2008 (3) TMI 676 - HC - Income Tax

Summary

Issues Involved:
1. Whether "finance charges" collected under hire-purchase agreements attract tax u/s 2(7) of the Interest-tax Act, 1974.
2. The nature of hire-purchase transactions and their classification as loans or advances.

Summary:

Issue 1: Taxability of "Finance Charges"
The primary question in the appeals is whether "finance charges" collected by respondent-companies under hire-purchase agreements are taxable u/s 2(7) of the Interest-tax Act, 1974. The revenue contends that these charges are essentially "interest" collected at a flat rate along with the loan amount in installments, making them assessable under the Act. The respondents argue that hire-purchase transactions fall outside the scope of the Interest-tax Act, and thus, finance charges should not be assessed as interest.

Issue 2: Nature of Hire-Purchase Transactions
The court examined whether the transactions in question are genuine hire-purchase agreements or merely loans disguised as such. The respondents, being hire-purchase finance companies, are covered by the definition of "credit institution" liable to pay interest tax on interest u/s 2(7) of the Act. The Assessing Officer found that the "finance charges" are essentially interest collected at a flat rate, making the transactions financial in nature rather than genuine hire-purchase agreements. The court noted that the vehicles are registered in the name of the borrower, and the respondents have only a license to repossess the vehicle on default, indicating a loan transaction rather than a hire-purchase agreement.

The court referred to the Supreme Court's decision in Sundaram Finance Ltd. v. State of Kerala, which distinguishes between genuine hire-purchase agreements and loan transactions secured by a right of seizure of goods. The court concluded that the transactions in question are loans, as the respondents have only a license to repossess the vehicle and the interest is loaded to the loan amount.

The Tribunal's reliance on the Hire Purchase Act, 1972, was found to be misplaced, as the option to purchase the vehicle for a nominal amount is an empty formality. The court also noted that the Circular No. 760 issued by CBDT does not exclude interest recovered under hire-purchase agreements from the Interest-tax Act.

Conclusion:
The court allowed the appeals, reversing the Tribunal's order and restoring the assessments confirmed in the first appeals. The transactions were found to be loans, and the finance charges were deemed taxable u/s 2(7) of the Interest-tax Act. The O.P. No. 10041/1996 was dismissed.