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TMI Blog2013 (12) TMI 848X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case, the Income Tax Appellate Tribunal was legally justified in holding that hire purchase transactions of the assessee were not loan transactions despite admitted facts on assessee's records that it was not a trading company and finance charges have been shown as revenue receipts and auditors certification that assessee has followed norms issued by Reserve Bank of India for Non-Banking finance Companies (NDFC)?" 2. The Income Tax Appeal No. 109 of 2002 (AY 1995-96), Appeal No. 247 of 2012 (AY 1996-97) and Appeal No. 246 of 2012 (AY 1997-98) have been filed by the assessee questioning the legality of reassessment proceeding under Section 10 of the Interest Tax Act, 1974 (in short the Act of 1974). 3. The appeals arise out of common order dated 28.9.2001 passed by the Income Tax Appellate Tribunal, Lucknow Bench, Lucknow (hereinafter referred to as ITAT) relating to assessment years 1992 -93, to 1997 -98 filed by the respondent assessee. 4. Briefly stated the facts of the present case are that as per the assessment order dated 5.6.1998, the assessee company is engaged in the business of "financing and leasing." On hire purchase transaction the assessee charged "fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he audited accounts/financial statements, assessee company is engaged in the business of financing and leasing. Referring to the finding recorded by the Assessing Officer, and the CIT (A) he submits that real nature of the transaction is financing by the assessee company and hirer is the real purchaser of vehicles. He submits that the assessee company has not disclosed the purchases of vehicles to the sales tax department. No sales tax return has been filed by it. It is not a dealer or trader of the articles financed by it. In its audited accounts filed with the income tax returns, the appellant has shown the finance charges as revenue receipts. The auditor has certified that assessee is not a trading company and it has followed the norms issued by the Reserve Bank of India for non banking financial companies. He submits that as per findings recorded by A.O. and CIT (A), it is the hirer who selects the vehicle for purchase and to this stage the assessee company does not come into picture. It is only after the hirer has exercised his purchasers rights to identify the product, he approaches the assessee company for reason that he needs someone who can pay the price of vehicle or a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Kanpur." He submits that the transaction entered between the respondent assessee and hirer is a transaction of hire purchase which does not fall within the ambit of Section 4 of the the Act, 1974. He submits that the scope of section 4 of the Act of 1974 cannot be enlarged so as to include the transactions of the nature which have been entered by the respondent assessee. Section 4 being the charging Section has to be construed strictly and its scope cannot be widened. He submits that the assessee company is not a financial company within the meaning of section 2(5-A/B) of the Act, 1974. He submits that in paragraph 29 to 34 of the impugned order, the ITAT considered the provisions of the Act of 1974, CBDT Circular No. 738 dated 25th March 1996, CBDT Circular No. 760 dated 13th January, 1998 and the terms of hire purchase agreement (Annexure 12 of the paper book) and thereafter recorded the following findings of fact : "(I) The article hired by the hirer is owned by the assessee company. The ownership arises from the purchase of the articles from its suppliers, who draw the bill in the name of the company. (II) The ownership of article is also acknowledged by the hirer who tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 of 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 essentially a loan transaction. 4. In this connection, the Assessing Officer should keep in mind the tests laid down by the Supreme Court in the case of Sundaram finance Ltd. V. State of Kerala, AIR 1966 SC 1178, wherein it has been held as under :--- "If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the surrounding circumstances. In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents. An owner of goods who purports absolutely to convey or acknowledges to have conveyed goods and subsequently purports to hire them under a hire-purchase agreement is not stopped from proving that the real bargain was a loan on the security of the goods. 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 and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-purchase agreement. The customer remains qua the world at large the owner and remains in possession, and on condition of performing the covenants has a right to continue to remain in possession. The right of the appellants may be extinguished by payment of the amount due to them under the terms of the hire-purchase agreement even before the dates fixed for payment. The agreement undoubtedly contains several onerous covenants, but they are all intended to secure to the appellants recovery of the amount advanced. We are accordingly of the view that the intention of the appellants in obtaining the hire-purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions." (Emphasis supplied by us) 11. While dismissing the appeal of the assessee respondent CIT, (A) held in paragraphs 8, 11, 12, 13, 14 and 15 as under : 8. The assessment order in question describes the nature of the transactions entered into by the appellant. The appellant does not challenge the accuracy of this description. The manner in which these transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraphs will show that despite some difference in the pattern of transactions in the two cases, the principle that emerges from the Supreme Court's decision in the case of Sundaram Finance Ltd. are fully applicable to the facts of the case before me. 12. An important principle that emerges from the Supreme Court's decision in the case of Sundaram Finance Ltd. is that one must not merely look at the