Supreme Court: In appeals against the judgment of the Kerala High Court, wherein the Court has set aside and reversed the finding of the Income Tax Appellate Tribunal (‘ITAT') observing that the hire purchase instalment includes “finance charges”, which is nothing but interest, and therefore, interest tax is leviable on the interest component, the Division Bench of Sanjiv Khanna* and M.M.Sundresh,JJ. said that it is not appropriate to pass an order of remand at this distinct point of time. Thus, it set aside the impugned judgments and the additions made by the assessing officer and upheld the orders passed by ITAT.
The issue in this case was, whether the appellants /assessees are liable to pay tax under the Interest-Tax Act, 1974(‘the Act') on the interest component included in the hire-purchase instalments paid under the hire purchase agreement.
The appellants contended 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. The ITAT has accepted the plea of the appellants that they are not liable to pay interest tax on the interest component imbedded in the hire-purchase installment and held that hire-purchase agreements are distinguishable from loans and advances.
The Court said that that the ITAT had relied on the provisions of the Hire-Purchase Act, 1972, which is palpably wrong, as the said enactment was never enforced and was subsequently repealed vide the Hire-Purchase (Repeal) Act, 2005.
The Court took note of CIT v. Sahara India Savings & Investment Corpn. Ltd., (2009) 17 SCC 43 and said that in Sahara India Savings(supra) prior to 01-10-1991, the word “interest” in Section 2(7) was defined to include any amount chargeable to income tax under the head “Interest on Securities”. Post the amendment, the words “amount chargeable to income tax … under the head ‘Interest on Securities'” stood deleted. The Act was enacted with twofold purposes, namely, as an anti-inflationary measure and for revenue collection. Thus, it was held that Section 2(7) of the Act to hold that the expression “interest” must be given a restrictive meaning as interest on “loans and advances, including commitment charges, discount on promissory notes and bills of exchange, but not to include interest referred to in Section 42(1-B) of the Reserve Bank of India Act, 1934 as well as discount on treasury bills”.
Further, the Court referred to State Bank of Patiala v. CIT, (2015) 15 SCC 483, wherein the Court said that the definition of ‘interest' in the Act is a narrow one and is exhaustive, as it is a “means and includes” definition.
The Court said that a hire-purchase agreement has two elements — an element of bailment and an element of sale. The element of sale fructifies when the option to purchase is exercised by the intending purchaser after fulfilling the terms of the agreement. Till then, the goods are given on hire. One can argue that in a hire-purchase, an element of interest is inbuilt, but what is payable is the hire amount and not interest per se. The hirer has an option to return the vehicle, or the goods taken on hire. It is not a simple transaction of giving a loan or advance on which interest is payable.
Further, it said that the transactions in the commercial and legal sense are far more complex with corresponding rights of the parties. Even if the hirer is recorded as the owner of the vehicle under Section 51 of the Motor Vehicle Act, 1988 the name of the appellant/assessee is also recorded in the registration book, which is in recognition of the hire-purchase agreement. Thus, any transfer or sale made by the hirer, or any violation of the hire-purchase agreement can lead to civil as well as criminal consequences. Thus, the Court held that the ratio in Sahara India Savings (supra) and State Bank of Patiala (supra), Commissioner of Income Tax, New Delhi v. M/s G.E. Capital Services India, ITA 1275 of 2006 and Commissioner of Interest Tax v. M/S G.E. Capital Transportation , ITA 1280 of 2006, is correct and the view taken by the Kerala High court in the impugned judgment is not in consonance with the above decisions of this court.
The Court while referring to Sundaram Finance Ltd. v. State of Kerala, (1966) 2 SCR 828 , said that to determine the distinction between the two transactions, the assessing officers were required to consider the issue on merits taking, inter alia, into account —
(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; and
(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.
However, when the hire-purchase company pays the price or a substantial part thereof on behalf of such hirer who is the real purchaser, but does not pay the full price, then such an agreement is in the nature of a security for re-payment of the loan and is essentially a loan transaction.
The Court said that one should be careful and cautious when applying the ratio of judgments relating to one tax enactment as a precedent in a case relating to another tax enactment. This rule of caution is important and should not be overlooked, more so when the language of the enactment and the object and purpose of the enactment are different.
The Court said that findings of fact generally recorded by the ITAT are treated as conclusive, and the High Court can interfere with the findings of fact while deciding a substantial question of law. 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.
[Muthoot Leasing & Finance Ltd. v. CIT, 2023 SCC OnLine SC 4, decided on 03-01-2023]
*Judgment by: Justice Sanjiv Khanna
*Apoorva Goel, Editorial Assistant has reported this brief.
