issue are concerned, the same are distinguishable. In the case of V.V.S. Alloys Ltd. v. Asstt. CIT [IT Appeal No. 1376 (All.) of 1997] order dated 30-11-1999, the issue related to validity of the notice under section 158BC. The Tribunal after examining the various provisions of Income-tax Act, including the provisions contained under section 282 of the Income-tax Act, held that the service of notice was not proper. It may be pointed out that that case related to a company and in view of the provisions contained under section 282(2) of IT Act the service was required to be done on the Principal Officer of the Company. So far as the Interest-tax Act is concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eri, who was neither accredit agent of the assessee nor an authorized agent for receiving the notice, but it was found that the assessee filed return in pursuance to that notice, the ITAT held that the notice must have been received by the assessee. The Hon'ble High Court upheld the approach of ITAT and further held that it would be taking to hyper-technically a view to hold that the notice served on the employee like Kumbhar Nameri, which is ultimately received by the assessee himself could not be said to be properly served on the assessee. It was also observed that--"If there is a procedural irregularity in the service of notice, if the assessee admits that he received the notice or from the facts it may be found that he must have received the notice even later on, the contention urged on behalf of such an assessee that the notice was improperly served must be rejected. The very fact that in the instant case, the assessee filed the return, indicates that the notice must have been received by him." In the case of Agricziltural Company, the Hon'ble Delhi High Court following the decision of Hon'ble Gujarat High Court in the case of Bhanji Kanji's Shop, held that the notice accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase did not raise any objection at any time before the Income-tax Officer that the notice was not served on the assessee personally or was not served on the agent who was empowered to receive notices. The objection raised regarding the validity of service of notice has lost its significance when the assessee acted upon the notice, filed the return in pursuance of the reassessment notice and participated in the reassessment proceedings. We, therefore, hold that the Tribunal has come to the correct conclusion in holding that the notice under section 148 of the Act was validly served on the assessee. We have already held, on the merits of the case, that the addition made in the reassessment proceedings was justified. Accordingly, our answer to both the questions of law referred to us is in the affirmative and against the assessee. However, in the circumstances of the case, there will be no order as to costs. 21. The facts of the above cited cases are similar to the facts of the case before us and, therefore, these authorities are fully applicable to the instant case, inasmuch as the receipt of the notice on behalf of the assessee was not denied and acted upon by the assessee, who fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest-tax Act, the provisions of Hire Purchase Act, 1972, copy available at pages 82-95 of the paper book, and the various other documents filed in the paper book of the assessee. The ld. counsel also made reference to the various Circulars of C.B.D.T. Instruction No. 1425 of C.B.D.T. dated 16-11-1981 on TDS under section 194A and various other documents. He also placed reliance on the following decisions:-- (i) Instalment Supply Ltd. v. STO, Ahmedabad AIR 1974 SC 1105. (ii) Kunnuk Nooruddin v. Jai Bharat Credit Investment Co. Ltd.'s case No. 81 of Bombay High Court dated 15th Nov., 1983. (iii) K.L. Johar Co. v. Dy. CTO [ ] Coimbatore, 16 ITR 213 (Sic). (iv) Sundaram Finance Ltd's case (v) Harita Finance Ltd. v. Asstt. CIT [IT Appeal No. 29 (Mad.) of 1997] ITAT Madras Bench dated 29-6-1998. 27. The ld. Sr. DR, on the other hand, supported the order of the Assessing Officer and that of the CIT(A) and submitted that most of the decisions referred to by the ld. Counsel for the assessee have been dealt with by the CIT(A) in the impugned order and are found not applicable. According to him, the finance charges relating to the so-called hire purchase transactions are, in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to hire purchases finance company are in the nature of interest as defined in section 2(7) of the Interest-tax Act, and, therefore, chargeable to Interest-tax Act. However, by another Circular No. 760 dated 13th January, 1998, the CBDT again clarified the position:-- 2. The Board have since considered the issue and are advised that in the case of transactions which are, in substance, in the nature of hire purchase, the receipts of hire charges would not be in the nature of interest. On the other hand, if the transactions are in substance in the nature of financing transactions, the hire charges should be treated as interest subject to interest-tax. 3. As to what constitutes a transaction in the nature of hire-purchase, the Assessing Officer should consider the issue on merits taking 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 hire purchase price, etc. When a h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions including the conditions that on total payment of charges, the hirer shall have the option to get the vehicle transferred in his name. The examination of various clauses of the hire purchases agreement goes to show that the ownership of the vehicle remains with the hire purchase trader and not with the hirer, although, on certain terms and conditions, the hirer is allowed to retain the possession of the vehicle and to use the same. It may be specifically pointed out that the assessee-company has not advanced loan for the purchase of the vehicle by the hirer as the vehicle is initially and originally purchased by the hire purchase trader (i.e. by the assessee-company) and not by the hirer. Thus, the transaction cannot be said to be a money-lending transaction or financing transactions. In fact, it is a lease of the vehicle by the hire purchase trader to the hirer and the hire charges are for the use of the vehicles and