documents but must discover what the real transaction was. If one goes by the terms of the agreements between the Hirers and the appellant company and the intention of the parties (which manifests itself in the fixation of the initial payment and instalments and the right of the Hirer to become the absolute owner of the motor vehicle, freed from encumbrance, on payment of the amount stipulated to be paid to the appellant), it becomes clear that the appellant is carrying on the business as a financier and not as a dealer of motor vehicles. As pointed by the Assessing Officer in the assessment order, no sale of vehicles has been shown by the appellant in its Profit and Loss Account. No sales tax return has been filed by it. The appellant is not a dealer or trader of the articles financed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... security to the transaction that is basically in the nature of a loan transaction between the appellant company and the hirer. 13. A significant feature of a loan transaction is that the borrower uses the lender's money. The borrower gets this facility at a price- he pays interest on loan to the lender. If 'X' be the principal amount of loan taken for a definite time-interval 't' and 'y', the amount of interest payable for utilisation of the borrowed funds during the said time-interval 't', the borrower, on repayment of the loan, ends up paying to the lender a sum equal to (X+Y). During the said time-interval 't', the borrower is a user of the borrowed funds and not its legal owner. A similar pattern can be seen in the transactions entered into between the hirer and the appellant company in this case. Here the hirer uses the vehicle purchased out of the appellant's money. He thus uses the appellant's money. He pays instalments of money to the appellant company over a pre-determined period of time at pre-determined frequencies. The total amount of hire that the hirer pays to the appellant company exceeds the price at which the appellant purchased the motor vehicle from the dealer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs 32, 33 and 34 : "32. So far as the hire purchase agreements entered into between the assessee company and the hirer are concerned, on a careful and close examination of various clauses, we find that the intention of the parties in executing the agreement is not to advance or take loan, but to give and take the vehicle on lease on certain conditions including the condition 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all duly perform and observe at the TERMS AND CONDITIONS of this agreement and shall have paid to the owners the total amount by way of hire as stipulated in the SCHEDULE B and earlier and has also paid all other dues and expenses due to the owners, under the TERMS AND CONDITIONS of this agreement, the Hirer will h ave the option to 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 expected) 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. 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay that profit on hire purchase trading is "Interest on Loans & Advances" within the meaning of Section 2(7) of the Interest Tax Act." 13. We find that the ITAT has failed to consider condition nos. 9, 10 and 11 under the heading "Terms and Conditions forming Part of the Agreement" which are reproduced below : "9. The Hirer shall keep the Motor Vehicle insured during the period of hiring, against any loss of damage by accident or fire or other risks, under a comprehensive policy with an insurance company approved by the Owners with an endorsement assigning the policy in favour of the owners, and shall punctually pay all premiums and other sums required for keeping the said insurance effective. In case, the Hirer shall, at any time, fail to effect or keep effective the Insurance Policy the Owners will, at their sole discretion, effect such Insurance and pay the premium to the Insurance Company and the Hirer shall, on demand, pay forthwith to the owners, full premiums so paid by the Owners. The Owners shall receive all claims payable by the Insurance Company for any loss or damage to the Motor Vehicle. The Hirer will be given the benefit of this claim if he is not overdue with his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (I), (ii) or (iii) of clause (5A), being - (i)a hire-purchase finance company, that is to say, a company which carries on, as its principal business, hire-purchase transactions or the financing of such transactions ; (ii)an investment company, that is to say, a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the Government or a local authority, or other marketable securities of a like nature; (iii)a housing finance company, that is to say, a company which carries on, as its principal business, the business of financing of acquisition or development of land in connection therewith ; (iv)a loan company, that is to say, a company [not being a company referred to in sub-clauses (I) to (iii)] which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise: (v)a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under Section 620 A of the Companies Act, 1956 (1 of 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under Section 2(7) of the Act. 16. In para 1 to 6, the ITAT noted the appearance of counsel and history of the case. In para 7 to 24, it discussed and decided the validity of reassessment proceeding under Section 10 of the Act. In para 25 to 34, the ITAT has briefly noted few facts, reproduced certain provisions of the Act of 1974; CBDT Circular dated 13.1.1998; certain terms of the agreement and then drawn conclusion (in para 33) merely on the basis of certain terms of agreement. In para 35, 36 and 37, it has referred to certain judgments. In para 38, the ITAT abruptly recorded the finding that "transaction of sale was first transaction between assessee company and the vendor. The hire purchase transaction is subsequent to that." These facts distinguish the present case from the facts in the case of Sundaram Finance Ltd.(supra) and, therefore, on the facts of this case it cannot be said that in substance hire purchase transaction in the present case is merely loan transaction. 