APPENDIX - CLARIFICATION ON APPLICABILITY OF INTEREST-TAX - Interest-tax Act, 1974

APPENDIX TEXT OF RELEVANT CIRCULARS/NOTIFICATIONS CLARIFICATION ON APPLICABILITY OF INTEREST-TAX ACT TO HIRE PURCHASE TRANSACTIONS 1. The Board have received representations seeking clarification about chargeability of interest-tax on finance charges accruing or arising to hire purchase finance companies. 2. The matter has been examined in consultation with the Ministry of Law. The Finance (No. 2) Act, 1991, extended the scope of interest-tax so as to cover "credit institutions" which include financial companies and in particular hire purchase finance companies carrying on their principal business as hire purchase transactions or the financing of such transactions. 3. Hire purchase transactions are generally in the nature of finance transactions entered into by the companies engaged in the business of financing. 4. The Board are of the view that the finance charges accruing or arising to hire purchase finance companies are in the nature of interest as defined in section 2(7) of Interest-tax Act and, therefore, chargeable to interest-tax. 5. The above clarification may be brought to the notice of all the officers concerned. Circular No. 738, dated 25-3-1996. CLARIFICATION I In Board's Circular No. 738, dated 25-3-1996 it was stated that hire-purchase transactions entered into by the hire-purchase companies and other credit institution are generally in the nature of financing transactions and hence the hire charges earned in the transactions would be in the nature of interest chargeable to tax under the Interest-tax Act, 1974. Acting under these instructions, the Assessing Officers have been treating all the hire-purchase transactions as mere financing transaction without distinguishing between a true hire-purchase transaction and a financing transaction in the form of a hire-purchase transaction. 2. The Board have since considered the issue and are advised that in the case of transactions which are, in substance, in the nature of hire-purchase, the receipts of hire charges would not be in the nature of interest. On the other hand, if the transactions are in substance in the nature of financing transactions, the hire charges should be treated as interest subject to interest-tax. 3. As to what constitutes a transaction in the nature of hire-purchase, the Assessing Officer should consider the issue of merits taking into account inter alia the following facts and circumstances : (i) The terms of the agreement. (ii) The nature of the arrangement between the supplier of the asset, the hire-purchase company and the end-user of the asset. (iii) The intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of hire-purchase price, etc. When a hirer is the real purchaser of the asset but does not pay the full purchase price and the hire-purchase company pays the price or a substantial part thereof on behalf of such hirer, and a hire-purchase agreement is entered into merely as an arrangement, then such agreement is a security for repayment of the loan and is essentially a loan transaction. 4. In this connection, the Assessing Officer should keep in mind the tests laid down by the Supreme Court in the case of Sundaram Finance v. State of Kerala AIR 1996 SC 1178 wherein it has been held as under— "If there is a bona fide and completed sale of goods evidenced by documents, anterior to and independent of subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction even though the reason for which it was entered into was to raise money. . . . . . . the intention of the appellant in obtaining the hire-purchase and the allied agreements was to secure the return of loan 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. . . ." 5. Accordingly, instead of routinely treating all hire-purchase transaction as mere financing transactions, the Assessing Officers may be advised to examine each transaction in the above light and charge interest-tax in such of those transactions which are not in the nature of hire-purchase. Circular No. 760, dated 13-1-1998. TEXT OF NOTIFICATIONS ISSUED UNDER SECTION 28 OF THE INTEREST-TAX ACT I In exercise of the powers conferred by section 28 of the Interest-tax Act, 1974 (45 of 1974), the Central Government, on the recommendation of the Reserve Bank of India, being of the opinion that it is necessary and expedient so to do in the public interest, hereby exempts North-Eastern Development Finance Corporation Ltd., Guwahati from levy of interest-tax for a period of ten assessment years commencing from the assessment year 1996-97. Notification No. SO 365(E), dated 2-5-1997. II In exercise of the powers conferred by section 28 of the Interest-tax Act, 1974 (45 of 1974), the Central Government, on the recommendation of the Reserve Bank of India, being of opinion that it is necessary and expedient so to do having regard to the peculiar circumstances of the case and in public interest, hereby exempts the banking companies to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act) from the levy of interest-tax in respect of their income from interest on securities with effect from the financial year 1995-96. Notification No. 9858 [F. No. 160/2/94-IT(A)], dated 11-9-1995. III In exercise of the powers conferred by section 28 of the Interest-tax Act, 1974 (45 of 1974), the Central Government, on the recommendation of the Reserve Bank of India, being of the opinion that it is necessary and expedient so to do in the public interest, hereby exempts interest, accruing or arising on or after the 1st day of April, 1993, to any banking company referred to in sub-clause (i) of clause (5A) of section 2 of the said Act on loan and advances made by it, having regard to the guidelines issued by the Reserve Bank of India, to any exporter as export credit, from levy of interest-tax. SO 161(E), dated 10-3-1993. IV In exercise of the powers conferred by section 28 of the Interest-tax Act, 1974 (45 of 1974), the Central Government, on the recommendation of the Reserve Bank of India, being of the opinion that it is necessary and expedient so to do in the public interest, hereby exempts the interest on foreign currency loans by foreign lenders granted to, and received by, Indian parties outside India from the levy of interest-tax. SO 1775, dated 7-6-1993. V In exercise of the powers conferred by section 28 of the Interest-tax Act, 1974 (45 of 1974), the Central Government, on the recommendation of the Reserve Bank of India, being of the opinion that it is necessary and expedient so to do in the public interest, hereby exempts the National Co-operative Development Corporation, New Delhi from the levy of interest-tax in respect of the loans and advances made either directly or through State Governments to non-banking co-operative societies. Notification No. 9403 [F. No. 160/2/93-IT(A-I)], dated 9-11-1993. VI In exercise of the powers conferred by section 28 of the Interest-tax Act, 1974 (45 of 1974), the Central Government, on the recommendation of the Reserve Bank of India, being of the opinion that it is necessary or expedient so to do having regard to the peculiar circumstances of the case, hereby exempts State co-operative banks included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), from the levy of interest-tax in respect of their income from interest on the borrowings of the Central Co-operative Banks which qualify for rebate under the scheme for the financial year 1974-75 and for the period beginning on the 1st day of April, 1975, and ending with the 30th day of June, 1975. Explanation.— In this notification, the expressions "Central co-operative bank" and "State co-operative bank" shall have the same meaning assigned to them in the Reserve Bank of India Act, 1934 (2 of 1934). Notification No. SO 2214, dated 15-5-1976.