TMI Blog2015 (7) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 current assets does not derogate from the concept of hire purchase. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t no right to recovery of the asset), the transaction should be regarded as one of purchase by installments and no deduction in respect of 'hire' should be made. Depreciation should be allowed to the lessee on the entire purchase price as per the agreement. (iii)Where 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 being allowed to the lessee on the initial value (i.e. the amount for which the hired subject would have been sold for cash at the date of agreement). He then drew our attention to an instruction bearing No.1097 dated 19th September, 1977 by which it was clarified that the circular dated 23rd March, 1943 was in existence and operative. He also drew our attention to the circular issued by the CBDT bearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 bonafide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, of the transaction, may not be regarded as a loan transaction even though the reason for which it was entered into was to raise money .. the intention of the appellant in obtaining the hirepurchase and the allied agreements was to secure 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. The question for considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited Balance Sheet himself has conceded 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 recoverable from the persons to whom he has financed the assets. Thus not claiming of the depreciation as business expenditure and not showing the assets financed, as owned assets in the Balance sheet establishes the fact that immediately at the time of entering into hire purchase agreement, the assessee did not remain the owner of the assets. We are, therefore, of the considered view that in terms of the hire purchase agreement entered into by the assessee as placed at Page-5 to 12 of the paper book, 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( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 installments of hire arises when the installments are paid and not before. In such a hire-purchase agreement there is no agreement to 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 evidences a loan transaction, subject to a hiring agreement under which the lender is given the license to seize the goods. 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pointed out that a hire purchase agreement has two elements: (1) element of bailment, and (2) element of sale, in the sense that it contemplates an eventual sale. The element of sale fructifies when the option is exercised by the intending purchaser after fulfilling the terms of the agreement. When all the terms of the agreement are satisfied and the option is exercised a sale takes place of the goods which till then had been hired. When this sale takes place it will be liable to sales tax under the 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased for the purpose of hiring it out to the named hirer on terms and conditions contained in the hire purchase agreement. In the present case there shall be two transactions of sale 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 judgement in the case of CIT Vs. Muthoot Leasing Finance Ltd., with respect, is over simplification of the mater. The view that option given to the borrower to purchase vehicle for rupee one in the hire purchase agreement is an empty formality is contrary to the views expressed by Their Lordships of the Apex Court in both the judgments cited above. Unless the option is exercised in accordance with the hire purchase agreement and the sale is effected the property in the goods shall continue to remain with the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the said agreement and that the registered owner refuses to deliver the certificate of registration or has absconded, such authority may, after giving the registered owner an opportunity to make such representation as he may wish to make (by sending to him a notice by registered post acknowledgement due at his address entered in the certificate of registration) and notwithstanding that the certificate of registration is not produced before it, cancel the certificate and issue a fresh certificate of registration in the name of the person with whom the registered 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 applying to the appropriate authority, for the renewal of a permit under section 81 or for the issue of duplicate certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 mark; (b) in any other case,- (i) renew the permit, or (ii) issue duplicate certificate of registration, or (iii)assign a new registration mark. (10) A registering authority making an entry in the certificate of registration regarding- (a) hire-purchase, lease or hypothecation agreement of a motor vehicle, or (b) the cancellation under sub-section (3) of an entry, or (c) recording transfer of ownership of motor vehicle, or (d) any alteration in a motor vehicle, or (e) suspension of cancellation 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irer 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 current assets does not derogate from the concept of hire purchase. The provisions of Interest Tax Act were considered by the 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, the Act is enacted for two-fold purposes, namely, as an anti-inflationary measure and, secondly, to augment the revenue. In the said judgment of the Division Bench of this court in the case of Unit Trust of India [2001] 249 ITR 612, it has been held that interest-t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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