2003 (8) TMI 540 - AT - Income Tax

Assessee engaged in business of hire purchase of vehicles - company were provides an arrangement for the security of loan given - such transaction is a nature of loan/advance and the hire charges received on such transactions treated as the nature of interest? -Applicability of CBDT Circulars - HELD THAT - The fact that it is registered with RBI as a hire purchase company would not make any difference. Further, we also noted from the order of CIT (A) -II, Agra that the assessee-company, had obtained loan from bank and for this purpose, the vehicles were shown as its stock. Even if it is so, the nature of transaction would not change. It is an internal matter between the bank and the assessee-company. Merely because the bank accepted the vehicle as stock of the company, the real nature of the transaction would not change. Despite this, it would be open to scrutiny as to what was the real nature of the transaction. Moreover, the bank is merely interested in security of loan given by it. From the letter dated 9-1-1997 issued by Central Bank of India granting finance limit of cash credit besides stock collateral security of substantial amount in the form of movable or immovable properties were also obtained by the bank. It has also been desired by the bank that before release of enhanced facilities, fresh equitable mortgage of these properties had to be recorded and formalities regarding creation of bank charge with ROC had to be completed. It was also desired that shares/debentures should be transferred in the bank s name. Beside these, guarantees from three guarantors of more than ₹ 95,00,000 were also obtained. It is also noted that undertaking from the purchaser of vehicle was also obtained by the bank. In view of all these facts, since the bank had already secured its advance against a number of securities, it was a not very much concerned to ascertain as to whether the vehicles were actually the stock of the company or not. Similar view has also been expressed by the Constitutional Bench of Hon ble Supreme Court in the case of Padma Sundra Rao v. State of Tamil Nadu 2002 (3) TMI 44 - SUPREME COURT , wherein it is held that the Court should not place reliance on the decisions without discussing as to how the factual situation fitted in with the fact situation of the decision on which reliance is placed. They concurred with the view that there was always a peril in treating the words of a speech or judgments though they were words in a legislative enactment, and it was to be remembered that judicial utterances are made in the light of the facts of a particular case. In view of the above, no help can be drawn by the assessee-company in its case. Thus, we are of the view that the assessee-company is engaged in financing business and only, advancing loan on interest and by no stretch of imagination it can be considered as a Hire Purchase Company. Thus, we dismiss all the three grounds of appeal of the assessee-company and uphold the order of CIT (A) -II, Agra for the assessment years 1994-95, 1995-96, 1996-97, 1997-98 and 1999-2000. Consequently all the appeals preferred by the assessee-company are dismissed

Summary

Issues Involved:

1. Classification of "hire charges" as "interest" under the Interest Tax Act, 1974.
2. Determination of the nature of transactions as hire purchase or financing transactions.
3. Applicability of CBDT Circulars and Supreme Court judgments.

Summary:

Issue 1: Classification of "hire charges" as "interest" under the Interest Tax Act, 1974

The assessee-company, engaged in the business of hire purchase of vehicles, claimed "hire charges" as exempt from tax under the Interest Tax Act. The Assessing Officer (AO) equated "hire charges" with "interest" u/s 2(7) of the Interest Tax Act, 1974, treating the transactions as loans. The AO's view was supported by the CIT (A) -II, Agra, who concluded that the hire purchase agreements were merely arrangements for securing loans, thus justifying the treatment of hire charges as interest chargeable to tax.

Issue 2: Determination of the nature of transactions as hire purchase or financing transactions

The Tribunal examined whether the transactions were genuine hire purchase agreements or financing transactions. The AO and CIT (A) -II, Agra, found that the vehicles were registered in the names of the hirers, and the purchase bills were also in their names, indicating that the assessee-company was not the owner of the vehicles but merely a financer. The Tribunal upheld this view, noting that the intention of the parties was to secure loans, not to engage in hire purchase transactions. The Tribunal referred to CBDT Circular No. 760, dated 13-1-1998, and the Supreme Court judgment in Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178, which supported the conclusion that the transactions were financing in nature.

Issue 3: Applicability of CBDT Circulars and Supreme Court judgments

The Tribunal considered CBDT Circular No. 738, dated 25-3-1996, which clarified that finance charges in hire purchase transactions are in the nature of interest. Circular No. 760, dated 13-1-1998, further clarified that true hire purchase transactions are not chargeable to interest tax, but financing transactions disguised as hire purchase are. The Tribunal applied the tests laid down in Sundaram Finance Ltd. v. State of Kerala to determine the nature of the transactions, concluding that the assessee-company's transactions were financing in nature.

Conclusion:

The Tribunal dismissed the appeals of the assessee-company for assessment years 1994-95 to 1999-2000, upholding the CIT (A) -II, Agra's order that the hire charges were interest chargeable to tax under the Interest Tax Act. The Tribunal allowed the Revenue's appeal for the assessment year 1998-99, reversing the CIT (A) -I, Agra's order that had favored the assessee. The Tribunal concluded that the assessee-company was engaged in financing business, not hire purchase, and the transactions were in the nature of loans.