for the damages caused to it. The Trader remains owner of the vehicles for all purposes, and the hirer simply has the option to purchase the vehicle in the last. A close scrutiny of other documents executed by the hirer simply shows that these are executed only f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase the said Motor vehicle on payment of Re. 1 and on such payment the hiring will come to an end. The owner will then make over all their rights, title and interest in the Motor Vehicle to the Hirer and until the owners transfer the Motor vehicle to the Hirer shall remain the absolute property of the Owners. (h) The hirer shall be at liberty at any time during the continuance of this Agreement to terminate the hiring by returning the Motor Vehicle to the Owners in Jabalpur in the order and condition in which it was delivered to the Hirer (fair wear and tear excepted) at his own cost but this shall be without prejudice to any claim the Owners may have against the Hirer in respect of this Agreement. (i) Without prejudice to the other rights of the Owners may terminate, with or without notice the hiring of the Motor Vehicle and forthwith retake and recover possession of the same. 33. Coming to the nature of hire purchase transactions, as discernible and as decipherable from the Above agreement and in view of the above terms and conditions, the following conclusions may be drawn:-- (i) The article hired by the hirer is owned by the assessee-company. The ownership arises f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading is 'Interest on Loans Advances' within the meaning of section 2(7) of the Interest-tax Act. 35. In the case of Instalment Supply Ltd. the Hon'ble Supreme Court of India has made the following observations after considering the nature of these transactions: "The person desiring to purchase a motor vehicle enters into a hire purchase agreement with the petitioner-company. It may be useful to give within a short compass the terms of the agreement. The company charges the hirer an initial deposit by way of premium as a consideration for granting the lease of the vehicle, which deposit becomes the absolute property of the company, the premium charged as aforesaid is a substantial amount, being usually 25% of the price in respect of new vehicles. The hirer undertakes to pay instalments and when all the instalments are paid, the vehicle becomes the property of the hirer at his option, on payment of rupee one to the company, as a consideration for the option; until all the stipulated instalments have been paid and the option exercised as aforesaid, the vehicle remains the property of the company as owners. The hirer is delivered possession of the vehicle and he remains responsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event under the Act is the sale of goods and until that taxable event takes place there can be no liability to pay tax. Therefore, though eventually most cases of hire-purchase may result in sales by the exercise of the option and the fulfilment of the terms of the agreement, tax is not eligible at the time when the hire-purchase agreement is made, for at that time the taxable event has not taken place; it can only be regular when the option has been exercised and all the terms of the agreement fulfilled and the sale actually takes place." 35.3 The case of K.L. Johar Co. related to transactions of hire purchase between a Finance Company and the customers. The purchaser i.e. the customer purchased the motor vehicles and thereafter the purchase money was financed by the Financier Company. The hire purchase agreement was entered between the Financing Company and the purchaser laying down certain stipulations. In that case, the Sales Tax Authorities assessed the Finance Company to sales tax on the ground that the hire purchase transaction was a sale liable to sales tax at the time of execution of the agreement. The Hon'ble High Court held that there were two sales involved in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm, the goods were purchased by the financier from the Dealer and the Financier obtained a hire purchase agreement from the customer under which a fax latter became the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The other class of such transactions was when a person, desiring to purchase goods and not having sufficient money on hand, borrowed the amount needed from the third person and paid it over to the vendor. This transaction, according to the Hon'ble Supreme Court, between the customer and the lendor will unquestionably be a loan transaction. The Hon'ble Supreme Court also observed that a hire purchase agreement is a more complex transaction. So far as the hire purchase transaction simplicitor is concerned, the Hon'ble Supreme Court made the following observations: "...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 purchase exercisable by the customer on payment of all the instalments of hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch, and the Bench after examining the agreement, the circulars of the Board and relevant case laws held that the term "chargeable interest" as defined in sub-section (5) of section 2 was though enlarged by the Finance Act (No. 2) of 1991, so as to include the financial institutions in its ambit, but no amendment was made in the definition of term "Interest" as given in sub-section (7) of section 2 of Interest-tax Act, which meant that the term "Interest" will continue to have the same meaning as was assigned to its earlier before the said amendment. According to the Bench, therefore, the charges in hire purchase transaction will not come in the ambit of interest, which is subject-matter of taxation in the Interest-tax Act. Since the facts of the case before the Madras Bench of ITAT, respectfully following the said decision, we hold that the charges collected by the assessee-company under hire purchase transaction are not covered within the definition of "Interest" as given in section 2(7) of the Interest-tax Act. 40. The above approach finds support from the letter of CBDT dated 16th Nov., 1981, on the point of deduction of TDS under section 194A of the Income-tax Act, 1961. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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