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2015 (7) TMI 56 - CALCUTTA HIGH COURT

2015 (7) TMI 56 - CALCUTTA HIGH COURT - [2015] 377 ITR 220 (Cal) - Transaction in the nature of hire-purchase - whether hire charges received under a hire purchase agreement amounts to interest liable to tax under the provisions of the Interest Tax Act? - Held that:- In the case before us there is nothing to show that assessee lent money to the hirer for purchasing the vehicle. Nor is there anything to show that the vehicle originally belonged to the assessee and the assessee in consideration of .....

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In a bailment the bailor does not divest himself of ownership. He merely curtails his right of enjoyment of the thing bailed in favour of the bailee. Further, the rights which the bailee being a hirer acquires may be enjoyed by him in terms of the hire purchase agreement and not otherwise.The nomenclature given by the assessee is not decisive. It is the substance of the matter which has to be looked into. Mere fact that the assessee has treated the vehicle for the purpose of accounting as its cu .....

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e industry and is, therefore, to be encouraged rather than discouraged. We may reiterate that it is not possible to presume that the legislature was not aware of the distinction between hire purchase transaction and transaction in the nature of loans and advances. Therefore, if the legislature wanted to apply the provisions of the Interest Tax Act to the hire purchase transaction, a specific reference to that effect would have been made.

We reiterate our view taken in the case of Pila .....

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ppellants 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. - Decided in favour of the assessee. - ITA No. 21 of 2003 - Dated:- 30-3-2015 - Girish Chandra Gupta And Arindam Sinha,JJ. For the Appellant : Mr J P Khaitan,Sr. Adv. For the Respondent : Mr S B Saraf, Mr R K Chowdhury, Mr Nizamuddin, A .....

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liable to tax under the provisions of Interest Tax Act, 1974?" Mr. Khaitan, learned Senior Advocate appearing for the appellant/assessee drew our attention to the circular dated 23rd March, 1943 bearing Circular No.9 of 1943 issued by the CBDT by which instruction was issued that the hire purchasers should be allowed depreciation, the relevant portion whereof reads as follows : "(i) In every case of payment purporting to be for hire purchase, production of the agreement under which the .....

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the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire-purchase. In such cases the periodical payments made by the hirer should for tax purposes be regarded as made up of :- (i) consideration for hire, to be allowed as a deduction in the assessment, and (ii) payment on account of purchase, to be treated as capital outlay, depreciation bei .....

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the hire charges cannot be treated as interest within the meaning of section 2(28A). To be precise, the circular reads as follows:- "In a hire-purchase contract the owner delivers goods to another person upon terms on which the hirer is to hire them on a fixed periodical rental. The hirer has also the option of purchasing the goods by paying the total amount of agreed hire at any time or of returning the same before the total amount is paid. It may be pointed out that part of the amount of .....

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w our attention to a CBDT Circular dated 13th January, 1998 bearing Circular No.760 wherein it is provided as follows: "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 .....

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f 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 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 Sundara .....

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re the return of loan 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… " 5. Accordingly, instead of routinely treating all hire-purchase transactions as mere financing transactions, the Assessing Officers may be advised to examine each transaction in the above light and charge interest-tax in such of those transactions which are not in the nature of hire purchase." Th .....

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is the hire charges for the vehicle and the hirer has the option to purchase the vehicle after payment of all the installments by paying a notional amount rupee 1/-. The installments received from hirer are partly towards the return of the cost of the vehicle and partly towards the hire charges which are shown in the accounts as finance charges. In such transaction the common intention behind the agreement is that it should take the form of the hire purchase agreement which would become a sale .....

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agreement in the case of Harita Finance Limited vs. ACIT (Interest-tax Appeal No.29/Mds/1997) the ITAT "A " Bench, Madras held the same view which is respectfully followed by me." The View taken by the CIT is evidently in consonance with the circulars dated 23rd March, 1943 and 16th November, 1981 quoted above. The reasons why the learned Tribunal held otherwise are as follows:- "We had also carefully gone through the audited Balance-sheet filed by the assessee as placed at .....

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nceded that after hiring of the assets, it did not remain the owner of the assets and, therefore, the same has not been shown under the head "fixed assets ". Moreover, the assessee has shown the amount recoverable from the hirer under the head "installment receivable (secured against vehicles financed as per agreement) " of ₹ 1,46,70,993/-. This itself indicates that the assessee has shown the amount under the head "current assets" for the hire charges recover .....

