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TMI Blog2015 (5) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... icer?" 2.0 Facts leading to the present Tax Appeal in nutshell are as under: 2.1 That the assessee UTI Bank Ltd. was a Banking Company to which the Banking Regulation Act, 1949 applies and was admittedly a Banking Company. That the assessee was having banking business and during the course of the banking business, it used to finance the loan/advances and was entering into the higher purchase transactions. 2.2 That the assessee Bank filed its return of chargeable interest on 31.12.1996 disclosing the chargeable interest of Rs. 668,698,930/-. That the assessee computed the interest tax at 3% on the same and paid the tax along with the interest on the same. That the notice under Section 2(7) of the Act was issued on 24.11.1997 and served on the assessee on 26.11.1997 to appear on 01.12.1997. The said notice was followed by another notice dated 24.08.1998. The Chartered Accountant of the assessee appeared before the Assessing Officer and filed the relevant details. That the assessee was asked to furnish the details of interest portion on the higher purchase transaction and whether such interest was offered to tax. That the assessee by letter dated 06.10.1998 communicated the details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o assess only finance component of gross lease rental income and not on gross lease rental income. On further appeal by the assessee before the learned Tribunal, by impugned judgment and order, the learned Tribunal has allowed the appeal preferred by the assessee and has deleted the addition of Rs. 1,03,47,165/- holding that the hire charges per se would not be in the nature of interest but only when the transaction in substance is in the nature of finance transaction, the hire charges would be treated as interest chargeable to the Act. That while deleting the additions of Rs. 1,03,47,165/-, the learned Tribunal observed that the transactions / hire purchase transactions cannot be said to be financial transactions but they are purely lease transactions and therefore, the receipt by the assessee from the lease rental cannot be said to be in the nature of interest chargeable to the Act. 2.4 Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Tribunal, the Revenue has preferred the present Tax Appeal raising the following substantial question of law. "Whether the ITAT is right in law and on facts in deleting the addition made to the chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is further submitted that while making the deletion of addition of Rs. 1,03,47,165/-, on considering certain clauses of the Lease Agreement / Hire Purchase Agreement, the learned Tribunal has misguided itself more particularly clause/para by which it is mentioned that the property in the equipment leased out shall remain wholly and exclusively that of the lessor; that the lessee will not claim any benefit under the clause Act associated with the ownership of equipments such as depreciation, investment allowance etc.; that upon expiration of earlier termination of Lease Agreement, the lessee shall deliver to the lessee the equipment at such places as the lessor may specify. It is submitted that as such the aforesaid clauses were required to be considered along with other clauses of the lease / Hire Purchase Agreement and the learned Tribunal was required to find out the real intention of the parties and/or the real nature of the transactions i.e. whether it was a financial lease or operating lease. 3.5 It is further submitted by Shri Patel, learned Advocate appearing on behalf of the Revenue that the learned Tribunal has not properly appreciated the fact that as such the assessee B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the Banking Regulation Act applies, it would be a "credit institution" as defined under Section 2(5A)(i) of the Act and therefore, on the finance interest component the assessee Bank is liable to pay the interest leviable under Section 2(7) of the Act. Making above submissions, it is submitted that the learned Tribunal has materially erred in deleting the additions of Rs. 1,03,47,165/- being the interest on the finance interest component levied under Section 2(7) of the Act. Therefore, it is requested to allow the present Tax Appeal and quash and set aside the impugned judgment and order passed by the learned Tribunal and restore the order passed by the learned CIT(A) and answer the substantial question raised in the present Tax Appeal in favour of the Revenue and against the assessee. 4.0 Present Tax Appeal is opposed by Shri R.K. Patel, learned advocate appearing on behalf of the assessee. 4.1 It is vehemently submitted that in the facts and circumstances of the case and on true interpretation of the agreement/lease agreement, no error has been committed by the learned Tribunal in treating the agreement as Lease Agreement and consequently the learned Tribunal has rightly de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the lease and the possession is to be received back by the assessee after termination of the lease, as such the agreement is a Operating Agreement / Lease Agreement and therefore, what is received by the assessee is the lease rental and therefore, not chargeable to interest as defined under Section 2(7) of the Act. It is submitted that therefore as such the finding recorded by the learned Tribunal is on interpretation of the Lease Agreement, no error has been committed by the learned Tribunal. Making above submissions and relying upon the decision of the Hon'ble Supreme Court in the case of Sundaram Finance Ltd. vs. The State of Kerala and Another reported in AIR 1966 SC 1178 and the decision of the Karnataka High Court in the case of Commissioner of Income Tax vs. Karnataka Bank Ltd. reported in (2012) 8 Taxmann.Com 6 (Karnataka), it is requested to dismiss the present Tax Appeal and answer the substantial question of law framed in favour of the assessee and against the Revenue. 