2015 (8) TMI 849 - HC - Income Tax

Levy of interest tax - Finance charges received on purchase and hire back transactions - whether is in the nature of loan and hence chargeable to interest tax as held by ITAT - whether the real intention of parties in all cases of purchase and hire back transactions is only to obtain finance and not to hire the asset? - Held that - We are unable to accept the contention of assessee that if the sale precedes the Hire Purchase Agreement, it would still fall within the definition of Sale and Hire Back Transaction. It is clear that transactions can be treated as hire purchase transactions only if there is bonafide and complete sale of goods, as evidenced by documents. But no agreements or documents have been produced before us for such verifications The later part of paragraph 4 of the circular No. 760 issued by the CBDT, which we extracted above would be applicable to the facts of the present case as we find that all the authorities have consistently held that there is no proof of actual sale though it is claimed as Sale and Hire Back transaction. As all these are findings of fact, we have no other option but to accept the department s plea and reject the assessee s contention. - Decided against assessee.

Summary

Issues:
1. Interpretation of finance charges received on purchase and hire back transactions under the Interest Tax Act.
2. Determination of whether purchase and hire back transactions are akin to loan transactions or hire purchase transactions.

Issue 1:
The appellant contended that finance charges from sale on Hire Back transactions should not be taxable under the Interest Tax Act as they are similar to regular Hire Purchase transactions. However, the assessing officer and Commissioner (Appeals) disagreed. The Commissioner found that in cases where the asset is pre-existing with the client, the hire purchase contract essentially functions as a loan transaction secured against the asset. Thus, finance charges from purchase and hire back transactions involving second-hand assets were deemed as falling under the definition of 'interest' as per Sec. 2(7) of the Interest Tax Act.

Issue 2:
The Commissioner (Appeals) consistently upheld the orders treating purchase and hire back transactions as finance transactions, with Tribunals following suit. The Tribunals, guided by CBDT Circular No. 760, concluded that without evidence of a sale-cum-hire back transaction, the finance charges on old assets should be considered as financial transactions, subject to interest tax. The Tribunal emphasized examining each transaction individually to determine if it qualifies as a hire purchase transaction under the Interest Tax Act.

Judgment:
The High Court concurred with the Tribunal's reasoning, citing the CBDT Circular and the Supreme Court's decision in Sundaram Finance v. State of Kerala. The Court noted that without documented evidence of a genuine sale preceding the hire purchase agreement, transactions involving old assets should be treated as finance transactions. The Court rejected the appellant's argument that sale preceding the Hire Purchase Agreement qualifies as a Sale and Hire Back Transaction, as no concrete proof of actual sale was presented. Consequently, the first question of law was decided in favor of the revenue, rendering the second question moot. All tax case appeals were disposed of without costs.