2006 (8) TMI 95 - AT - Income Tax

Interest Tax - Department is of the view that the hire purchase transactions are nothing but financing transactions entered into by assessee and charges liable to interest tax - Held that hire charges received by assessee are not interest chargeable to interest tax

Summary

Issues Involved:
1. Nature of the transaction: Whether it was a hire purchase agreement or a financing transaction.
2. Taxability of hire charges: Whether the hire charges received by the assessee are liable to interest-tax under the Interest-tax Act, 1974.

Detailed Analysis:

Nature of the Transaction:
The primary issue revolves around whether the transactions in question are true hire purchase agreements or merely financing transactions disguised as hire purchase agreements. The Department argued that the transactions were financing transactions, while the assessee maintained that they were hire purchase agreements.

1. Department's Argument:
- The Department contended that the transactions were essentially financing transactions. The vehicles were registered in the name of the hirer, indicating that the ownership did not remain with the assessee-company.
- The Department relied on the Supreme Court's decision in Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489. The decision emphasized that the intention behind hire purchase agreements was to secure the return of loans advanced to customers, making these transactions financing transactions rather than genuine sales.
- The Department also cited the Central Board of Direct Taxes (CBDT) Circular No. 738 and Circular No. 760, which guided the classification of hire purchase transactions as financing transactions if they were essentially loan transactions.

2. Assessee's Argument:
- The assessee argued that the transactions were bona fide hire purchase agreements governed by the Hire Purchase Act, 1972. According to Section 2(c) of the Act, a hire purchase agreement includes an agreement under which goods are let on hire with an option to purchase.
- The assessee referred to the Tribunal's decision in N. K. Leasing and Construction P. Ltd. v. Deputy CIT [2001] 79 ITD 658, which held that hire purchase transactions are not financing transactions and hire charges are not interest under the Interest-tax Act.
- The assessee also pointed out that the agreements were in the form prescribed by the Hire Purchase Act, 1972, and the vehicles were shown as current assets in the balance sheet, not as loans and advances.

Taxability of Hire Charges:
The second issue was whether the hire charges received by the assessee were subject to interest-tax under the Interest-tax Act, 1974.

1. Department's Argument:
- The Department argued that the hire charges were essentially interest on loans and advances, making them chargeable to interest-tax under Section 4 of the Interest-tax Act.
- The definition of "interest" under Section 2(7) of the Interest-tax Act includes interest on loans and advances, and the Department contended that the hire charges fell within this definition.

2. Assessee's Argument:
- The assessee argued that hire charges were not interest on loans and advances but payments under hire purchase agreements. Therefore, they were not chargeable to interest-tax.
- The assessee cited various Tribunal decisions, including Commercial Motors Finance Ltd. v. Asst. CIT [2002] 82 ITD 176 and Muthoot Leasing and Finance Ltd. v. Joint CIT [2003] 84 ITD 477, which held that hire charges under hire purchase agreements are not subject to interest-tax.

Judgment:
The Tribunal dismissed the Department's appeals, holding that:

1. The transactions in question were genuine hire purchase agreements governed by the Hire Purchase Act, 1972. The agreements were in the prescribed form, and the vehicles were shown as current assets, not as loans and advances.
2. The hire charges received by the assessee were not interest on loans and advances and, therefore, not chargeable to interest-tax under the Interest-tax Act, 1974.
3. The Tribunal relied on its previous decisions and the CBDT Circular No. 760, which clarified the distinction between hire purchase transactions and financing transactions.

Conclusion:
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, confirming that the hire charges received by the assessee were not liable to interest-tax under the Interest-tax Act, 1974, as they were payments under genuine hire purchase agreements. The Department's appeals were dismissed.