TMI Blog2008 (3) TMI 676X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the respondents on the other hand is that hire purchase transactions are outside the scope of the Interest-tax Act and so much so, finance charges collected cannot be assessed as interest. We have heard Senior counsel Sri P.K.R. Menon appearing for the appellant and Senior counsel Sri P. Balachandran and other counsel appearing for the respondents. 2. Admittedly respondents being hire purchase finance companies are specifically covered by the definition credit institution which are liable to pay interest tax on interest covered by section 2(7) of the Act. In fact, at least some of the respondents have paid tax on certain other receipts of interest and consequently have no dispute that they are not assessable under the Act. The short question arising for consideration is whether finance charges recovered by them from motor vehicle financing business is interest as defined under section 2(7) of the Act. For easy reference, interest as defined under section 2(7) is extracted hereunder : (7) Interest means interest on loans and advances made in India and includes- (a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hire purchase transactions entered into by it are in substance financial transactions. The margin money is the cost of the asset as reduced by the hire purchase finance sanctioned to the hirer at his request. It has no relation to the cost of the asset. If a hirer seeks 90 per cent of the cost of the asset as hire purchase finance, margin money will be the balance 10 per cent only. For the same asset if a hirer is sanctioned 75 per cent of the cost as hire purchase finance the margin money will be 25 per cent only. This shows that the hire purchase advance is a loan, pure and simple granted by the assessee according to the needs of the hirer. Similarly finance charges are also calculated at a flat rate of 11 per cent per annum on the net amount financed and this is nothing but calculation of interest at the rate of 11 per cent p.a. at flat rate for the period of hire purchase. The hire purchase price is also fixed by adding the finance charges to the net amount financed. The hire purchase price so fixed is payable in equal monthly instalments over a number of years. It is clear from the above that the finance charges collected by the assessee actually represents interest on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan amount advanced by the finance company. Besides enodrsement of hypothecation in the RC book of the vehicle, the respondents take promissory notes, cheques etc., from the borrowers towards security. The Supreme Court has considered the distinction between hire purchase arrangement and loan transaction in the following words in the decision in Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178 :- . . .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 is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iced the salient features of the so-called hire purchase agreement, whereunder the loan amount is recovered in instalments along with flat rate of interest charged for loan period and loaded to the instalments. Respondents have taken cheques, promissory notes, etc., towards security for the loan, in addition to hypothecation noticed in the RC book. It is clear from the terms of transaction that the vehicle financing covered by so-called hire purchase agreements is only in the nature of loan and contrary to hire-purchases conceived under the Hire Purchase Act, respondents have only a licence to repossess the vehicle and get the vehicle registered in their name and that too under orders of Registering Authority under the Motor Vehicles Act after default is committed by the hire purchasers. We are of the view that the Tribunal mis-directed itself and reached a wrong conclusion only because of their failure to appreciate the facts pertaining to transaction properly and without reference to the provisions of the Motor Vehicles Act which deal with ownership, hypothecation, etc., on vehicles. Respondents have heavily relied on Circular No. 760, dated 13-1-1998 issued by CBDT wherein they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Act or not was not raised or decided by that Court. Similarly another decision relied on by the respondent is that of the Madras High Court in CIT v. Harita Finance Ltd. [2006] 283 ITR 370 also does not deal with the nature of transaction involved in this case. On the other hand, the Court has only held that Tribunal s findings on facts are binding and conclusive and there is no scope for interference in Reference Case. However, in this case revenue had specifically canvassed against the findings of the Tribunal contrary to the concurrent findings entered by the assessing authority and the first appellate authority based on documents and with reference to specific hire purchase agreements entered into between the respondents and their parties. After going through the facts pertaining to transactions extracted above, we find no justification for the Tribunal to come to the findings different from that of the two lower authorities. Besides this we have already noticed that the exercise of option provided in the agreement relied on by the Tribunal is contrary to the real deal and against the provisions of the Motor Vehicles Act because of registration of vehicles by the borr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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