Bhagwandas Auto Finance Limited v. Commissioner Of Income Tax

Being aggrieved by the order of the Learned Tribunal for the assessment year 1996-97, the financier preferred this appeal which was admitted by the Hon'ble Division Bench on the following two grounds:

“(a) Whether on a true and proper construction of the hire purchase agreements and the provisions of Section 2(7) of the Interest Act, 1974, the hire charges received by the appellant are interest on loans and advances chargeable to Interest Tax?

(b) Whether the purported findings of the Tribunal that the transactions were loan/financing transactions or that the appellant was not the owner of the vehicles and upholding the assessment of the hire charges as interest chargeable under the interest Tax Act, 1974 are based on any material and/or have been arrived at by ignoring the relevant materials and/or by taking into consideration irrelevant and/or extraneous materials and/or are otherwise arbitrary, unreasonable and perverse?”

The fact of this case is that the appellant had entered into a hire purchase agreement on or about 1st August, 1995 with one Indu Bhusan Ghosh Dastider under various terms and conditions which include payment of Rs. 20,000/- as initial payment by way of hire and then subsequent payment of 18 instalments @ Rs. 2060/- per month excluding the first instalment of Rs. 2180/-. It is thus clear that payment of the instalments would have to continue till 18 months commencing from 6th September, 1995. The Assessing Officer on the strength of the definition of Section 2(7) of the Interest Tax Act, 1974 (hereinafter referred to as “Act of 1974” has held that it is a financial transaction and in the grab of hire purchase agreement the loan was advanced. So, the Act of 1974 is attracted in this case. The Tribunal has upheld this finding.

We feel the first question on which this appeal was admitted needs to be addressed first and thereafter we shall look into the second question.

While assailing the judgment of the Learned Tribunal Mr. J.P Khaitan, learned Senior Advocate appearing for the appellant, submits that the pre-condition of applicability of the Interest Tax Act, 1974 is that there must be a clear proof of advancing loan which would fetch interest either in a direct or indirect way, otherwise the Act of 1974 has no application. He submits that hire purchase agreement is a different transaction in its character and it is wrong to assume that this is a financing agreement with the hirer. It depends upon the nature of the agreement and terms contained therein settled between the parties. He submits that in this connection a judgment of the Supreme Count in the case of Sundaram Finance Ltd. v. The State of Kerala reported in 17 STC 489 is of great assistance to understand the true scope and purport of hire purchase agreement. He also submits that the Learned Tribunal is not the assessing authority to examine the true scope and purport of the hire purchase agreement and without arriving at a conclusion on the strength of departmental circular it held that this hire purchase agreement is a loan transaction and attracts the aforesaid Act.

Mr. Siddharta Chatterjee, learned Advocate appearing for the Revenue, submits that hire purchase agreement is in disguise of loan transaction as the payment made by the financier to the hirer enables him to buy or own a vehicle and such fund is supplied by the financier and obviously the difference of the cost price in the market and the price paid either by way of instalment or instalments by the hirer is quite substantial and such difference can only be termed to be an interest paid by the hirer to the financier. According to him, all the attributes of definition of interest in Section 2 Clause 7 of the Act of 1974 can be discerned.

In this context we have considered the contentions of the learned Advocates and we have gone through the impugned judgment of the learned Tribunal. We think that before we dilate the rival contentions, we set out the charging sections of the Interest Tax Act, 1974.

“4. [(1)] Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the 1st day of April, 1975, a tax in this Act referred to as interest-tax in respect of its chargeable interest of the previous year at the rate of seven per cent of such chargeable interest:

[Provided that the rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1983 shall be three and a half per cent of such chargeable interest.]

[(2) Notwithstanding anything contained in sub-section (1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the 1st day of April, 1992, interest-tax in respect of its chargeable interest of the previous year at the rate of three per cent of such chargeable interest.]

5. Subject to the provisions of this Act, 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:

Provided that any interest in relation to categories of bad or doubtful debts referred to in section 43D of the Income-tax Act shall be deemed to accrue or arise to the credit institution in the previous year in which it is credited by the credit institution to its profit and loss account for that year or, as the case be, in which it is actually received by the credit institution, whichever is earlier.”

It appears from Sub-section (2) of Section 4 that the aforesaid Act is applicable in case of a credit institution which includes the institution or persons carrying business of financing. Interest is defined in Section 2, Clause (7) of the Act of 1974 which reads as follows:

“interest” 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 _ _ _ _ _”

Thus, it is clear that there must be an element of loan and advance in order to attract the definition in this case for Clauses (a) & (b) thereunder do not apply, though the definition is inclusive. Therefore, if any excess amount is paid to that of legitimately payable can be termed to be an interest as well.

We find that the learned Tribunal and the Assessing Officer blindly held that each and every hire purchase agreement is treated to be a loan transaction and, therefore, there is an universal application of Act of 1974. We are of the view on considering the decision cited that all the hire purchase agreements cannot be termed to be an agreement for advancing loan in order to attract the said Act. It depends upon each and every individual nature of the documents and what is intended to be done realistically by and between the parties is of utmost importance. We find the agreement shows that the hire of vehicle on payment of certain amount of money at the initial stage from owner namely, financier being the assessee in order to acquire a motor vehicle from the financier and the price of the vehicle may be higher than that of the market price, which was to be paid by monthly instalments as mentioned in the hire purchase agreement. The terms of agreement mentioned therein provide that the ownership of the vehicle will always remain with the owner and it will remain until and unless the hirer pays off the entire instalments within the time stipulated and thereafter exercises option to acquire ownership and not otherwise. If this event does not occur, then the ownership remains with the financier and the entire amount so paid is treated to be hire charges and/or rather consideration for using the vehicle. According to us, the financing is made and money is lent for acquisition of the ownership of any property, article or chattels and the title to the goods instantly passed on to the loanee. In the hire purchase agreement terms do not suggest so. But unfortunately this aspect of the matter has not been gone into either by the learned Tribunal or by the Assessing Officer. We see considerable force in the submission of Mr. Khaitan that in the judgment of the Tribunal there has been casual reference and mention of the hire purchase agreement, not true purport of the hire purchase agreement and quotation of departmental circular to attract the aforesaid provision of the Act. We think that the Tribunal has not applied its mind in a proper perspective. In such circumstances, we cannot uphold both the orders. Accordingly, we set aside the orders and send this matter back to the Tribunal to come to correct decision based on the aforesaid observation made by us which should be as an illustrative one and not as a binding precedent and a fresh decision shall be taken within three months from the date of communication of this order.

I.T.A No. 278 of 2002 is, thus, disposed of.

All parties are to act on a xerox signed copy of this order on the usual undertakings.