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the transactions were in substance in the nature of financing transaction, the hire charges received by the assessee are in the nature of interest chargeable to the interest tax under Section 2(7) of the Interest Tax Act. The amount recoverable from the hirer shown as installment receivable and which is secured against vehicles financed as per agreement as shown under the head "current assets, loans and advances" in the Balance-sheet of the assessee itself indicates that the hire purch .....

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t taken into account the circulars dated 23rd March, 1943 and 16th November, 1981 at all. The view taken by the Tribunal is on the basis that the assessee did not claim depreciation; and (ii) that the subject matter of the hire purchase agreements were shown as current assets which the learned Tribunal thought "that the hire purchase agreement was a security for repayment of the loan. Both the reasons, according to us, are without any substance. We already have referred to the Circular date .....

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n their Lordships distinguished a loan transaction from a hire purchase agreement as follows:- "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 t .....

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buy goods; the hirer being under no legal 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 hire-purchase 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 evidenc .....

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no obligation to buy the vehicle. He has an option either to buy the vehicle or to return the same. The transaction entered into by the assessee does not also disclose that the hirer was the owner of the vehicle and he entered into the hire purchase agreement only for the purpose of raising a loan. In the case of Sundaram Finance (supra) their Lordships referred to the judgement in the case of K. L. Johar Vs. Deputy Commercial Tax Officer reported in AIR 1965 SC 1082, Their Lordships distinguish .....

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paid and may later be paid in instalments. This follows from the definition of sale in S.4 of the Indian sale of Goods Act (as distinguished from an agreement to sell) which requires that the seller transfers the property in the goods to the buyer for a price. The essence of a sale is that the property is transferred from the seller to the buyer for a price, whether paid at once or paid later in instalments. On the other hand, a hire-purchase agreement, as its very name implies, has two aspects. .....

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the agreement but remains in the intending seller, and only passes later when the option is exercised by the intending purchaser. The distinguishing feature of a typical hire-purchase agreement therefore is that the property does not pass when the agreement is made but only passes when the option is finally exercised after complying with all the terms of the agreement. The next question that arises is whether a hire purchase agreement ever ripens into a sale and if so when. We have already point .....

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Act for the taxable event under the Act is the taking place of the sale, the Act providing for a multi-point sales tax at the relevant time. Where however option is not exercised or cannot be exercised because of the inability of the intending purchaser to fulfil the terms of the agreement, there is no sale at all. As the taxable event is the sale of goods, the tax can only be levied when the option is exercised after fulfilling all the terms of the hire-purchase agreement. We cannot agree with .....

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Therefore, even 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 exigible 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 exigible when the option has been exercised and all the terms of agreement fulfilled and the sale actually takes place. When sale takes place in a particular case will depend upon the terms of .....

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greements are fulfilled and it is at that time that the tax is exigible." Mr. Saraf, learned Advocate appearing for the revenue, has drawn our attention to a sample invoice dated 8th July, 1996 issued by Agro Service Centre which goes to show that the invoice has been raised upon the assessee but there is an indication "A/C. - Shri Gopal Chandra Singh". He submitted that the mention of the hirer in the invoice itself is a clear pointer to show that it was really a loan transaction .....

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le if the terms of hire purchase agreement are fully performed. The first sale is by Agro Service Centre to the assessee and the second sale is by the assessee to Gopal Chandra Singh. Mr. Chowdhury and Mr. Nizamuddin appearing in other two matters involving the same question of law drew our attention to a judgment in the case of CIT Vs. Muthoot Leasing & Finance Ltd. reported in (2008) 3 KLT 340. We have perused the judgment but are unable to agree with the views contained therein. The judge .....

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ontinue to remain with the assessee. Moreover in the case of Muthoot Leasing & Finance only the provisions of Section 51 of the Motor Vehicles Act were considered without any attempt to distinguish a hire purchase transaction from a loan transaction simplicitor. Section 51 of the Motor Vehicles Act provides as follows:- "Special provisions regarding motor vehicle subject to hire-purchase agreement, etc. - (1) Where an application for registration of a motor vehicle which is held under a .....

