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Commissioner of Income Tax Versus Axis Bank Ltd

2015 (5) TMI 118 - GUJARAT HIGH COURT

Lease rental on the lease of certain assets - Addition made to chargeable interest under Section 2(7) of the Interest Tax Act - ITAT deleted addition - Held that:- 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. (2004 (10) TMI 325 - SUPREME COURT OF INDIA) we are of the opinion that the transaction b .....

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n treating the transaction entered into by the assessee in the form of agreement as a Lease Agreement. As observed hereinabove, in substance, the transaction is a financial transaction and the agreement is a Finance Agreement and therefore, the assessee is liable to pay the Tax on interest as defined under Section 2(7) of the Act on the finance interest component which even according to the assessee would be ₹ 1,03,47,165/-.- Decided against the assessee. - Tax Appeal No. 1028 of 2005 - Da .....

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Appeal preferred by the respondent assessee - UTI Bank Ltd. and has held that the lease rental on the lease of certain assets' interest under the Interest Tax Act (hereinafter referred to as "Act") is not chargeable to 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 chargeable interest, under Section 2(7) of the Interest Tax Act by the Assess .....

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6 disclosing the chargeable interest of ₹ 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 .....

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2 Total interest component 1,03,47,165 That the assessee denied the chargeability of interest tax on the aforesaid interest component of ₹ 1,03,47,165/- contending inter alia that the interpretation of Section 2(7) of the Act made by the CBDT in Circular No.738 dated 25.03.1996 and Circular No.760 dated 13.01.1998 to include deemed interest component in higher purchase/lease rental in the definition of 'chargeable interest' is contrary to the provisions of the Act. It was submitted .....

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le and is, therefore, a credit institution covered under Section 2(5A)(i) of the Act and therefore, the extended definition contained in Section 2(5B) of the Act cannot be applied in the case of the assessee bank as the assessee bank is not covered by residuary clause mentioned in Section 2(5A)(iv) of the Act. It was further submitted that section 2(5B) of the Act was an extension of Section 2(5A)(iv) only. That the Assessing Officer did not accept the contentions of the assessee for the reasons .....

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efore the learned CIT(A) and the learned CIT(A) partly allowed the said appeal and directed the Assessing Officer to 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 ₹ 1,03,47,165/- holding that the hire charges per se would not be in the nature of .....

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argeable 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 chargeable interest, under Section 2(7) of the Interest Tax Act by the Assessing Officer?" 3.0 Shri Varun Patel, learned Advocate appearing on behalf of the appellant - Revenue .....

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1998 while deleting the additions. 3.2 It is further submitted that the learned Tribunal has even not properly appreciated the Lease Agreement in substance. It is further submitted by Shri Patel, learned Advocate appearing on behalf of the Revenue that the learned Tribunal has materially erred in not properly appreciating the fact and the Agreement that as such the Lease Agreement is a Finance Agreement which has been given a color of Lease Agreement / Hire Purchase Agreement with certain clause .....

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the finance interest component included in the lease rental income as per Section 2(7) of the Act. 3.3 It is further submitted by Shri Patel, learned Advocate appearing on behalf of the Revenue that as such the finance charges accruing on carrying out of the purchase transactions were in the nature of interest as defined in section 2(7) of the Act and consequently the learned Tribunal ought to have confirmed the addition of ₹ 1,03,47,165/-. It is further submitted by Shri Patel, learned Ad .....

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ioned 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 consi .....

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request and as per the requirement of the lessee from the manufacturer/supplier and the lessor purchased the equipment leased for consideration of ₹ 4,71,75,000/- against which under the Agreement, the lessee was required to pay a total sum of ₹ 5,97,23,580/- i. e. in 60 monthly installments of ₹ 9,95,383/- i. e. much more amount than the purchase value of the equipment and the aforesaid total amount of ₹ 5,97,23,580/would include the finance interest component, the lear .....

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herefore, on the finance interest component the assessee Bank is liable to pay the interest leviable under Section 2(7) of the Act. It is submitted that therefore as such considering the aforesaid clauses in the Hire Purchase / Lease Agreement, it is the lessee who, for all the practical purposes, is the owner of the asset and not the lessor and therefore, in substance the Hire Purchase Agreement / Lease Agreement is a financial lease. In support of his above submissions, Shri Patel, learned Adv .....

