Income Tax Appellate Tribunal - Cochin
Muthoot Leasing & Finance Ltd. vs Joint Commissioner Of Income Tax on 28 February, 2002
Equivalent citations: [2003]84ITD477(COCH), (2003)79TTJ(COCH)773
ORDER
K.P.T. Thangal, J.M.
1. These appeals are by the assessee and pertain to the asst. yrSection 1996-97 and 1997-98.
2. The facts in both the appeals are identical and are as follows: For the asst. yr. 1996-97, the assessee filed the return under the IT Act, 1974, declaring the chargeable interest at Rs. 59,72,414 and for the asst. yr. 1997-98 at Rs. 65,72,339. The assessments were completed on 26th March, 1999, and 15th March, 2000, including therein Rs. 2,04,83,189 and Rs. 3,95,21,019 being finance charges on hire-purchase transactions to the chargeable interest respectively for the asst. yrs, 1996-97 and 1997-98. Aggrieved by the orders of the AO, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) confirmed the action of the AO in treating finance charges as interest chargeable to interest-tax for the two years under consideration. The assessee is aggrieved.
3. The effective grounds urged by the assessee in both the appeals are identical and directed against the orders of the learned CIT(A) in treating the finance charges received on hire-purchase transactions as interest chargeable under the IT Act. According to the assessee since the assessee has complied with the requirements enumerated in the CBDT Circular No. 760, dt. 13th Jan., 1998, the learned CIT(A) went wrong in confirming the orders of the AO.
4. It was the case of the assessee before the AO that finance and service charges on hire-purchase transactions are not includible in chargeable interest since the provisions of IT Act are not applicable to the same. The AO agreed with the assessee in respect of its claim of service charges. However, the AO held that the assessee's claim that finance charges collected by it do not come within the purview of IT Act requires detailed examination. During the course of the assessment proceedings, the assessee submitted that its transactions are covered by Circular No. 760, dt. 13th Jan., 1998, issued by the CBDT and that the assesses also satisfies the tests laid down by the Supreme Court in the case of Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178. The CBDT originally issued a Circular No. 738, dt. 25th March, 1996, clarifying that the finance charges accruing or arising to hire-purchase finance companies are within the ambit of 'interest' as defined in Section 2(7) of the IT Act, 1974. The Board subsequently clarified the position once again vide its Circular No. 760, dt. 13th Jan., 1998, stating categorically that in the case of transactions which are in the nature of hire-purchase, the receipt of hire charges would not come within the purview of 'interest' under the Interest-tax Act, and if the transactions are in substance in the nature of financing transactions, the hire charges would fall within the ambit of Interest-tax Act and should be treated as such. The Board further clarifies that each transaction should be treated on merits considering the intention of the parties which manifests itself in the mode of fixation of the initial payment, the method of determination of the hire-purchase price, etc. and other attendant circumstances.
5. During the course of assessment proceedings, the assessee filed copies of a set of documents relating to the hire-purchase advances given by the assessee to one Sri Peter Paul, manager, Anjali Hotel, Kottayam in October, 1998. The documents included sanction letter, hire-purchase agreement, forms addressed to the Registering Authority (Vehicles) and letters addressed to the insurance company, etc. All of them were signed by the hirer. First the transaction commenced by a letter from Sri Peter Paul requesting the assessee for hire-purchase finance of a specified amount. The hire-purchaser requests the assessee to finance for the purchase of a new vehicle and the assessee agrees to the request on the terms and conditions stipulated in the hire-purchase agreement dt. 23rd Oct., 1998. According to the AO this advancing of money to the hirer for the purchase of the vehicle in response to the request of the hirer is essentially in the nature of a financing transaction. All other is consequential and of lesser importance in expressing the intention of both the parties. The AO then proceeds to look into the method of fixation of initial payment, i.e., margin money, determination of finance charges and of hire-purchase price, etc. The AO held that the above acts will show that the hire-purchase transactions entered into by the assessee are in substance financial transactions only. The AO noticed that if a hirer seeks 90 per cent of the cost of the asset as hire-purchase finance, the margin money will be 10 per cent. On the other hand, if the margin money is 25 per cent, the cost of hire-purchase finance is 75 per cent which irresistibly leads to the conclusion that it is nothing, but advance of loan pure and simple, according to the needs of the applicant (hirer). The AO further noticed that finance charges are fixed at a flat rate per annum on the net amount financed. The hire-purchase price is also fixed by adding the finance charges to the next amount financed. Such amount fixed is payable in equal monthly instalments over a number of years as agreed upon mutually. On verification of the clauses of the hire-purchase agreement, the AO came to the conclusion that the main features of the hire-purchase agreement are similar to those described in paras 16 and 17 of the judgment of the Hon'ble Supreme Court in the case of Sundamm Finance Ltd. (supra). The relevant portion reproduced by the AO in the assessment order for the asst. yr. 1996-97 is extracted below :
"... The intention clearly disclosed thereby is that on payment of the amount due at any time after the hire-purchase agreement, the vehicle would be free from encumbrance. It is also to be noted that the agreement does not contemplate exercise of an option on payment of a nominal sum of money as is to be found in other hire-purchase agreements. Execution of the promissory note, the hire-purchase agreement and the other documents, in our judgment, indicate that it was the intention of the parties not to transfer any interest in the vehicle by the customer to the appellants; it was intended to give security by hypothecating the vehicle in favour of the appellants and for ensuring repayment of the loan advanced that the customer submitted to the various onerous conditions of the hire-purchase agreement."