17. We find that the ITAT has failed to examine the agreement in totality and the documents to discover the real nature of the transaction which was emphasised by the CBDT vide Circular No. 760 dated 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buy and hire to him the vehicle required by him. The potential hirer or customer identifies the vendor or the dealer from whom the vehicle should be purchased. He also specifies the vehicle that should be purchased. The choice in these areas is entirely that of the customer or the potential hirer. On acceptance of the proposal by the appellant company, the hirer pays the initial hire money. The appellant company buys the vehicle, from the dealer identified by the hirer. The hirer gets the vehicle from the dealer. An agreement is entered into between the appellant company and the hirer to hire the motor vehicle to the Hirer. The Hirer agrees to pay to the appellant company, a certain sum as initial payment by way of 'hire'. He also agrees to pay to the appellant company the "total amount of hire" in pre-determined instalments (generally monthly instalments, the frequency and interval of which are determined at the time of the agreement). The Hirer gets an option to purchase the hired motor vehicle from the appellant company on payment of the total amount of hire plus Re.1/- . On payment of this additional amount of Rs. 1/- over and above the total amount of hire paid in instalments, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an that part of the purchase consideration which was paid by the respondent assessee to the dealer as finance to the hirer. The excess amount so paid by the hirer to the respondent assessee is nothing but interest on loan. The amount so invested by the respondent assessee in the purchase of vehicles is the amount of loan advanced by it to the hirer. As per Clause (10) of the agreement a promissory note was also executed by the hirer in favour of the assessee company for total hire payable for the motor vehicle as per "Schedule B" as co- lateral security and the assessee company was given the right to negotiate the said Demand Promissory Note in favour of their bankers or any other party for valuable consideration and also sue upon the same. All these facts supported by the findings of fact recorded by the CIT(A) in paragraphs 8, 11, 12, 13, 14 and 15 (as quoted in paragraph 11 above) when tested on the principles of law laid down by Hon'ble Supreme Court in paragraphs 23, 24 and 28 of the case of Sundaram Finance Ltd.(supra), the only conclusion that can be reached is that the transactins entered by the respondent assessee with the customer/hirer is a loan transaction and the finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 7(a) and 7 (b) of the assessee's as under : "7. Because the reassessment proceedings U/s 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 A.Y. 1994-95 had escaped assessment. (b) nor the related notice dated 27.4.98 has been validly issued and served on the appellant." 23. The ITAT elaborately discussed the afore noted grounds in paragraphs no. 8 to 23 of the impugned order and recorded its finding in paragraph 12 and 13 with regard ground no. 7 (a) and in paragraphs 17, 18 and 21 with regard to ground no. 7 (b) and thus rejected both the grounds in appeal of the assessee. Paragraphs 12, 13, 17, 18 and 21 of the impugned order of the ITAT are reproduced below : "12. A perusal of the above, goes to demonstrate that the A.O. had applied mind and held that there were reasons to believe that chargeable interest had escaped assessment within the meaning of Sec. 10(a) of the Interest Tax Act. The reasons so recorded by the A.O. are, in our view, very specific and not vague and, in our opinion, these reasons serve a solid basis of reopening th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 this, the assessee filed returns in response to this notice and also attended assessment proceedings before the A.O. In his letter dated 30.1.2001, available at page 2 of the paper book of Department. The Dy. CIT, Kanpur, has clarified that in the assessee's group of cases, all works relating to income tax proceedings,is being looked after by their employees of Tax Department and services of notices, orders etc. are being effected on them. This practice is not un-common. It is usually observed that employees of a particular company or firm receive notices and make their signatures endorsing the receipt and the Departmental Officials do not enquire about their authority or power of attorney. Particular company or firm receive notices and make their signatures endorsing the receipt and the Department officials do not enquire about their authority or power of attorney. What is relevant is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above. The following decisions also support the above view :- (a) Ramnivas hanuman Dass Comani Vs. ITO, 37 ITR 329 (Bom.) (b) Mohammed Idress barry & Co. Vs. CIT, 32 ITR 180. (Lahore) (c) The Bhopal Trading Co., Kanpur Vs. CIT, 28 ITR 478 (All.)" 24. We do not find any infirmity in the afore quoted findings recorded by the ITAT. The findings so recorded by the ITAT are findings of fact based on evidences. In view of these facts, we do not find any substance in the challenge made by the assessee in Appeal No. 109 of 2002, 247 of 2012 and 246 of 2012. 25. In view of the above discussions, the impugned order of the ITAT in so far as it held the transaction in question to be hire purchase transaction and finance charges to be not liable to interest tax, is set aside and the order of the CIT(A) is upheld. The Appeal No. 109 of 2002, 247 of 2012 and 246 of 2012 filed by the assessee is dismissed. 26. In result the ITA No. 32 of 2002, ITA No. 77 of 2002, ITA No. 78 of 2002, ITA No. 79 of 2002, ITA No. 366 of 2012, ITA No. 368 of 2012, ITA No. 369 of 2012, ITA No. 370 of 2012, ITA No. 371 of 2012, ITA No. 76 of 2002, ITA No. 289 of 2012 succeed and are hereby allowed. The impugned or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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