1978 (3) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Ownership under a hire purchase agreement.
2. Rights of the financier versus the rights of the revenue (Income Tax Department).
3. Validity of seizure and retaking possession of the vehicle by the financier.
4. Issuance of tax clearance and registration certificates by the Regional Transport Officer.

Issue-wise Detailed Analysis:

1. Ownership under a hire purchase agreement:
The third respondent obtained possession of a stage carriage vehicle under a hire purchase agreement (Ext. P-2) with the petitioner, a financier. The agreement stipulated that the hirer (third respondent) would pay rent and maintain custody of the vehicle, but could not sell or otherwise part with it without the petitioner's consent. If the hirer defaulted on payments or attempted to alienate the vehicle, the petitioner's rights would be determined ipso facto, allowing them to seize the vehicle. The vehicle would only become the hirer's sole property upon full payment.

2. Rights of the financier versus the rights of the revenue (Income Tax Department):
The third respondent defaulted on payments, leading the petitioner to seize the vehicle. The petitioner's request for a tax clearance certificate and a new registration certificate was denied by the Regional Transport Officer (RTO) due to objections from the Tax Recovery Officer (TRO), citing the third respondent's unpaid income tax arrears. The TRO argued that under the hire purchase agreement, the third respondent was the vehicle's owner, and the transaction was essentially a loan secured by the vehicle.

3. Validity of seizure and retaking possession of the vehicle by the financier:
The Supreme Court's decision in K. L. Johar & Co. v. Dy. CTO [1965] 16 STC 213 was cited by the petitioner's counsel, asserting that the financier is the real owner under a hire purchase agreement. The clauses in the agreement, allowing the financier to seize the vehicle upon default, indicated that the property did not pass to the hirer until all terms were met. The court noted that even if the third respondent was considered the owner, the petitioner's security interest in the vehicle would prevail over the revenue's claim, as the revenue's preferential right applies only when claims are equal in degree.

4. Issuance of tax clearance and registration certificates by the Regional Transport Officer:
The court held that the petitioner's secured interest in the vehicle took precedence over the revenue's claim. Under Section 222 of the Income Tax Act, 1961, and Schedule II, Rule 16, the revenue's recovery procedures did not override the petitioner's secured rights. The court quashed the RTO's denial (Ext. P-1) and directed the issuance of a tax clearance certificate and a new registration certificate in the petitioner's name.

Conclusion:
The court concluded that the petitioner's rights as a secured creditor under the hire purchase agreement prevailed over the revenue's claim for unpaid taxes by the third respondent. The original petition was allowed, directing the RTO to issue the necessary certificates to the petitioner. There was no order as to costs.