The AO, however, agrees that in a hire-purchase agreement, in the case of the assessee, there is a provision for exercise of an option by the hirer for purchase on payment of a nominal sum of money. This was only the distinguishable factor between the case of Sundaram Finance Ltd. (supra) and the assessee. The AO noted that as per Clause (IV) of the agreement the hirer can exercise the option to purchase the asset on the hiring coming to an end and the consideration of such option to purchase given to the hirer is fixed under cl. HI at Re. 1 which is collected along with the first instalment. The AO held that the provision of the option in the hire-purchase agreement does not affect the nature of the transaction. It still remains a finance transaction. The option for purchase provided in cl. IV of the agreement is pre-concluded by collecting/paying Re. 1 along with the first instalment. The AO, therefore, held that "the transaction will not become a hire-purchase transaction in substance, for the mere reason that the hire-purchase agreement contains a provision for exercise of option for purchase by the hirer. Since the vehicle stands registered in the name of the hirer himself the provision in the agreement for exercise of option to purchase by him is redundant."
6. Quoting the observations of the Hon'ble Supreme Court of India in para 24 of their judgment in the case of Sundaram Finance Ltd. (supra), which reads as under-
". . . If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into was to raise money. If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostensibly passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer's title, and confer a licence to seize. When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of the goods. But a hire-purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exercisable by the customer on payment of all the instalments, of hire arises when the instalments are paid and not before. In such a hire-purchase agreement there is no agreement to buy goods; hirer being under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire-purchase agreement must be distinguished from transaction in which the customer is the owner of the goods and with a view to finance his purchase he enters into an agreement which is in the form of a hire-purchase agreement with the financier, but in substance evidence a loan transaction, subject to hiring agreement under which the lender is given the licence to seize the goods."
The AO held that there is no evidence of any bona fide and completed sale anterior to and independent of the hiring to the hirer and the transaction cannot be regarded as a hire-purchase transaction. He held that, on the other hand, the intention of the assessee in obtaining hire-purchase agreement and the allied documents like promissory notes from the hirer and guarantor sufficiently goes to show that the primary intention of the assessee was financing. He further noted that the assessee has also obtained sufficient number of cheques to cover the future instalments as required in the sanction letter to secure the return of loan advanced to its customers. He held that the hire-purchase transactions entered into by the assessee are essentially financing transactions and hence the financing charges collected by the assessee in reality represented interest on the amounts advanced to its customers. Such financing charges amounted to Rs. 2,04,83,189 which the AO treated as includible in the chargeable interest received by the assessee during the previous year relevant to the assessment year under appeal. Aggrieved by the above order, the assessee carried the matter in appeal before the learned first appellate authority.
7. It was the case of the assessee before the learned first appellate authority that the real relationship with the parties was that of a bailor and bailee and not that of lender and borrower. The title to the goods was reserved with the hire vendor till the hire acquired the property in the goods under an option granted to him, since the transaction being a transaction regarding bailment of goods could not be communicated unless goods were delivered. The assessee also relied on the Instruction No. 1425 in E. No. 275/90/80 IT(B), dt. 18th Nov., 1981, issued by the CBDT dealing with the provisions of Section 194A. The above instruction says that Section 194A was not applicable for payment of hire instalments since the financing charges paid were not in the nature of interest within the meaning of Section 2(28A) of the IT Act, 1961. The assessee further submitted that the AO had failed to note that the method adopted by the assessee was only to quantify the hire amount and adoption of percentage did not make hire-purchase transaction into finance transaction. The assessee further submitted that the hirer was under no obligation to buy the goods and he could become the owner by exercising the option. The assessee also relied on the Circular No. 760, dt. 13th Jan., 1998, and Sections 2(c), 2(e), 2(f), 7(b) and 8 of the Hire Purchase Act, 1972.
