Interest Tax Act,1974 – s.2(5-A) and s.2(5-B) – Hire-purchase agreements – Appellants-assessees are credit institutions within meaning of s.2(5-A) – Whether appellants-assessees liable to pay tax on interest component included in hire-purchase instalments paid under hire-purchase agreements – ITAT referred to CBDT Circular No. 760 dated 13th January 1998 and observed that hire-purchase agreement is a composite transaction, and has elements of bailment and sale and appellants-assessees are not liable to pay interest tax as hire instalments are not interest on loans and advances that is chargeable to interest tax – High Court reversed the finding of ITAT, observing that hire-purchase instalment includes “finance charges”, which is nothing but interest, and therefore, interest tax is leviable on the interest component – The transaction, though styled as a hire-purchase agreement, the High Court held, is in fact a finance agreement for purchase of a vehicle – Reliance placed by appellantassessee on Circular No. 760 dated 13th January 1998 issued by CBDT was rejected by the High Court – On appeal, held: Given the dictum and ratio in the cases of Sahara India Savings and Investment Corporation Limited and State Bank of Patiala Through General Manager, the view taken by High Court is not correct – In Circular No. 760 dated 13th January 1998, the CBDT observed that they considered the issue and were advised that in 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 – In transactions which are, in substance, in the nature of financing transactions, the hire charges should be treated as interest, subject to interest tax – To determine the distinction between the two transactions, the assessing officers were required to consider the issue on merits taking, inter alia, into account – (i) the terms of the agreement; (ii) the nature of the arrangement between the supplier of the asset, the hire-purchase company and the end user of the asset; and (iii) the intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of hire-purchase price etc – However, when hire-purchase company pays the price or a substantial part thereof on behalf of such hirer who is real purchaser but does not pay the full price, then such agreement is in nature of a security for re-payment of the loan and is essentially a loan transaction – High Court reversed finding of ITAT without framing a specific substantial question of law and thus, interference with findings of fact was unwarranted – Orders passed by ITAT deleting the additions made by assessing officer in case of appellant, set aside – Motor Vehicles Act 1988 – s.51. Interest Tax Act,1974 – s.2(7) – Interpretation & scope of – Interest recovered under hire-purchase agreement, if falls under s.2(7) – Held: s.2(7) has been interpreted in two decisions, that is, in the cases of Sahara India Savings and Investment Corporation Limited and State Bank of Patiala Through General Manager, which have given a very limited and restricted meaning to s.2(7) of the Act as interest directly arising “on” loans and advances, and not any other interest, be it interest earned on investment or interest payable on delayed payment of the discounted bill of exchange.
Hire-Purchase – Elements – Held: A hire-purchase agreement has two elements – an element of bailment and an element of sale – Any transfer or sale made by the hirer or any violation of the hirepurchase agreement can lead to civil as well as criminal consequences.
Taxation – Taxation matters – Interference by High Court with findings of fact recorded by the ITAT – Scope – Held: Findings of fact generally recorded by the ITAT are treated as conclusive – The High Court can interfere with the findings of fact while deciding a substantial question of law when the findings are not supported by the material on record, so as to be treated as perverse – For this, the High Court must frame a separate substantial question of law and only then interfere with the findings of fact by the ITAT, while applying the strict parameters.
Taxation matters – Precedents – Rule of caution when applying the ratio of judgments relating to one tax enactment as a precedent in a case relating to another tax enactment – This rule of caution is important and should not be overlooked, more so when the language of the enactment and the object and purpose of the enactment are different.
Constitution of India – Art.141 – SLP – Dismissal of – Held: If the dismissal is in limine and at the admission stage, it would not constitute a binding precedent u/Art.141 of the Constitution.
