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TMI Blog2002 (2) TMI 315X X X X Extracts X X X X X X X X Extracts X X X X ..... eration. The assessee is aggrieved. 3. The effective grounds urged by the assessee in both the appeals are identical and directed against the orders of the learned CIT(A) in treating the finance charges received on hire put-chase transactions as interest chargeable under the Interest-tax Act. According to the assessee since the assessee has complied with the requirements enumerated in the CBDT Circular No. 760 dated 13-1-1998, the learned CIT(A) went wrong in confirming the orders of the Assessing Officer. 4. It was the case of the assessee before the Assessing Officer that finance and service charges on hire purchase transactions are not includible in chargeable interest since the provisions of Interest-tax Act are not applicable to the same. The Assessing Officer agreed with the assessee in respect of its claim of service charges. However, the Assessing Officer held that the assessee's claim that finance charges collected by it do not come within the purview of Interest-tax Act requires detailed examination. During the course of the assessment proceedings, the assessee submitted that its transactions are covered by Circular No. 760 dated 13-1-1998 issued by the CBDT and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of hire purchase price, etc. The Assessing Officer held that the above acts will show that the hire purchase transactions entered into by the assessee are in substance financial transactions only. The Assessing officer noticed that if a hirer seeks 90 per cent of the cost of the asset as hire purchase finance, the margin money will be 10 per cent. On the other hand, if the margin money is 25 per cent, the cost of hire purchase finance is 75 per cent which irresistibly leads to the conclusion that it is nothing, but advance of loan pure and simple, according to the needs of the applicant (hirer). The Assessing Officer further noticed that finance charges are fixed at a flat rate per annum on the net amount financed. The hire purchase price is also fixed by adding the finance charges to the next amount financed. Such amount fixed is payable in equal monthly instalments over a number of years as agreed upon mutually. On verification of the clauses of the hire purchase agreement, the Assessing Officer came to the conclusion that the main features of the hire purchase agreement are similar to those described in paragraphs 16 and 17 of the judgment of the Hon'ble Supreme Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their judgment in the case of Sundaram Finance Ltd., which reads as under-- "...If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a 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. If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostensibly passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer's title, and confer a licence to seize. When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of the goods. But a hire-purchase agreement is a more complex transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that of lender and borrower. The title to the goods was reserved with the hirer vendor till the hirer acquired the property in the goods under an option granted to him. Since the transaction being a transaction regarding bailment of goods could not be communicated unless goods were delivered. The assessee also relied on the Instruction No. 1425 in E. No. 275/90/80 IT(B) dated 18-11-1981 issued by the CBDT dealing with the provisions of section 194A. The above instruction says that section 194A were not applicable for payment of hire instalments since the financing charges paid were not in the nature of interest within the meaning of section 2(28A) of the Income-tax Act, 1961. The assessee further submitted that the Assessing Officer had failed to note that the method adopted by the assessee was only to quantify the hire amount and adoption of percentage did not make hire purchase transaction into finance transaction. The assessee further submitted that the hirer was under no obligation to buy the goods and he could become the owner by exercising the option. The assessee also relied on the Circular No. 760 dated 13-1-1998 and sections 2(c), 2(e), 2(f), 7(b) and 8 of the Hire Purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions/documents will show that the assessee was only protecting its interest in regard to the money advanced and the charges so received from the customers are nothing, but interest includible in the total income of the assessee. Coming to the provisions of section 2(c), 2(e), 2(f), 7(b) and 8 of the Hire Purchase Act, the learned first appellate authority held that- "It is clear from the facts stated above that although the appellant may be making a provision for the purchase of article on a nominal amount of Re. 1 in all the cases irrespective of the nature of assets, yet, the intention of the party's manifest in the documents is that the appellant is advancing money for the purchase of article and he is not the owner of the article as such and this conclusion is further corroborated by the provisions of clause 6 and 12 of the agreement." In the light of the above, the learned CIT(A) confirmed the order of the Assessing Officer. The assessee is aggrieved and is in second appeal before the Tribunal. 9. The learned representative of the assessee submitted that the assessee is doing four types of businesses, namely, (i) bills discounting, (ii) loans on hypothecation of vehicle/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 13-1-1998. The assessee's learned representative submitted that it is very clear that the service charges collected by a finance company from its customers under hire purchase agreement are not interest exigible to interest-tax. The assessee's learned representative submitted that looking from any angle it is only a hire purchase as defined in the Hire Purchase Act, 1972. Hire purchase is an agreement under which the goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement or to return it. This agreement does not constitute an agreement for the loan of money. The hirer simply pays for the use of the goods/vehicle with an option to purchase the goods/vehicle on completion of the payment. In fact, the relationship between the assessee and the applicant is that of bailor and bailee. Only the title to the goods is reserved with the hirer vendor till the hirer acquired the property in the goods by making payment in entirety under the option granted to him. This being a transaction of bailment of goods, it is not commenced until the goods are delivered. No instalments of hire accrue before the goods are delivered. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Sundaram Finance Ltd., is not at all applicable to the instant case of the assessee. In that case the intention of the parties was only a loan transaction and only because of that it was held that the transaction in question was not a hire purchase transaction. In the above case, the Hon'ble Supreme Court observed that there should be an anterior purchase of goods by the owner before entering into a transaction with the hirer to make the transaction a hire purchase transaction. Even if that yardstick is applied the assessee is the owner of the vehicle because the assessee has already paid advance to vehicle/property owner and the vehicle/property is allotted in the name of the assessee even before the application by the applicant, i.e., the hirer. The assessee's representative also relied on the following decisions in, support of his case, viz., (a) CIT v. Madras Autorickshaw Drivers Co-operative Society Ltd. [1983] 143 ITR 981 (Mad.); (b) CIT v. State Bank of Travancore [1997] 228 ITR 40 (Ker.); The assessee's learned representative also placed reliance on the decision of the ITAT, Hyderabad Bench 'A' in the case of N.K. Leasing Construction (P.) Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking) accruing or arising to the credit institution in that previous year," Financial company is defined in sub-section (5B) of section 2 of the Interest-tax Act, to mean a company, other than a company referred to in sub-clause (i), (ii) or (iii) of clause (5A), being......Interest is also defined in section 2(7) of the Act and it means interest on loans and advances made in India and includes- "(a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India, but does not include- (i) interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills." The above makes it clear that, first of all, only interest on loans and advances made in India is exigible to Interest tax. The section further goes to say that it also includes c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to such person on the payment of the last of such instalment, and (iii) such person has a right to terminate the agreement at any time before the property so passes. Section 2(d) of the Hire Purchase Act, 1972 goes to define as to what is "hire purchase price". The section says that "hire purchase price" means the total sum payable by the hirer under a hire purchase agreement in order to complete the purchase of, or the acquisition of property in, the goods to which the agreement relates; and includes any sum so payable by the hirer under the hirer-purchase agreement by way of a deposit or other initial payment, or credited or to be credited to him under such agreement on account of any such deposit or payment, whether that sum is to be or has been paid to the owner or to any other person or is to be or has been discharged by payment of money or by transfer or delivery of goods or by any other means; but does not include any sum payable as a penalty or as compensation or damage for a breach of the agreement." Section 2(e) defines who is a "hirer". "Hirer" means the person who obtains or has obtained possession of goods from an owner under a hire-purchase agreement, and includes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --Subject to the provisions of this Act, the property in the goods to which a hire-purchase agreement relates shall pass to the hirer only on the completion of the purchase in the manner provided in the agreement." The right of the hirer to terminate the agreement at any time before the completion of the agreement by making payment under the hire purchase agreement is given in section 10 of the Act. The rights and obligations of the owner of the property are explained in sections 18, 19, 20, 21, 22 and 23 of the Act. As per section 18 the owner has the right to terminate the hire purchase agreement if default is committed by the hirer in making the payment or any breach of condition committed. 14. The certificate issued by the Reserve Bank of India clearly shows that the assessee is a hire purchase finance company and the hire purchase assets form a major part of the assessee's assets, i.e., 76 per cent of the total assets and the income from hire purchase and leasing constitute almost the same percentage. The Revenue has placed reliance on the Board's Circular No. 738 dated 25-3-1996 to hold that the charges accruing or arising to the assessee, being a hire purchase finance co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the finance as he is in short of money. It is to be further noted that if it is money transaction that attracts the provisions of the Interest-tax Act, 1974 as mooted by the Revenue, nothing prevents the assessee to finance the hirer. The assessee is having money and the other party is also ready to receive money from the assessee. Instead the assessee approaches Maruti Udyog Ltd., or other dealers of vehicles and gets the vehicle released in the applicant's name and payment is made by the assessee. The dispute of the Revenue is that the so called service charges are not actually service charges, but only interest. The mere fact that the assessee has taken some post-dated cheques as guarantee/security for prompt payment by the hirer does not alter the nature of the transaction. The vehicle is delivered to the applicant and he is using the same. The assessee's ownership comes to an end as soon as the last instalment is paid by the applicant. 15. As we have noted above, the profit and loss account of the assessee-company that hire purchase charges constitute a dominant portion of the assessee's income, i.e. hire purchase business is the principal business carried on by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it appears that deposit money should vary according to the cost of the vehicle/asset and not according to the capacity of the applicant to make the initial advance/deposit. This logic does not appear to be correct. In hire purchase, the intention of the applicant is to purchase the vehicle/asset. Applicant is running short of money. He approaches a party (like the assessee) for having the vehicle/asset and as a result of the agreement entered into by him with the assessee the vehicle/asset is transferred in the name of the applicant on condition that he makes the payment towards the principal plus service charges. When the last instalment is paid, the ownership of the vehicle passes to the applicant. Though the vehicle is registered, as in the instant case, in the name of the other party, that is, the applicant, the owner is at liberty to seize the vehicle/asset as per the terms of the hire purchase agreement if the applicant commits default in making the payment or breach of any of the conditions. Even after the seizure of the vehicle/asset and appropriating the same towards recoupement of the investment which the owner has already made for acquiring the asset/vehicle in question, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to M/s. A.V.G. Motors Pvt. Ltd. Kottayam, in which the assessee states that the assessee is making payment vide DD drawn on the bank as per assessee's hire purchase scheme. It is the assessee who writes to the dealer and makes the payment. It is seen that the final invoice is drawn in the name of the assessee. The hire purchase agreement is at pages 6 to 8 of the assessee's paper book giving details of the scheduled payments. Clause IV of the hire purchase agreement states that the assessee shall remain the absolute owner of the property till the full payment is made by the hirer. The agreement lays down the conditions on page 2 of the agreement. It stipulates how the hirer should keep the vehicle i.e., in the control and custody of the hirer in good condition etc. Condition No. 8 provides opportunity to the hirer to terminate the hiring by returning the vehicle to the owner, i.e., the assessee in this case. Vide Condition No. 12, the owner agrees to permit the hirer to have the registration of the vehicle in the name of the hirer, subject to the further condition that the hirer shall transfer the registration in the name of the owner whenever required to do so by the owner especia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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