8. The learned CIT(A) noticed that the assessee, in fact, first received the application from the applicant for advance of loan of a fixed amount being the balance of the price of the vehicle, which portion the applicant is unable to pay. The assessee purchased the vehicle after receipt of this application from the hirer. In the invoice both the names of the assessee and the hirer is mentioned, only to show that the applicant is the hirer though the vehicle is registered in the name of the applicant only. This shows that the real intention was to buy the article in the name of the applicant and not in the name of the assessee. The purchase of the article or asset took place subsequent to the receipt of application and deposit money from the hirer. The hire-purchase agreement was entered into between the parties, i.e., the assessee and the hirer on 23rd Oct., 1998 and the purchase of the vehicle took place on 26th Oct., 1998. The learned first appellate authority held that if the assessee was really hiring out its articles or assets, then the promissory note would have been taken only after the asset was purchased i.e., after 26th Oct., 1998, the date on which the vehicle was registered in the name of the hirer. The learned CIT(A) further rioted that the assessee gives the order for the purchase of a particular item only when a buyer approaches the assessee for the purpose of purchasing the same. A percentage of the consideration is given in advance and in lieu of the amount proposed to be invested in the purchase of the item. The financing charges are computed/relatabie to the amount advanced for the purchase of the item. The learned CIT(A) further noted that the percentage of the charges fixed in advance with reference to the amounts advanced have no connection with the age/utility of the article advanced. The details of the instalments payable will show clearly that the instalments have been fixed on periodical basis which include the element of interest and element of principal as well. The charges received from the customers are in relation to the finance provided to them, i.e., for the use of the money and not of the vehicle. The learned first appellate authority noted that in case of loss of vehicle/article the applicant has to pay the entire balance amount mentioned in the second schedule remaining unpaid at the time of loss. He held that the transactions/documents will show that the assessee was only protecting its interest in regard to the money advanced and the charges so received from the customers are nothing, but interest includible in the total income of the assessee. Coming to the provisions of Sections 2(c), 2(e), 2(f), 7(b) and 8 of the Hire Purchase Act, the learned first, appellate authority held that-
"It is clear from the facts stated above that although the appellant may be making a provision for the purchase of article on a nominal amount of Re. 1 in all the cases irrespective of the nature of assets, yet, the intention of the party's manifest in the documents is that the appellant is advancing money for the purchase of article and he is not the owner of the article as such and this conclusion is further corroborated by the provisions of Clauses 6 and 12 of the agreement."
In the light of the above, the learned CIT(A) confirmed the order of the AO. The assessee is aggrieved and is in second appeal before the Tribunal.
9. The learned representative of the assessee submitted that the assessee is doing four types of businesses, namely, (i) bills discounting, (ii) loans on hypothecation of vehicle/property, (iii) making part payment of cost of vehicle or for using the asset, and (iv) collecting financing charges/hire charges. The document is prepared in the name of the applicant arid to the extent of the invoiced amount. The assessee's name is also included as the assessee makes advance for the purchase of the vehicle. This is also because margin money is collected. The learned representative of the assessee submitted that the assessee bears the booking charges. As far as the assessee's business of bills discounting and making direct loans is concerned there is no dispute. The assessee itself has offered these amounts. The dispute is with regard to the so-called hire charges and service charges, The assessee excluded service charges on the ground that this is not interest as contemplated under the Interest-tax Act, 1974. The dispute is confined to finance charges collected by the assessee and it is collected monthly on hypothecation. According to the assessee, interest chargeable to tax is only Rs. 59,72,414 and as per the AO in addition to this, an amount of Rs. 2,04,83,189 being service charges is includible, for levy of interest-tax. According to the assessee, this is service charges not includible; whereas according to the Revenue it is includible for the purpose of interest-tax. The assessee's learned representative submitted that by no stretch of imagination it could be said that finance charges collected on hire-purchases are interest liable for interest-tax, when as per the Act only interests charged by the financial institutions are liable for interest-tax. Moreover, the instruction of CBDT (Instruction No. 1425 in E. No. 275/90/80, dt. 16th Nov., 1981) on the question of deduction of tax at source under Section 194A has made very clear that the assessee is not liable to deduct tax at source on hire-purchase transactions. The learned representative of the assessee brought to our attention Section 370 of the Companies Act which deals which the acceptance of loans to companies under the same management. As per the Company Law Board, leasing and hire-purchase transactions will be outside the scope of this section as they do not result in making any loans or deposits. Further, relying on the following circulars, viz., (1) Circular No. 738, dt. 25th March, 1996 [(1996) 218 ITR 131 (St));
(2) Instruction No. F. No. 160/1/96/ITA 1 (PI) dt. 16th July, 1996; and (3) Circular No. 760, dt. 13th Jan., 1998 [(1998) 229 ITR 42 (St)).
