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2023 (1) TMI 285 - SC - Income TaxLiability to pay tax under the Interest-Tax Act, 1974 - interest component included in the hire-purchase instalments paid under the hire-purchase agreement - Assessees are non-banking finance and leasing companies registered with the Reserve Bank of India -Some of the appellants assessees have been reclassified as hire-purchase finance companies. It is not disputed that the appellants assessees are credit institutions within the meaning of Section 2(5-A) of the Act - contention of the appellants assessees is that under a hire-purchase agreement, they hire out a vehicle to the customer and receive hire-purchase instalments, and not interest on loans and advances - distinguish between financial lease and operating lease - HELD THAT - We are dealing with and interpreting Section 2(7) of the Act, which has been interpreted in two decisions, that is, in the case of Sahara India Savings and Investment Corporation Limited 2009 (11) TMI 25 - SUPREME COURT and State Bank of Patiala Through General Manager 2015 (11) TMI 869 - SUPREME COURT which have given a very limited and restricted meaning to Section 2(7) of the Act as interest directly arising on loans and advances, and not any other interest, be it interest earned on investment or interest payable on delayed payment of the discounted bill of exchange. Findings of fact generally recorded by the ITAT are treated as conclusive. The High Court can interfere with the findings of fact while deciding a substantial question of law when the findings are not supported by the material on record, so as to be treated as perverse. See Karnataka Board of Wakf v. Anjuman-E-Ismail Madris-Un-Niswan, 1999 (8) TMI 1018 - SUPREME COURT and C. Doddanarayana Reddy (Dead) By Legal Representatives and Others v. C. Jayarama Reddy (Dead) By Legal Representatives and Others 2020 (2) TMI 1676 - SUPREME COURT For this, however, the High Court must frame a separate substantial question of law and only then interfere with the findings of fact by the ITAT, while applying the strict parameters. In the present case, the High Court did not frame a specific substantial question of law and thus, the interference with the findings of fact is unwarranted. This is not to say that the tax authorities are not entitled to examine the surrounding facts and circumstances to ascertain the true character and nature of the transaction, regardless of the nomenclature given by the parties. Given the aforesaid legal position, we may have even remanded the matter to the assessing officer for fresh adjudication and to re-examine all the transactions in light of the aforesaid ratio and reasoning, keeping in mind the dictum laid in Sahara India Savings and Investment Corporation Limited (supra) and State Bank of Patiala Through General Manager (supra) to rule out cases where camouflage or subterfuge has been adopted to avoid payment of interest tax. This would have entailed not only looking at the documents but also several other factors, which would have meant getting information and ascertainment of facts in detail from the assessee and the hirer. However, at this distinct point of time, we do not think that it would be appropriate to pass an order of remand. It is to be also noted that the Act has ceased to operate with effect from 31st March 2000. We allow the present appeals and set aside the impugned judgments. The additions made by the assessing officer are set aside and the orders passed by the ITAT deleting the additions in the case of the appellant M/s. Muthoot Leasing and Finance Limited and other cases are upheld.
Issues Involved:
1. Liability to pay tax under the Interest-Tax Act, 1974, on the interest component included in hire-purchase instalments. 2. Interpretation of "interest" under Section 2(7) of the Interest-Tax Act, 1974. 3. Nature of hire-purchase agreements and their classification for tax purposes. 4. Validity of the High Court's interference with ITAT's findings of fact. 5. Applicability of CBDT Circulars in determining the nature of hire-purchase transactions. Detailed Analysis: 1. Liability to Pay Tax under the Interest-Tax Act, 1974, on the Interest Component Included in Hire-Purchase Instalments: The core issue was whether the appellants (non-banking finance and leasing companies) are liable to pay tax on the interest component included in hire-purchase instalments under the Interest-Tax Act, 1974. The Supreme Court granted leave to consider this question and examined the nature of hire-purchase agreements, which involve both bailment and sale elements. The ITAT had previously ruled that hire-purchase agreements are distinguishable from loans and advances, and therefore, the interest component in hire-purchase instalments is not taxable under the Act. 2. Interpretation of "Interest" under Section 2(7) of the Interest-Tax Act, 1974: Section 2(7) defines "interest" as interest on loans and advances made in India, including commitment charges and discount on promissory notes and bills of exchange. The Supreme Court referred to its previous decisions in Sahara India Savings and Investment Corporation Limited and State Bank of Patiala, which interpreted "interest" narrowly, confining it to interest directly arising from loans and advances. The Court held that hire-purchase instalments, though they may include an interest component, are not interest on loans or advances. 3. Nature of Hire-Purchase Agreements and Their Classification for Tax Purposes: The Supreme Court examined the dual nature of hire-purchase agreements, which involve an element of hire and an option to purchase. The Court distinguished these agreements from simple loan transactions, noting that hire-purchase agreements are more complex and involve corresponding rights and obligations of the parties. The Court emphasized that even if a hirer is registered as the owner of the vehicle under the Motor Vehicles Act, the hire-purchase company's rights remain intact, and the transaction cannot be equated with a loan or advance. 4. Validity of the High Court's Interference with ITAT's Findings of Fact: The High Court of Kerala had reversed the ITAT's decision, holding that the hire-purchase instalments include "finance charges" and are thus subject to interest tax. The Supreme Court criticized this interference, noting that findings of fact by the ITAT are generally conclusive unless they are perverse or unsupported by material on record. The High Court had not framed a specific substantial question of law, making its interference unwarranted. 5. Applicability of CBDT Circulars in Determining the Nature of Hire-Purchase Transactions: The Supreme Court referred to two CBDT Circulars: Circular No. 738 (1996) and Circular No. 760 (1998). The latter clarified that in cases where transactions are in substance hire-purchase, the receipts are not in the nature of interest. The Court emphasized that the nature of the transaction should be determined based on the terms of the agreement, the arrangement between parties, and the intention behind the transaction. The Court found that the hire-purchase agreements in question were not merely financing transactions but involved substantive hire-purchase elements. Conclusion: The Supreme Court allowed the appeals, setting aside the High Court's judgments and upholding the ITAT's decisions. The Court ruled that the interest component in hire-purchase instalments is not taxable under the Interest-Tax Act, 1974, as it does not constitute interest on loans or advances. The Court also highlighted the need for careful interpretation of tax statutes and the importance of distinguishing between different types of financial transactions.
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