TMI Blog2020 (12) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 194I of the Income Tax Act. Alternative plea of the ld. AR of the assessee, it is noted that the amendment by which the 2nd Proviso to section 40(a)(ia) is brought into Statute and the same is remedial in nature as held in the case of CIT vs. Calcutta Export [ 2018 (5) TMI 356 - SUPREME COURT] . Thus it is settled proposition that the 2nd Proviso to section 40(a)(ia) shall have retrospective effect. Once the recipient of the charges has considered this amount as part of its income and filed the return of income then the question of invoking of section 40(a)(ia) does not arise - Decided in favour of assessee. - ITA No. 309/ALLD/2017 - - - Dated:- 3-12-2020 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER Appellant by : Shri S. K. Jaiswal, CA Respondent by : Shri A. K. Singh,Sr. DR ORDER PER SHRI VIJAY PAL RAO, JUDICIAL MEMBER: This appeal by the assessee is directed against the order dated 20.09.2017 passed by Commissioner of Income Tax (Appeals), Allahabad for the assessment year 2010-11. The assessee has raised the following grounds: 1. BECAUSE the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n finance charges. Therefore, in view of 2nd Proviso to section 40(a)(ia) of the Act, no disallowance is called for. 4. On the other hand, the ld. DR has submitted that the assessee has not submitted the relevant documents like hire purchase agreement, invoices, account statement etc. Therefore, the AO has to ascertain the true nature of the transaction and manner of accounting thereof as to whether it is a capital expenditure or revenue expenditure. He has further submitted that the interest paid to NBFC is liable to TDS u/s 194A even the financial charges paid under the hire purchase agreement is subjected to TDS u/s 194I of the Income Tax Act. In support of his contention, he has relied upon a decision of Hyderabad Benches of Tribunal dated 04.03.2014 in the case of ACIT vs. M/s R. Balarami Reddy Co. in ITA No.2224 of 2011 and submitted that the Tribunal has considered the Explanation 1 to section 194A after the amendment by Finance Act 2006 w.e.f. 13.07.2006 and thereby the payment made by the assessee towards hire charges on hire purchase agreement is liable for TDS u/s 194I of the Income Tax Act. The ld. DR has also relied upon the decision dated 09.04.2018 of Mumbai Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the hire purchase agreement has been explained by the Supreme Court quite long ITA No. 2224/H/2011 M/s. R. Balarami Reddy Co. time back in the case of Sundaram Finance Ltd. Vs. The State of Kerala. In paragraph-24 of the said judgment, their lordships have explained the position stating thus: 'But a hire purchase agreement.........................is 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 instalments of hire arises when the instalments 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 agreement must be distinguished from transaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordship of the apex court have categorically held that hire purchase agreements are executory contracts under which the goods are let on hire and the hirer has an option to purchase in accordance with the terms of the agreement. These types of agreements were originally entered into between the dealer and the customer and dealer used to extend credit to the customer. But as hire-purchase scheme gained in popularity and in size, the dealers who were not endowed with liberal amount of working capital found it difficult to extend the scheme to many customers. Then the financiers came into the picture. The finance company would buy the goods from the dealer and let them to the customer under hire-purchase agreement. The dealer would deliver the goods to the customer who would then drop out of the transaction leaving the finance company to collect instalments directly from the customer. Under hirepurchase agreement, the hirer is simply paying for the use of the goods and for the option to purchase them. The finance charge, representing the difference between the cash price and the hire-purchase price, is not interest but represents a sum which the hirer has to pay for the privilege of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment of interest on the borrowed loan. Therefore, the provisions of section 194A cannot be invoked in these transactions. In the instant case, though the assessee has made the payment of financial charges but the A.O. has treated it to be the payment of interest charges and invoked the provisions of section 194A of the I.T. Act. In the light of aforesaid proposition of law, we are of the view that revenue has wrongly treated the payment of financial charges as a payment of interest and disallowed the entire payment. We therefore set aside the order of the CIT(A) and held that for payment of financial charges, no TDS is required to be deducted. Therefore, the assessee is entitled for the deduction of the entire payment of financial charges. We accordingly direct the A.O. to allow the deduction of the financial charges paid by the assessee after setting aside the order of the CIT(A). 8. Therefore, there is no quarrel on the point that the provision to section 194A are not applicable in respect of the payment in question and consequently the claim of deduction cannot be disallowed by invoking the provision to section 40(a)(ia) of the Income Tax Act. The AO has invoked the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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