The assessee's learned representative submitted that it is very clear that the service charges collected by a finance company from its customers under hire-purchase agreement are not interest exigible to interest-tax. The assessee's learned representative submitted that looking from any angle it is only a hire-purchase as defined in the Hire Purchase Act, 1972. Hire-purchase is an agreement under which the goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement or to return it. This agreement does not constitute an agreement for the loan of money. The hirer simply pays for the use of the goods/vehicle with an option to purchase the goods/vehicle on completion of the payment. In fact, the relationship between the assessee and the applicant is that of bailor and bailee. Only the title to the goods is reserved with the hire vendor till the hirer acquired the property in the goods by making payment in entirety under the option granted to him. This being a transaction of bailment of goods, it is not commenced until the goods are delivered. No instalments of hire accrue before the goods are delivered.
10. The learned representative of the assessee further submitted that as per the relevant section of the Hire Purchase Act, 1972, i.e., Sections 2(b), 2(e), 2(f), 3, 4, 6, 8, 12, 13 and 17 the property in the goods to which the hire-purchase agreement relates shall pass to the hirer only on the completion of purchase in the manner provided in the agreement. The learned representative further submitted that the assessee has produced before the AO all the relevant documents at the time of entering into the hire-purchase agreements with the customers, viz., hire-purchase agreement, invoice of the supplier in the name of the assessee, letters sent by the assessee to the supplier, sanction letters of the assessee, etc. As per Clause 4 of the agreement, the hirer had an option to purchase the asset after payment of the entire instalments. As per Clause 12 of the agreement, the assessee (owner) gives the permission to register the vehicle in the name of the hirer and as per Clause 12 of the agreement, the hirer during the continuance of the agreement, indemnify the owner against the loss or damage to the assets. For the assessment year under consideration, the assessee has received a sum of Rs. 11,00,272 as interest from vehicle booking, from Maruti Udyog Ltd. The deposits were made by the assessee with Maruti Udyog Ltd., since it was very difficult to get immediate delivery of Maruti vehicles, as these vehicles were sold with a premium, in the market. After getting the margin money from the customer as his contribution, the assessee gives direction to the dealer enclosing the demand draft towards the cost of vehicle to deliver the vehicle to the hirer who has already entered into hire-purchase agreement with the assessee. However, in the invoice the name of the assessee is also included. The hirer could become the owner of the property/vehicle only on making a nominal payment, of course, paid along with the first instalment. This means the hirer gets the vehicle/property from the assessee and not from any third person. The assessee is the owner. The assessee not merely makes the payment to the third party and the third party delivers the goods to the hirer. If that was not so, the Revenue's contention that it is financing activity, would have been correct. The assessee's learned representative submitted that the decision of the Hon'ble Supreme Court in the case of Sundaram Finance Ltd. (supra), is not at all applicable to the instant case of the assessee. In that case the intention of the parties was only a loan transaction and only because of that it was held that the transaction in question was not a hire-purchase transaction. In the above ease, the Hon'ble Supreme Court observed that there should be an anterior purchase of goods by the owner before entering into a transaction with the hirer to make the transaction a hire-purchase transaction. Even if that yardstick is applied the assessee is the owner of the vehicle because the assessee has already paid advance to vehicle/property owner and the vehicle/property is allotted in the name of the assessee even before the application by the applicant, i.e., the hirer. The assessee's representative also relied on the following decisions in support of his case, viz.,
(a) CIT v. Madras Autorickshaw Drivers Co-operative Society Ltd. (1983) 143 ITR 981 (Mad);
(b) CIT v. State Bank of Travancore (1997) 228 ITR 40 (Ker);
The assessee's learned representative also placed reliance on the decision of the ITAT, Hyderabad Bench 'A' in the case of N.K. Leasing & Construction (P) Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 261 : (2001) 79 ITD 658 (Hyd), ITAT, Madras Bench 'A' in the case of Harita Finance Ltd. v. Asstt. CIT (Interest-tax Appeal No. 29 (Mad) of 1997 dt. 29th June, 1999) relating to the asst. yr. 1994-95 and of the ITAT, Bangalore Bench in the case of ICDS Ltd. v. Dy. CIT (Interest-tax Appeal No. 13 (Bang) of 1998, dt. 13th July, 2000) relating to the asst. yr. 1995-96, and submitted that the issue in this appeal is squarely covered by the decisions of the various Benches of the Tribunal and also the decisions of the High Courts and Supreme Court mentioned supra.