5.0 Heard learned advocates appearing on behalf of respective parties at length. A short question posed for consideration of this Court in the present Tax Appeal is whether the agreement entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement. But there are variations when a financier is interposed between the owner of the goods and the customer. The agreement, ignoring variations of detail, broadly takes one or the other of two forms: (1) when the owner is unwilling to look to the purchaser of goods to recover the balance of the price, and the financier who pays the balance undertakes the recovery. In this form, goods are purchased by the financier from the dealer, and the financier obtains a hirepurchase agreement from the customer under which the latter becomes 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 decision of this Court in K. L. Johar & Company v. Deputy Commercial Tax Officer (1) dealt with a transaction of this character. (2) In the other form of transactions, goods are purchased by the customer, who in consideration of executing a hire purchase agreement and allied documents remains in possession of the goods, subject to liability to pay the amount paid by the financier on his behalf to the owner or dealer, and the financier obtains a hirepurchase agreement which gives him a licenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of hirepurchase agreements must be distinguished from transactions in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire purchase agreement with the financier, but in substance evidences a loan transaction, subject to a hiring agreement under which the lender is given the licence to seize the goods." Considering the aforesaid decision of the Hon'ble Supreme Court, agreement as a whole and the relevant paras / clauses in the agreement are required to be considered to find out the real transaction i.e. whether the transaction is a finance transaction / Finance Agreement or a Lease / Operating Agreement. At this stage it is required to be noted that as per the Memorandum of Association of the assessee, the main object of the company was mainly to carry on the business of banking that is to say accept for the purpose of lending or investment deposits of money from the public, repayable or demand otherwise. 5.2 From the documents / material on record and as per the transaction/agreement entered into by the assessee, the lessee was required to pay monthly installment of Rs. 9,95,383/whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with the Lessor: (a) that the Equipment is of a size, design, capacity and manufacture approved and selected by the Lessee; (b) that the Lessee is satisfied that the equipments are suitable for its purposes; (c) that the Lessor is not the manufacturer of the Equipment and will not be responsible for any warranty in relation to the same; (d) that having inspected the equipment, the Lessee has signed this agreement relying entirely on its own judgment and not on any statements or representations made by the Lessor or the agents or servants of Lessor; (e) that the warranty of fitness or that the equipment is mercantable shall apply, to this contract, that the Lessor has not made and does not hereby make any representation or warrant with respect to the merchantability, conditions, quality, durability or suitability of the equipment in any respect, that all premises warranties and conditions, expressed or implied by contract statute or otherwise, whether given hereunder or collateral hereto or otherwise, and hereby stand expressly negatived and extinguished; (f) that the equipment is accepted by the Lessee on the basis of that the equipment is in good condition and substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, bears the wear and tear, maintains and operates the machinery/equipment, undertakes indemnity and agrees to bear the risk of loss or damage, if any. He is the one who gets the property insured. He remains liable for payment of taxes and other charges and indemnity. He cannot recover from the lessor, any of the above mentioned expenses. The period of lease extends over and covers the entire life of the property for which it may remain useful divided either into one term or divided into two terms with clause for renewal. In either case, the lease is noncancellable." Thus, considering the various clauses in the agreement entered into between the assessee and the lessee reproduced hereinabove and the intention of the parties and the observations made by the Hon'ble Supreme Court in the case of Asea Brown Boveri Ltd. (Supra) reproduced hereinabove, we are of the opinion that the transaction by the assessee - lessor and lesseee is in substance a financial lease/transaction and therefore, the assessee is liable to pay the interest tax on the interest co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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