Case Law Details
Muthoot Leasing And Finance Limited Vs CIT (Supreme Court of India)
Conclusion: The Hon’ble Supreme Court observed while allowing the appeal that as per Circular No. 760 dated 13th January 1998, the CBDT have stated 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 and hence assessee were liable to pay interest under Interest-Tax Act, 1974.
Facts: In present facts of the case, the common question which arises for consideration in this matter was 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? In the said case, the appellants are 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. It is not disputed that the appellants – assessees are credit institutions within the meaning of Section 2(5-A) of the Act.
The contention of the appellants assessees is 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 findings of fact recorded by the ITAT, the hirer has acknowledged that the appellants assessees are 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 hirer must keep the vehicle in his sole custody and possession at the address mentioned in the agreement, or such other place as the owner has previously consented to in writing. 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 hirer may, at any time, determine the hire-purchase agreement by delivering the vehicle at his own cost to the owners. If the hirer fails to pay the hire instalments within the stipulated time, becomes insolvent, pledges or sells, or attempts to pledge or sell or otherwise alienate or transfer the vehicle, or does or suffer any act or thing whereby, or in consequence of which, the vehicle may be distrained, seized or taken into execution under legal process, or breaks or fails to perform or observe any condition as mentioned in the hire-purchase agreement, the owner is entitled to forthwith determine the agreement and, thereupon, entitled to enter the place where the vehicle is kept and seize, remove and retake possession thereof. The owner is also entitled to sue for all the instalments due, damages for breach of the agreement, and the cost in retaking possession of the vehicle. 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.
On these facts, the ITAT accepted the plea of the appellants – assessees that they are not liable to pay interest tax on the interest component imbedded in the hire-purchase instalment. The ITAT referred to Circular No. 760 dated 13th January 1998 issued by the Central Board of Direct Taxes and 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 noted above, the ITAT held that hire-purchase agreements are distinguishable from loans and advances. The hire instalments are something different and more, and not the interest on loans and advances that is chargeable to interest tax.
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