11. We have heard rival submissions and gone through the orders of the Revenue authorities and the decisions (supra). The IT Act, 1974 (Act No. 45 of 1974), received the assent of the President of India on 23rd Sept., 1994. It states that it is an Act to impose special tax on interest in certain cases. The rate of tax is 7 per cent. In relation to scheduled banks, the tax operation was suspended after 28th Feb., 1978, by the Finance Act, 1978. "Subsequently, the scope of the Interest-tax Act was extended to selected public financial institutions also. Operation of the Act was suspended from the asst. yr. 1986-87 by Finance Act, 1985, but was re-introduced as an anti-inflationary measure w.e.f. 1st Oct., 1991, by Finance (No. 2) Act, 1991. Tax is levied on the gross interest income of credit institutions including banks, co-operative societies engaged in the business of banking (except co-operative societies which provide credit facilities to farmers or village artisans), public financial institutions, state financial corporations and financial companies. For this purpose, financial companies mean companies engaged in the business of hire-purchase transactions or financing such transactions., investment companies, house finance companies, companies engaged in the business of providing finance by way of making loans, advances or otherwise mutual benefit finance companies and companies which carry on business consisting of one or more of the activities referred to above. Section 4 of the IT Act is a charging section. The term "chargeable interest" is defined in Section 2(5) of the Act and it means "total amount of interest referred to in Section 5, computed in the manner laid down in s. 6 of the Act. As per Section 5, chargeable interest means,--
"Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions or to any cooperative society engaged in carrying on the business of banking) accruing or arising to the credit institution in that previous year."
'Financial company' is defined in Sub-section (5B) of Section 2 of the IT Act, to mean "a company, other than a company referred to in Sub-clause (1), (ii) or (iii) of Clause (5A), being...". 'Interest' is also defined in Section 2(7) of the Act and it 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 (IB) of.s.42 of the Reserve Bank of India Act, 1934 (2 of 1934);
(ii) discount on treasury bills."
The above makes it clear that, first of all, only interest on loans and advances made in India is exigible to interest-tax. The section further goes to say that it also includes commitment charges on unutilised portion of any credit, The learned representative of the assessee brought to our attention p. 15 of the paper book filed by the assessee, which is a letter from the Reserve Bank of India dt. 13th Dec., 1999, which is regarding reclassification of the company. The letter says that the assessee is reclassified as a hire-purchase finance company, as the hire-purchase assets formed 75 per cent of the total assets and income from hire-purchase and leasing constituted almost the same percentage, A perusal of Section 2(7)(a) makes it clear that commitment charges on unutilised portion of any credit sanctioned for being availed of in India, and as per Section 2(7)(b) any discount on promissory notes and bills of exchange drawn or made in India only forms part of interest on loans and advances and nothing more. Now the question is, whether interest on account of hire-purchase transaction will amount to 'interest' within the meaning of Section 2(7) for the purpose of interest-tax. The answer is an emphatic 'No'. The case of the Revenue is that service charges so named and collected by the assessee for financing the purchase of vehicle/asset is nothing, but interest. Whatever be the nomenclature given by the assessee, in effect it is interest. The assessee was providing only financial assistance to a party for purchase of the vehicle. The terminology is not that important. It is only the intention of the assessee that is relevant. The dispute now revolves around the question, what is hire-purchase?
12. The Hire Purchase Act, 1972 (Act No. 26 of 1972), came into effect from 8th June, 1972. The Act states that it is 'An Act to define and regulate the rights and duties of parties to hire-purchase agreements and for matters connected therewith or incidental thereto." Section 2(b) of the Hire Purchase Act, 1972, defines "hire" as the sum payable periodically by the hirer under a hire-purchase agreement. Section 2(c) of the Act again defines "hire-purchase agreement" as "an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which
(i) possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount, in periodical instalments, and
(ii) the property in the goods is to pass to such person on the payment of the last of such instalment, and
(iii) such person has a right to terminate the agreement at any time before the property so passes."
