REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS.
Also Read: https://newslaw.in/case-type/civil/inherent-jurisdiction-and-invalid-decree-a-case-summary/
4441 OF 2011)
Leave granted in Special Leave Petition (Civil)
No 4441 of 2011.
The common question which arises for consideration in this batch of Civil Appeals is: whether the appellants – assessees are liable to pay tax under the Interest-Tax Act, 1974 on the interest component included in the hire-purchase instalments paid under the hire- purchase agreement? It is not disputed that the appellants – assessees are credit institutions within the meaning of Section 2(5-A) of the Act, which reads as follows: “ (5- A) “credit institution” means,— (i) a banking company 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); (ii) a public financial institution as defined in Section 4- A of the Companies Act, 1956 (1 of 1956); (iii) a State financial corporation established under Section 3 or Section 3-A or an institution notified under Section 46 of the State Financial Corporations Act, 1951 (63 of 1951), and (iv) any other financial company; ” It is also imperative to mention Section 2(5-B) of the Act, which defines a “financial company” and includes with in its ambit hire-purchase finance companies: “(5 – B) “financial company” means a company, other than a company referred to in sub-clause (i), (ii) or (iii) of clause (5-A), being — (i) a hire-purchase finance company, that is to say, a company which carries on, as As per the hire-purchase agreements, the hirer must pay rent to the owner during the hiring as per the sums mentioned in the agreement on the dates mentioned therein. The owners, if agreeable, may permit the hirer to have the registration of the vehicle in his own name, provided that the hirer shall transfer the registration in the name of the owner whenever required to do so by the owner, especially when the hirer commits breach of any of the conditions of the agreement, due to which the owners are obliged to seize the vehicle.
Relying on the terms and conditions of the hire- purchase agreement noted above, the ITAT held that hire-purchase agreements are distinguishable from loans and advances. The transaction, though styled as a hire-purchase agreement, the High Court held, is in fact a finance agreement for purchase of a vehicle. At this stage, it may be relevant to state that the special leave petition preferred by the Commissioner of Income Tax, New Delhi against the decision of the Delhi High Court in a connected matter, in the case of Commissioner of income Tax, New Delhi v.
Section 2(7) of the Act, post amendment with effect from 1 October 1991, reads as under: “(7) “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, but does not include — (i) interest referred to in sub-section (1-B) of Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills;” 10.
With this objective in mind, the court proceeded to examine and interpret 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 ”.
It was held that interest on these bonds and debentures bought by the respondent – assessee therein, as and by way of “ investment ”, is not taxable as interest under Section 2(7) of the Act as they do not qualify and could not be treated as “ interest on loans and advances ”. Commissioner of I.T., Karnataka-I, Bangalore that discounting of a bill is a form of advance or loan and hence, compensation paid on delayed payment of money due thereon is interest on loans and advances, was overruled as overlooking the limited coverage in Section 2(7) of the Act. The decision in State Bank of Patiala Through General Manager (supra) also draws distinction between the broad definition of the expression “interest” in the Income Tax Act, 1961 vide Section 2(28-A), to observe that the expression used under the Act, that is the Interest-Tax Act, 1974, is much narrower and restricted. 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. Capital Transportation, is correct and the view taken by the High court of Kerala in the impugned judgment is not in consonance with the above decisions of this court. However, the learned counsel for the Revenue has relied on Sundaram Finance Limited (supra), which decision had also been relied upon by the High Court of Kerala in the impugned judgment.
(supra) dealt with the agreements where the financier has paid the balance amount to the erstwhile owner of the goods and thereupon obtained the hire-purchase agreement from the customer, under which the customer becomes the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price.
Also Read: https://newslaw.in/case-type/criminal/conviction-upheld-for-murder-and-concealment-of-body/
In another form of hire-purchase transactions, goods are purchased by the customer who, in consideration of executing a hire-purchase agreement and allied documents, remains in possession of the goods, subject to the liability to pay the amount paid by the financier on behalf of the customer to the owner or the dealer. The sale letter was a formal document which was not made effective by registering the vehicle in the name of the assessee and even the insurance of the motor vehicle had to be effected as if the customer was the owner.
However, in the subsequent Circular No 760 dated 13 January 1998, the CBDT observed that they considered the issue and were advised that in 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. As noticed above, this judgment in Sundaram Finance Limited (supra) relates to the true nature of hire in hire-purchase agreements as in the context of the sales tax enactment. In the context of the said enactment, this Court deemed it appropriate to distinguish between financial lease and operating lease and held that the services rendered in the former case would be taxable, whereas the latter would fall out of the tax net.
Case Title: M/S.MUTHOOT LEASING AND FINANCE LTD. REP. BY ITS MANAGING DIRECTOR Vs. THE COMMISSIONER OF INCOME TAX (2023 INSC 5)
Case Number: C.A. No.-010201-010202 / 2010
