Non-Banking Finance & Leasing Companies Not Liable To Pay Interest Tax On Instalments Paid Under Hire Purchase Agreement : Supreme Court

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 AppealA 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 - AssesseesThe 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 HistoryThe 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 involvedSection 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 Bench1. Nature of a Hire-Purchase AgreementThe 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 TransactionWhile 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...

Non-Banking Finance & Leasing Companies Not Liable To Pay Interest Tax On Instalments Paid Under Hire Purchase Agreement : Supreme Court

Anurag Tiwary

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