Section 2(d) of the Hire Purchase Act, 1972, goes to define as to what is "hire-purchase price". The section says that "hire-purchase price" means "the total sum payable by the hirer under a hire-purchase agreement in order to complete the purchase of, or the acquisition of property in, the goods to which the agreement relates; and includes any sum so payable by the hirer under the hirer-purchase agreement by way of a deposit or other initial payment, or credited or to be credited to him under such agreement on account of any such deposit or payment, whether that sum is to be or has been paid to the owner or to any other person or is to be or has been discharged by payment of money or by transfer or delivery of goods or by any other means; but does not include any sum payable as a penalty or as compensation or damage for a breach of the agreement."
Section 2(e) defines who is a "hirer". "Hirer" means the person who obtains or has obtained possession of goods from an owner under a hire-purchase agreement, and includes a person to whom the hirer's rights or liabilities under the agreement have passed by assignment or by operation of law.
13. Before coming to a conclusion it is also necessary to see what is "deposit", "net cash price", "net hire-purchase charges" and "net hire-purchase price." These terms are defined in Clauses (b), (c), (d) and (e) of [Sub-section (1) of] Section 7 of the Hire Purchase Act, 1972, as follows :
"7(1) In this section,--
(a) ** ** **
(b) "deposit" means any sum payable by the hirer under the hire-purchase agreement by way of deposit or other initial payment or credited or to be credited to him under the agreement on account of any such deposit or payment, whether that sum is to be or has been discharged by payment of money or by transfer or delivery of goods by any other means;
(c) "net cash price" in relation to goods comprised in a hire-purchase agreement, means the cash price of such goods as required to be specified in the hire-purchase agreement under Clause (b) of Sub-section (1) of Section 4, less any deposit as defined in Clause (b);
(d) "net hire-purchase charges" in relation to a hire-purchase agreement for any goods, means the difference between the net hire-purchase price and the net cash price of such goods;
(e) "net hire-purchase price", in relation to goods comprised in a hire-purchase agreement, means the total amount of the hire-purchase price of such goods as required to be specified in the hire-purchase agreement under Clause (a) of Sub-section (1) of Section 4 less, --
(i) any amount which is payable to cover the expenses of delivering the goods or any of them to or to the order of the hirer and which is specified in the agreement as included in the hire-purchase price;
(ii) any amount which is payable to cover registration or other fees under any law in respect of the goods of the agreement or both and which is specified in the agreement as included in the hire-purchase price; and
(iii) any amount which is payable for insurance (other than third party insurance) in respect of the goods and which is specified in the agreement as included in the hire-purchase price."
It is also important to note that when the property in the goods passes to the hirer, the owner of the asset ceased to be the owner of the property. This can be gauged from Section 8 of the Hire Purchase Act, 1972, which reads as follows :
"8. Passing of property.--Subject to the provisions of this Act, the property in the goods to which a hire-purchase agreement relates shall pass to the hirer only on the completion of the purchase in the manner provided in the agreement."
The right of the hirer to terminate the agreement at any time before the completion of the agreement by making payment under the hire-purchase agreement is given in Section 10 of the Act. The rights and obligations of the owner of the property are explained in Sections 18, 19, 20, 21, 22 and 23 of the Act. As per Section 18 the owner has the right to terminate the hire-purchase agreement if default is committed by the hirer in making the payment or any breach of condition committed.
