Posted On | 5 Jan 2023 10:23 AM
The Supreme Court has held that non-banking finance and leasing companies are not liable to pay tax on the interest component included in the hire-purchase instalment paid under the hire purchase agreement.
Issue for Consideration in the Civil Appeal
A bench of Justices Sanjiv Khanna and M M Sundresh were considering the issue as to 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?
Brief Background of the Civil Appeal
Appellants – assessees in the civil appeal were non-banking finance and leasing companies registered with the Reserve Bank of India. Some of the appellants – assessees have been reclassified as hire-purchase finance companies. They are also credit institutions within the meaning of Section 2(5-A) of the Interest-Tax Act, 1974.
Contention of the Appellants – Assessees
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 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. Therefore, for this reason, they are not liable to pay any interest tax.
Judicial History
The ITAT accepted the plea of the appellants – assessees that they are not liable to pay interest tax on the interest component embedded in the hire-purchase instalment. The ITAT also observed that the hire-purchase agreement is a composite transaction, and has elements of bailment and sale. Relying on the terms and conditions of the hire purchase agreement, the ITAT held that hire-purchase agreements are distinguishable from loans and advances.
The High Court of Kerala in the case of The Commissioner of Income Tax, Cochin v. M/s. Muthoot Leasing & Finance Limited by the impugned judgment dated 10th March 2008 set aside and reversed the finding of the 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 transaction, though styled as a hire-purchase agreement, the High Court held, is in fact a finance agreement for purchase of a vehicle.
The High Court of Delhi in Commissioner of Interest Tax v. M/s G.E. Capital Transportation , took a different view, and observed that the assessees therein having not earned any interest on loan or advance, no component of the hire-purchase instalment paid by the customer/hirer towards the hire is chargeable to interest tax under the Act.
Legal Provision involved
Section 2(7) of the Act, post amendment with effect from 1st October 1991, which defines the term ‘interest’, 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;”
Discussion by the Bench
1. Nature of a Hire-Purchase Agreement
The judgment states that a hire-purchase agreement usually has two important elements – an element of bailment and an element of sale wherein 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. It further states, “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.
2. The Nature of the Transaction
While discussing the nature of the transaction involved in hire-purchase agreements, the judgment specifically states that these are not simple transactions of giving a loan or advance on which interest is payable. It has held, “The transactions in 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 MV Act, the name of the appellant – assessee is also recorded in the registration book, which is in recognition of the hire-purchase agreement. The registered owner under the MV Act may be liable in case of accidents/traffic challans, etc. But this, in no way, dilutes the right of the appellants – assessees in respect of the title of the property, that is, the vehicle. 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.”
3. Meaning and Interpretation of Section 2(7) of the Interest Tax Act, 1974.
The court further discussed the meaning of Section 2(7) which has been interpreted in two decisions of the Supreme Court, that is, in the case of Commissioner of Income Tax, Kanpur vs. Sahara India Savings and Investment Corporation Limited (2009) 17 SCC 43 and State Bank of Patiala Through General Manager vs. Commissioner of Income Tax, Patiala (2015) 15 SCC 483. Both the judgments have given a very limited and restricted meaning to Section 2(7) of the Act as interest directly arising “on” loans and advances, and not any other interest, be it interest earned on investment or interest payable on delayed payment of the discounted bill of exchange.
4. High Court not to interfere with findings of facts arrived at by the ITAT
While noting that the ITAT had recorded findings of facts and the High Court shouldn’t have interfered with those findings, the court has held 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, 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.”
Judgment
Finally, based on the above discussion, the court held that, “Given the dictum and ratio in Sahara India Savings and Investment Corporation Limited and State Bank of Patiala Through General Manager, the view taken by the High court of Kerala in the impugned judgment is not in consonance with the above decisions of this court.”
Case Title: M/S. MUTHOOT LEASING AND FINANCE LIMITED AND ANOTHER vs. COMMISSIONER OF INCOME TAX CIVIL APPEAL NOS. 10201-10202 OF 2010
Citation : 2023 LiveLaw (SC) 7
Interest Tax Act, 1974 – non-banking finance and leasing companies are not liable to pay tax on the interest component included in the hire-purchase instalment paid under the hire purchase agreement.