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Government may prescribe from the parties to the said agreement, make an entry as to the existence of the said agreement in the certificate of registration [and an intimation in this regard shall be sent to the original registering authority if the last registering authority is not the original registering authority]. (3) Any entry made under sub-section (1) or sub-section (2), may be cancelled by the [last registering authority] on proof of the termination of the said agreement by the parties .....

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f registration as the person with whom the registered owner has entered into the said agreement. (5) Where the person whose name has been specified in the certificate of registration as the person with whom the registered owner has entered into the said agreement, satisfies the registering authority that he has taken possession of the vehicle [from the registered owner] owing to the default of the registered owner under the provisions of the said agreement and that the registered owner refuses t .....

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egistered owner has entered into the said agreement: Provided that a fresh certificate of registration shall not be issued in respect of a motor vehicle, unless such person pays the prescribed fee: Provided further that a fresh certificate of registration issued in respect of a motor vehicle, other than a transport vehicle, shall be valid only for the remaining period for which the certificate cancelled under this sub-section would have been in force. (6) The registered owner shall, before apply .....

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tion of the vehicle under section 52, make an application] to the person with whom the registered owner has entered into the said agreement, (such person being hereafter in this section referred to as the financier) for the issue of a no objection certificate (hereafter in this section referred to as the certificate). Explanation.- For the purposes of this sub-section and subsections (8) and (9), "appropriate authority " in relation to any permit, means the authority which is authorise .....

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ails to communicate the reasons for refusal to issue the certificate to the applicant within the said period of seven days, the certificate applied for shall be deemed to have been issued by the financier. (8) The registered owner shall, while applying to the appropriate authority for the renewal of any permit under section 81, or for the issue of a duplicate certificate of registration under sub-section (14) of section 41, or while applying for assignment of a new registration mark under sectio .....

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assignment of a new registration mark in respect of a vehicle which is held under the said agreement, the appropriate authority may, subject to the other provisions of this Act,- (a) in a case where the financier has refused to issue the certificate applied for, after giving the applicant an opportunity of being heard, either- (i) renew or refuse to renew the permit, or (ii) issue or refuse to issue the duplicate certificate of registration, or (iii)assign or refuse to assign a new registration .....

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of registration of a motor vehicle, or (f) change of address, shall communicate [by registered post acknowledgement due] to the financier that such entry has been made. [(11) A registering authority registering the new vehicle, or issuing the duplicate certificate of registration or a no objection certificate or a temporary certificate of registration, or issuing or renewing, a fitness certificate or substituting entries relating to another motor vehicle in the permit, shall intimate the financi .....

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s registered ownership is limited for the purpose of the provisions of the Motor Vehicles Act. He in law is nothing more than a bailee which will become further evident from Section 2(30) of the Motor Vehicles Act, 1988 which is as follows:- "'Owner' means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject of a hire-purchase agreement, or an agreement of lease .....

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mplied title with the incidental right of transfer. A person may be in possession and control of vehicle nevertheless he might not have any title or right to transfer it". Section 51 makes it clear that the right of the hirer is subject to superior right of the person with whom he has entered into a hire purchase agreement. The hirer is a bailee as already indicated. In a bailment the bailor does not divest himself of ownership. He merely curtails his right of enjoyment of the thing bailed .....

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Bombay High Court in the case of Discount and Finance House of India Ltd., reported in [2003] 259 ITR 295. In a very instructive judgment delivered by His Lordship Kapadia, J. [ as His Lordship then was], the object of the Interest Tax Act was examined and His Lordship held as follows:- "This has been discussed in the judgment of the Division Bench of this court to which one of us (S.H.KAPADIA,J.) is a party in the case of Unit Trust of India v. P.K. Unny [2001] 249 ITR 612 (Bom). Therefore .....

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ower. " If the object of the Interest Tax Act is kept at the back of the mind, it would be clear that unlike loans and advances the hire purchase transactions resulting in sale of various household goods including cars and automobiles was not intended to be curbed by the Interest Tax Act. As a matter of fact, the sale of household goods including cars and automobiles through the hire purchase transactions provides a boost to the industry and is, therefore, to be encouraged rather than disco .....

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loans and advances made in India and includes- (a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India, but does not include- (i) interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills;" From a plain reading of definition, it is clear that an investment made by an assessee either in .....

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