14. The certificate issued by the Reserve Bank of India clearly shows that the assessee is a hire-purchase finance company and the hire-purchase assets form a major part of the assessee's assets, i.e., 76 per cent of the total assets and the income from hire-purchase and leasing constitute almost the same percentage. The Revenue has placed reliance on the Board's Circular No. 738, dt. 25th March, 1996, to hold that the. charges accruing or arising to the assessee, being a hire-purchase finance company, are exigible to tax under Section 2(7) of the IT Act, 1974 and that the Board subsequently clarified in Circular No. 760, dt. 13th Jan., 1998, that in case of transaction which are, in substance, in the nature of hire-purchase, the receipt of hire charges would not be in the nature of interest and that if the transactions are in substance in the nature of financing transactions, the hire charges should be treated as interest subject to interest-tax. But the Board further clarified that before coming to such a conclusion whether a hire-purchase transaction is in substance in the nature of hire-purchase or financing has to be considered on merits taking into account, the intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of the hire-purchase price, etc. and other attendant circumstances. Considering the fact that the application from the hirer was first received by the assessee and then the assessee approached the vehicle/property dealer and the dealer delivered the vehicle/property to the applicant though the name of the assessee was included in the invoice and considering the further fact that the registration of the vehicle was done in the name of the applicant, the Revenue came to the conclusion that it was not actually a hire-purchase transaction, but one of extension of financial help to the hirer to purchase the vehicle. While coming to the above conclusion the Revenue authorities also considered the initial payment made by the hirer towards margin money. They also considered the calculation of interest (service charges--according to the assessee) per annum on the net amount of the finance. We are unable to agree with the Revenue. It is to be noted that the decision relied on by the Revenue, i.e., Sundaram Finance Ltd. 's case (supra) does not support the Revenue's case. The assessee disclosed Rs. 11,00,273 and Rs. 16,41,885 as interest received by it on booking Maruti vehicles in the asst. yrs. 1996-97 and 1997-98, respectively. The first book and allotment is done in the name of the assessee. The assessee does not take delivery of the vehicle. On receipt of the application from the hirer, the assessee requests Maruti Udyog Ltd., to deliver the goods/vehicle to the hirer and in the invoice the assessee's name is also included. It is true that the applicant approaches the assessee to have the finance as he is in short of money. It is to be further noted that if it is money transaction that attracts the provisions of the IT Act, 1974, as mooted by the Revenue, nothing prevents the assessee to finance the hirer. The assessee is having money and the other party is also ready to receive money from the assessee. Instead the assessee approaches Maruti Udyog Ltd., or other dealers of vehicles and gets the vehicle released in the applicant's name and payment is made by the assessee. The dispute of the Revenue is that the so-called service charges are not actually service charges, but only interest. The mere fact that the assessee has taken some post-dated cheques as guarantee/security for prompt payment by the hirer does not alter the nature of the transaction. The vehicle is delivered to the applicant and he is using the same. The assessee's ownership comes to an end as soon as the last instalment is paid by the applicant.
15. As we have noted above, the P&L a/c of the assessee-company that hire-purchase charges constitute a dominant portion of the assessee's income, i.e., hire-purchase business is the principal business carried on by the assessee. There is no dispute for the Revenue that hire-purchase charges cannot be said to be interest on loans and advances in any manner, unless the hire charges have resulted in the execution of agreements which are nothing but agreements for loans and advances. Hire-purchase charges are not interest, according to the clarification issued by the CBDT, of course, in the context of Sections 2(28A) and 194A of the IT Act, 1961. It is all the more clear that the first circular, i.e., Circular No. 738, dt. 25th March, 1996, clarifies that hire-purchase transactions are generally in the nature of financial transactions, but later the Board clarified that the intention of the parties is the dominant factor to decide whether the transaction falls within the ambit of hire-purchase transaction or not. In other words, there is no dispute that hire-purchase charges received are different from interest received on loans and advances. Therefore, it is to be noted that the assessee made payments to the first seller of the vehicle and the transaction comes to an end. The assessee is the owner of the vehicle. The mere fact that the vehicle's registration has been done does not lead to the conclusion that the applicant received the goods/vehicle from the first seller and the repayment by the applicant to the assessee is only the principal amount of loan plus interest.
16. We have noted that Hire Purchase Act, 1972, defines hire-purchase agreement as an agreement under which goods/vehicles are let on hire and under which the hirer has an option to purchase the goods/vehicles in accordance with the terms of the agreement and includes an agreement under which-
(i) possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical instalments, and
(ii) the property in the goods is to pass to such person on the payment of the last of such instalment, and
(iii) such person has a right to terminate the agreement at any time before the property so passes.
The case of the Revenue authorities is that the margin money, that is, the initial payment corresponds to the amount required by the applicant and not in proportion to the value of the vehicle/asset. In the Hire Purchase Act, it forms a part of the deposit and it is defined in Section 7(1)(b) of the Act. It is an initial payment. According to the Revenue's logic it appears that deposit money should vary according to the cost of the vehicle/asset and not according to the capacity of the applicant to make the initial advance/deposit. This logic does not appear to be correct. In hire-purchase, the intention of the applicant is to purchase the vehicle/asset. Applicant is running short of money. He approaches a party (like the assessee) for having the vehicle/asset and as a result of the agreement entered into by him with the assessee the vehicle/asset is transferred in the name of the applicant on condition that he makes the payment towards the principal plus service charges. When the last instalment is paid, the ownership of the vehicle passes to the applicant. Though the vehicle is registered, as in the instant case, in the name of the other party, that is, the applicant, the owner is at liberty to seize the vehicle/asset as per the terms of the hire-purchase agreement if the applicant commits default in making the payment or breach of any of the conditions. Even after the seizure of the vehicle/asset and appropriating the same towards recoupement of the investment which the owner has already made for acquiring the asset/vehicle in question, still the owner has the right to receive the balance amount from the hirer if the sale proceeds of the same falls short of the balance payable by the hirer.
