Applicability of Interest-Tax in hire-purchase agreements – Supreme Court gives relief

Applicability of interest tax on interest component in hire-purchase agreement. Supreme Court set asides the addition and upheld fact findings of ITAT

ABCAUS Case Law Citation
ABCAUS 3630 (2023) (01)

Important Case Laws relied upon:
The Commissioner of Income Tax v. M/s Muthoot Leasing & Finance Limited
Sundaram Finance Limited v. State of Kerala and Another
Commissioner of Interest Tax v. M/s G. E. Capital Transportation
Commissioner of Income Tax v. Sahara India Savings and Investment Corporation Limited
State Bank of Patiala v. Commissioner of Income Tax
K. L. Johar and Co. v. Deputy Commercial Tax Officer

The appellants assessees were non-banking finance and leasing companies registered with the Reserve Bank of India.

The contention of the appellants assessees was 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. As per the agreement, the appellants assessees remain the owners of the vehicle. 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. Further, the hirer has to take proper care of the vehicle and keep it in good condition. He has to also pay all rents, rates, taxes and outgoings payable. The owner or any person authorised by him

in writing is entitled to inspect the vehicle at all reasonable times during the period of hire. The owners, if agreeable, may permit the hirer to have the registration of the vehicle in his own name.

On the above counts, the ITAT had accepted the plea of the appellants assessees that they were not liable to pay interest tax on the interest component imbedded in the hire-purchase instalment.

The Hon’ble High Court observed that Hon’ble High Courts have taken conflicting views on the subject.

The Hon’ble Supreme Court noted the CBDT Circular No. 738 dated 25^th March 1996 and Circular No. 760 dated 13^th January 1998 which stated that in transactions which are, in substance, in the nature of financing transactions, the hire charges should be treated as interest, subject to interest tax. To determine the distinction between the two transactions, the assessing officers were required to consider the issue on merits.

The Hon’ble Supreme Court stated that taxation depends upon the language of the charging section and what is brought to tax within the four corners of the charging section. Therefore, 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 Hon’ble Supreme Court said that findings of fact generally recorded by the ITAT are treated as conclusive.  The High Court can interfere with the findings of fact while deciding a substantial question of law when the findings are not supported by the material on record, so as to be treated as perverse. 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.

The Hon’ble Supreme Court observed that 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 was unwarranted. However, the tax authorities are 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.

Since the Act has ceased to operate with effect from 31^st March 2000, the Hon’ble Supreme Court did not deemed fit to order remand of the case.

Accordingly, the Apex Court set aside the impugned   judgments of Hon’ble High Court and additions made by   the assessing officer were set aside and the orders passed by the ITAT deleting the additions were upheld.

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