2015 (7) TMI 56 - HC - Income Tax

Transaction in the nature of hire-purchase - whether hire charges received under a hire purchase agreement amounts to interest liable to tax under the provisions of the Interest Tax Act? - Held that - In the case before us there is nothing to show that assessee lent money to the hirer for purchasing the vehicle. Nor is there anything to show that the vehicle originally belonged to the assessee and the assessee in consideration of the hirer promising to pay the price in installments delivered possession thereof to the hirer. In a hire purchase agreement the hirer is under no obligation to buy the vehicle. He has an option either to buy the vehicle or to return the same. The transaction entered into by the assessee does not also disclose that the hirer was the owner of the vehicle and he entered into the hire purchase agreement only for the purpose of raising a loan. The hirer is a bailee as already indicated. In a bailment the bailor does not divest himself of ownership. He merely curtails his right of enjoyment of the thing bailed in favour of the bailee. Further, the rights which the bailee being a hirer acquires may be enjoyed by him in terms of the hire purchase agreement and not otherwise.The nomenclature given by the assessee is not decisive. It is the substance of the matter which has to be looked into. Mere fact that the assessee has treated the vehicle for the purpose of accounting as its current assets does not derogate from the concept of hire purchase. If the object of the Interest Tax Act is kept at the back of the mind, it would be clear that unlike loans and advances the hire purchase transactions resulting in sale of various household goods including cars and automobiles was not intended to be curbed by the Interest Tax Act. As a matter of fact, the sale of household goods including cars and automobiles through the hire purchase transactions provides a boost to the industry and is, therefore, to be encouraged rather than discouraged. We may reiterate that it is not possible to presume that the legislature was not aware of the distinction between hire purchase transaction and transaction in the nature of loans and advances. Therefore, if the legislature wanted to apply the provisions of the Interest Tax Act to the hire purchase transaction, a specific reference to that effect would have been made. We reiterate our view taken in the case of Pilani Investment & Industries 2015 (7) TMI 53 - CALCUTTA HIGH COURT that in pith and substance, a completed hire purchase transaction may have some similarity with a purchase effected by obtaining a loan, but that similarity cannot obliterate the identity of a real hire purchase transaction which is a more complex transaction in contradistinction of a loan simplicitor as discussed in the case of Sundaram Finance (1965 (11) TMI 123 - SUPREME COURT OF INDIA) wherein held that the intention of the appellants in obtaining the hire- purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions. - Decided in favour of the assessee.

Issues Involved:
1. Interpretation of the Hire Purchase Agreement.
2. Classification of hire charges as interest under the Interest Tax Act, 1974.
3. Applicability of various CBDT circulars.
4. Analysis of the nature of the transaction (hire purchase vs. financing).
5. Examination of relevant case law and statutory provisions.

Issue-wise Detailed Analysis:

1. Interpretation of the Hire Purchase Agreement:
The primary issue was whether the hire purchase agreement constituted a financing transaction, making the hire charges received interest liable to tax under the Interest Tax Act, 1974. The Court examined the terms of the agreement and the intention of the parties involved, distinguishing between a true hire purchase agreement and a mere financing arrangement.

2. Classification of Hire Charges as Interest:
The Court analyzed whether the hire charges received under the hire purchase agreement could be classified as interest. The CIT(A) had held that the finance charges received under the hire purchase transaction could not be treated as interest under section 2(7) of the Interest Tax Act. The Tribunal, however, had taken a contrary view, considering the hire charges as interest based on the accounting treatment and the non-claiming of depreciation by the assessee.

3. Applicability of Various CBDT Circulars:
The Court considered several CBDT circulars, including Circular No. 9 of 1943, Circular No. 1097 of 1977, Circular No. 1425 of 1981, and Circular No. 760 of 1998. These circulars provided guidance on the treatment of hire purchase transactions for tax purposes. The Court noted that the Tribunal had failed to consider these circulars adequately, particularly the guidance that hire charges in a genuine hire purchase agreement should not be treated as interest.

4. Analysis of the Nature of the Transaction:
The Court referred to the Supreme Court judgment in Sundaram Finance Ltd. v. State of Kerala, which distinguished between a loan transaction and a hire purchase agreement. The Court emphasized that in a true hire purchase agreement, the hirer is under no obligation to buy the goods; they have the option to return the goods or purchase them upon fulfilling the terms of the agreement. The Court found that the Tribunal had erroneously treated the transaction as a financing arrangement without sufficient basis.

5. Examination of Relevant Case Law and Statutory Provisions:
The Court examined relevant case law, including Sundaram Finance Ltd. v. State of Kerala and K. L. Johar v. Deputy Commercial Tax Officer, to delineate the characteristics of a hire purchase agreement. The Court also considered the provisions of the Motor Vehicles Act, 1988, particularly Section 51, which deals with the registration of vehicles under hire purchase agreements. The Court concluded that the hirer in a hire purchase agreement is a bailee, not the owner, until the option to purchase is exercised.

Conclusion:
The Court concluded that the hire purchase agreement in question was a genuine hire purchase transaction and not merely a financing arrangement. Therefore, the hire charges received under the agreement could not be classified as interest liable to tax under the Interest Tax Act, 1974. The appeal was allowed in favor of the assessee, and the Tribunal's judgment was set aside. The Court reiterated that the substance of the transaction must be examined, and mere accounting treatment or non-claiming of depreciation does not alter the nature of a hire purchase agreement.

← Previous Next →