17. If we strictly consider and accept the contention of the Revenue, the provisions of the Hire Purchase Act, 1972, will not and cannot have any meaning. It is true, hire-purchase agreement is a mode of financing and helping a person to acquire an asset, and the legislature itself has recognised it under the law backing up by a special enactment and tells that it is distinct and different from loans and advances and the reward received for doing that service, viz., extending financial help is not interest simplicitor. It is something other than interest. What the AO tells is, apparent is not real. The intention of the applicant is finance sirnplicitor. What the assessee does is only financing. As held by the Hyderabad Bench 'A' of the Tribunal, in the case of N.K. Leasing & Construction (P) Ltd. (supra) that-
"Merely because the words "amount of loan" were mentioned on the guarantee form, by itself was not enough to conclude that it was not hire-purchase transaction but was a loan. Words have not to be read in isolation but documents as a whole will have to be read to arrive at the true construction, Therefore, hire-purchase transactions entered into by the assessee were the hire-purchase transactions resulting into hire charges to the assessee which were not covered within the meaning of the word 'interest' under the Act."
18. It is to be noted that a hirer who is desirous of purchasing a vehicle/asset, but does not and could not pay the full purchase price and the hire-purchase company pays the price or a substantial part of the price on behalf of the hirer by entering into an agreement with the hirer, such agreement is a security for repayment of the loan and essentially a loan transaction. The Board in its Circular No. 760, dt. 13th Jan., 1998, requires the AO to keep in mind the tests laid down by the Hon'ble Supreme Court in the case of Sundaram Finance Ltd. (supra). It is to be noted that a hire-purchase agreement is a composite transaction involving two elements viz., bailment and sale. The hirer pays periodically for bailment of the asset. It is in the nature of hire charges. Page 4 of the assessee's paper book is a letter dt. 23rd Oct., 1998, from the assessee to M/s A.V.G. Motors (P) Ltd, Kottayam, in which the assessee states that the assessee is making payment vide DD drawn on the bank as per assessee's hire-purchase scheme. It is the assessee who writes to the dealer and makes the payment. It is seen that the final invoice is drawn in the name of the assessee. The hire-purchase agreement is at pp. 6 to 8 of the assessee's paper book giving details of the scheduled payments. Clause IV of the hire-purchase agreement states that the assessee shall remain the absolute owner of the property till the full payment is made by the hirer. The agreement lays down the conditions on p. 2 of the agreement. It stipulates how the hirer should keep the vehicle i.e., in the control and custody of the hirer in good condition, etc. Condition No. 8 provides opportunity to the hirer to terminate the hiring by returning the vehicle to the owner, i.e., the assessee in this case. Vide Condition No. 12, the owner agrees to permit the hirer to have the registration of the vehicle in the name of the hirer, subject to the further condition 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 a breach of any of the conditions of the agreement. Condition No. 13 makes it clear that the vehicle is held by the hirer as a mere bailee of the owner and the hirer has no proprietary right, title or interest till the payment is complete, etc.
19. Coming to the decision of the Hon'ble Supreme Court in the case of Sundamm Finance Ltd. (supra), Their Lordships have held that-
"If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction, may not be regarded as a loan transaction even though the reason for which it was entered into was to raise money."
The learned representative of the assessee relied on the decision of the Hon'ble Madras High Court in the case of Madras Autorickshaw Drivers Co-operative Society Ltd. (supra) in support of the assessee's claim. In this case, the Hon'ble Madras High Court held that a society engaged in providing credit facilities to its members, but the society purchasing autorickshaws and selling them to its members under the hire-purchase agreement cannot be treated as providing credit facilities. It is to be noted that there is a marked difference between the assessee and a co-operative society, which is incorporated to promote economic interest. But the difference ends there. The assessee also purchases vehicles and sell them to the public who run short of money, and receives payments in instalments. The vehicle is, in fact, a security. The assessee and like parties are at liberty to terminate the agreement and to seize the vehicle if the hirer commits default. The lines tried to draw by the Revenue between hire-purchase transaction and credit facility is only its intention and for this proposition the Revenue relies on the decision of the apex Court mentioned (supra).
20. In the light of the above discussions, we are of the view that the orders of the Revenue authorities are liable to be set aside. Therefore, it cannot be held that the service charges collected by the assessee is interest simplicitor exigible to interest-tax.
21. In the result, both the appeals filed by the assessee stand allowed.