Allowing the appeals, the Court
HELD : 1. A hire-purchase agreement has two elements – an element of bailment and an element of sale. The element of sale fructifies when the option to purchase is exercised by the intending purchaser after fulfilling the terms of the agreement. Till then, the goods are given on hire. One can argue that in a hire-purchase, an element of interest is inbuilt, but what is payable is the hire amount and not interest per se. The hirer has an option to return the vehicle or the goods taken on hire. It is not a simple transaction of giving a loan or advance on which interest is payable. The transaction(s) in commercial and legal sense are far more complex with corresponding rights of the parties. Even if the hirer is recorded as the owner of the vehicle under Section 51 of the MV Act, the name of the appellant – assessee is also recorded in the registration book, which is in recognition of the hirepurchase agreement. The registered owner under the MV Act may be liable in case of accidents/traffic challans, etc. But this, in no way, dilutes the right of the appellants – assessees in respect of the title of the property, that is, the vehicle. Any transfer or sale made by the hirer or any violation of the hire-purchase agreement can lead to civil as well as criminal consequences. Given the dictum and ratio in Sahara India Savings and Investment Corporation Limited and State Bank of Patiala Through General Manager, the view taken by the High Court of Delhi in M/s G.E. Capital Transportation, as followed by the High Court of Delhi in Commissioner of Interest Tax v. M/S G.E. Capital Transportation is correct and the view taken by the High Court of Kerala in the impugned judgment is not in consonance with the above decisions of this court. [Para 14][329-C-H]
2. In Circular No. 760 dated 13th January 1998, the CBDT observed that they considered the issue and were advised that in 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. In transactions which are, in substance, in the nature of financing transactions, the hire charges should be treated as interest, subject to interest tax. To determine the distinction between the two transactions, the assessing officers were required to consider the issue on merits taking, inter alia, into account – (i) the terms of the agreement; (ii) the nature of the arrangement between the supplier of the asset, the hirepurchase company and the end user of the asset; and (iii) the intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of hire-purchase price etc. However, when the hire-purchase company pays the price or a substantial part thereof on behalf of such hirer who is the real purchaser but does not pay the full price, then such agreement is in the nature of a security for re-payment of the loan and is essentially a loan transaction. [Para 16][331-F-H; 332-A-B]
3.1. The judgment in Sundaram Finance Limited relates to the true nature of hire in hire-purchase agreements as in the context of the sales tax enactment. In the present case, however, one is dealing with and interpreting Section 2(7) of the Act, which has been interpreted in two decisions, that is, in the case of Sahara India Savings and Investment Corporation Limited and State Bank of Patiala Through General Manager, which have given a very limited and restricted meaning to Section 2(7) of the Act as interest directly arising “on” loans and advances, and not any other interest, be it interest earned on investment or interest payable on delayed payment of the discounted bill of exchange. [Para 17][332-B-E]
3.2. Taxation depends upon the language of the charging section and what is brought to tax within the four corners of the charging section. Therefore, one should be careful and cautious when applying the ratio of judgments relating to one tax enactment as a precedent in a case relating to another tax enactment. This rule of caution is important and should not be overlooked, more so when the language of the enactment and the object and purpose of the enactment are different. [Para 18][332-E-F]
4.1. Findings of fact generally recorded by the ITAT are treated as conclusive. The High Court can interfere with the findings of fact while deciding a substantial question of law when the findings are not supported by the material on record, so as to be treated as perverse. For this, the High Court must frame a separate substantial question of law and only then interfere with the findings of fact by the ITAT, while applying the strict parameters. In the present case, the High Court did not frame a specific substantial question of law and thus, the interference with the findings of fact is unwarranted. This is not to say that the tax authorities are not entitled to examine the surrounding facts and circumstances to ascertain the true character and nature of the transaction, regardless of the nomenclature given by the parties. [Para 19][333-C-E]
4.2. In the present case, at this distinct point of time, it would not be appropriate to pass an order of remand. It is to be also noted that the Act has ceased to operate with effect from 31st March 2000. 21. The impugned judgment is accordingly set aside. The additions made by the assessing officer are set aside and the orders passed by the ITAT deleting the additions in the case of appellant and other cases are upheld. [Paras 20, 21] [333-G; 334-A]
Commissioner of Income Tax, Kanpur v. Sahara India Savings and Investment Corporation Limited (2009) 17 SCC 43 and State Bank of Patiala Through General Manager v. Commissioner of Income Tax, Patiala (2015)
15 SCC 483 : [2015] 12 SCR 243 – relied on.
The Commissioner of Income Tax, Cochin v. M/s. Muthoot Leasing & Finance Limited [Judgment dated 10th March, 2008 of High Court of Kerala in ITA No.
269 of 2002] – overruled.
State Bank of Mysore v. Commissioner of I.T.,
Karnataka-I, Bangalore (1989) 175 ITR 607 – held overruled.
Commissioner of Income Tax v. Cholamandalam
Investment and Finance Co. Ltd. (2008) 296 ITR 601 – held approved.
K.L. Johar and Co. (In Both Appeals) v. Deputy Commercial Tax Officer, Coimbatore III (In Both Appeals) AIR 1965 SC 1082 : [1965] 2 SCR 112;
Sundaram Finance Limited v. State of Kerala and Another AIR 1966 SC 1178 : [1966] 2 SCR 828;
Commissioner of Interest Tax, New Delhi v. M/s G.E. Capital Services India [Decision of Supreme Court dated 16 th May, 2008 in SLP(C) No. 14202 of 2008] and Association of Leasing and Financial Service Companies v. Union of India and Others (2011) 2 SCC
352 : [2010] 13 SCR 381 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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