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s of banking that is to say except for the purpose of lending or investment deposits of money from the public, repayable or demand otherwise, and to carry on the business of, a) borrowing, raising or taking up of money; b) lending or advancing of money either upon or without security etc. and even otherwise the assessee bank is a banking company to which the Banking Regulation Act applies, it would be a "credit institution" as defined under Section 2(5A)(i) of the Act and therefore, on .....

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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 Lea .....

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996 and levied the interest under Section 2(7) of the Act by observing that finance charges accruing or arising to Hire Purchase Finance Companies are in the nature of interest as defined under Section 2(7) of the Act. It is submitted that however the aforesaid circular came to be further clarified vide Circular No.762 dated 13.01.1998 and as per the said circular 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 .....

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to Act. It is submitted that therefore, the learned Tribunal has rightly deleted the addition of ₹ 1,03,47,165/- and ₹ 53,02,200/- for Assessment Year 1996-97 and 1997-98 respectively. 4.2 Shri Patel, learned advocate appearing on behalf of the assessee has heavily relied upon various clauses of the agreement more particularly paras 4, 11, 12, 15 and 24 of the agreement which inter alia provides (1) that the property and the equipment shall at all times remain solely and exclusively .....

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sion 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 .....

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es 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 entered into by the assessee can be said to be a Finance Agreement or Lease/Operating Agreement and whether on the interest component the assessee is liable to pay the Interest Tax as defined under Section 2(7) of the Act or not? At the outset it is required to be noted and it is not in dispute that the assessee bank - UTI Bank Limited .....

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/ Hire Purchase Agreement and therefore, whatever is recovered by the assessee is a lease rental and therefore, not liable to pay the Tax on the interest as defined under Section 2(7) of the Act. On the other hand it is the case on behalf of the Revenue that the agreement entered into by the assessee is, in substance, in the nature of finance transaction and/or Finance Agreement and therefore, the assessee is liable to pay the Tax as defined under Section 2(7) of the Act, on the interest compon .....

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unless prohibited by statute, appear to go behind the documents and to determine the nature of transaction, whatever may be the form of the documents. In paras 23 and 24 as such the Hon'ble Supreme Court in the said decision has observed and held as under: "23. A hirepurchase agreement is normally one under which an owner hires goods to another party called the hirer and further agrees that the hirer shall have an option to purchase the chattel when he has paid a certain sum, or when t .....

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r 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 co .....

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n the light 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 hirepurchase agreement is not estopped from proving that the real bargain was a loan on the security of the goods. If there is a bona .....

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art 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 not 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 bal .....

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egal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class 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 hir .....

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ain 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 ₹ 9,95,383/which is termed as monthly lease rent. However, it also provides for discounting factor at 15% and the net discounte .....

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the amount to be recovered from the lessee would be and/or can be said to be finance interest component. At this stage it is required to be noted that in the present case admittedly the assessee had purchased the equipment as per the requirement of the lessee and from the manufacturer suggested by the lessee and even the equipment can be used only by the lessee as per its requirement. It is also required to be noted that in the agreement itself it is specifically mentioned that "in consider .....

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also further provides that "the equipment will be delivered by the manufacturer / supplied to the lessee and it is agreed that the risk in respect of the equipment shall be to the account of the lessee at the time of taking delivery of the equipment from the premises of the lessor and/or any supplier to the lessor from whose premises it is taken delivery". Therefore, even the delivery of the equipment was directly to be given by the manufacturer / supplier to the lessee. The agreement .....

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quipments 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 Le .....

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ondition and substantial working order conditions. (g) that the Lessor shall not be liable to the Lessee for any liability claim, loss, damage or expenses of any kind or nature: (i) caused directly or indirectly by the equipment, or any inadequacy thereof for any purpose or any defect therein or by the use thereof; or (ii) in relation to any repairs, servicing, maintenance or adjustments thereto, or to any delay in providing or failure to provide the same, of in relation to any interruption or l .....

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allment of ₹ 9,95,383/is termed as lease rental and in the agreement it is also mentioned that the ownership of the equipment shall be of the lessor and on completion of 60 months' period the lessee has to return the equipment to the lessee. However, at this stage it is required to be noted and even in one of the correspondence by the lessor it is stated that the equipment installed will not be of any use to any other person. Therefore, merely because in the agreement it is mentioned t .....

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ble Supreme Court while considering what can be said to be a financial lease transaction has observed as under: "17. In our opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase of assets or equipments or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, .....

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