2017 (12) TMI 1422 - HC - Income Tax

Chargeability of Finance charges as, interest received from hire purchase transaction, and other interest to attract tax on interest under the Interest Tax Act, 1974 - Held that - Admittedly, the finance charges involved in the instant case are from hire purchase of vehicles. The position has now been settled by a precedent of this Court involving the same assessee, Commissioner of Income Tax v. K.S.F.E. Ltd. (2008 (3) TMI 676 - KERALA HIGH COURT) as held hire purchase companies are squarely covered by definition of credit institutions under the Act and are liable to pay tax on charge of interest on loans and advances. It is immaterial whether a loan or advance is called hire-purchase agreement or not. On the other hand, what is to be considered is whether the transaction involved is really a loan or advance and if the transaction is found so, then the interest earned on the same is taxable under the Interest-tax Act. - Decided against assessee.

Summary

Issues:
1. Appeal against the order of the Income Tax Appellate Tribunal by the Revenue.
2. Whether finance charges such as interest from hire purchase transactions are taxable under the Interest Tax Act.

Analysis:
1. The Revenue appealed against the Income Tax Appellate Tribunal's order regarding the assessment year 1997-98 of the assessee, a Kerala State Government Undertaking. The assessing officer made additions to the tune of &8377;18,43,38,284 on various interests, claiming the assessee as a "credit institution" under the Interest Tax Act, resulting in a demand of &8377;99,65,582. The Commissioner of Income Tax (Appeals) upheld the additions, considering the assessee as a financial company. The Tribunal partially allowed the appeal based on a previous order, leading to the Revenue challenging this decision.

2. The central legal issue was whether finance charges like interest from hire purchase transactions attract tax under the Interest Tax Act. The Revenue argued that such charges are akin to interest and are taxable, while the assessee contended that hire purchase transactions fall outside the scope of interest tax. The definition of 'interest' under Section 2(7) of the Interest Tax Act was crucial in determining the taxability of finance charges.

3. The Tribunal relied on a previous decision to conclude that finance charges may not be taxable. However, a precedent involving the same assessee clarified that hire purchase transactions, despite their form, could be considered as loans or advances attracting tax under the Interest Tax Act. The court emphasized that the nature of the transaction, not its label, determines tax liability. The Tribunal's decision was deemed erroneous for overlooking key facts and provisions, leading to the reversal of the appeal decision in favor of the Revenue.

In conclusion, the High Court upheld the Revenue's appeal, emphasizing that finance charges from hire purchase transactions can be taxable under the Interest Tax Act if they qualify as loans or advances. The decision highlighted the importance of substance over form in determining tax liability, aligning with established legal principles.