1. These eight appeals involving similar issues and filed by the same group of assessees, are being decided by this common order for the sake of convenience.
2. Shri S.K. Garg, F.C.A. and Shri Amit Shukla, advocates, have appeared in these appeals on behalf of the assessees, whereas Shri Prasenjit Singh, senior Departmental Representative represented the Department.
3. ITA No. 6/Alld/1999 has been filed by the assessee, namely, Commercial Motors Finance Ltd. Kanpur, against the order of CIT(A)-II, Kanpur, dt. 2nd Feb., 1999, for the asst. yr. 1994-95. ITA Nos. 7 to 12 (six appeals) have been filed by the other assessee, namely, M/s Kailash Motors Finance Ltd., Kanpur against a combined order of CIT(A)-II, Kanpur dt. 2nd Feb., 1999, for six assessment years i.e., asst. yrs. 1992-93 to 1997-98. ITA No. 4/Luc/2001 has been filed by M/s Kailash Auto Finance Ltd. Kanpur, against the order of CIT(A), Lucknow, dt. 22nd Jan., 2001, for the asst. yr. 1996-97. It may be pointed out that whereas the orders of CIT(A) Kanpur, in the case of Commercial Motors Finance Ltd. are of the same date and based on similar reasons, the order of CIT(A) in the case of ITA No. 4/Luc/2001 has been passed after following the orders passed in the case of M/s Kailash Motors Finance Ltd. for the asst. yrs. 1992-93 to 1997-98 dt. 2nd Feb., 1999.
4. The assessee-appellant in ail the three sets of appeals have taken similar grounds i.e. ground Nos. 1 to 6 for challenging the order of the learned first appellate authority. However, in ITA Nos. 6 & 7 to 12/Alld/99, the appellants have taken the following additional grounds : "Because the reassessment proceedings under Section 10(a) of the Act cannot be said to have been validly initiated as : (a) there existed neither any material which could lead to the formation of belief that "chargeable interest" for the asst. yr.
1994-95 had escaped assessment; (b) nor the related notice dt. 27th April, 1998, has been validly issued and served on the appellant.
And consequently, the assessment order dt. 5th June, 1998, as has been passed in pursuance of the notice is liable to be declared as null and void." 5. Since the facts of all these eight appeals are common and further since the same issue is involved in all these appeals, we consider it proper to take up ITA No. 6/Alld/1999 as a leading appeal.
6. The relevant facts and background relating to this matter may be summarized as below : 6.1. The assessee-company was engaged in the business of finance/hire purchase and leasing of vehicles. As revealed out from the assessment order, the assessee used to charge finance charges as well as repayment of principal amount. This amount was taken in the balance sheet as capital receipt. The finance charges as well as the interest received during the relevant previous year were shown in the final account filed alongwith the return of income under the heads, (i) finance charges, (ii) interest earned on loans & advances.
6.2. The assessee did not file return of chargeable interest voluntarily. The AO found that in the final accounts filed along with the return of income under the IT Act, 1961, the finance charges were nothing but interest charges on the money financed to the hire and therefore, these came "in the definition of chargeable interest" as per Section 5 r/w Section 2(7)/2(58) (sic) of Interest tax Act, 1974. The AO also held that receipts shown as "Interest earned on Loans & Advances" also formed a part of "chargeable interest".
6.3. The AO., on the basis of above view initiated proceedings under Section 10 of the Interest-tax Act. In response to the show-cause notice, the assessee filed returns of chargeable interest, but did not include the finance charges in the disclosed chargeable interest. When asked to explain the reasons for this omission, the assessee filed written reply contending that the finance charges did not constitute chargeable interest for the purpose of the Act.
6.4. The AO was not satisfied with the explanation of the assessee and came to the conclusion that the assessee was a finance company and was doing the finance business of the vehicles and no sale of vehicle was done by it. According to the AO, the finance charges were nothing but the interest charges on the loans given towards purchase of vehicles.
In support of this conclusion, the AO placed reliance on the Board's Circular No. 760, dt. 13th Jan., 1998 and also on the decision of the Hon'ble Supreme Court in India in the case of Sunderam Finance Ltd. v.State of Kerala AIR 1966 SC 1178 : (1966) 2 SCR 828.
6.5. On the basis of above conclusion, the AO took the finance charges of Rs. 12,91,027 as total chargeable interest and completed the assessment under Section 8(2) of the Interest-tax Act, on the above amount.
6.6. The assessee challenged the action of the AO before the CIT(A).
The main contention of the assessee was that the "finance charges" earned by the assessee were in respect of the business of hire-purchase of light and heavy vehicles carried on by the appellant. The assessee also took several pleas in support of this contention raised before the learned first appellate authority. The learned CIT(A) has reproduced these pleas in support of this contention raised before the first appellate authority. The learned CIT(A) has reproduced these pleas in paras 4(1) to 4(11) of his order. For the sake of brevity, we are not reproducing these pleas in this order.
6.7. The learned CIT(A) after considering the scope of Sections 5 and 7 of Interest-tax Act and also on examination of the decision of Hon'ble Supreme Court of India in the case of Sunderam Finance Ltd. (supra) as well as the Circular No. 738, dt. 25th March, 1996, of the CBDT came to the conclusion that finance charges in this case were nothing, but the interest charged on the loan transactions between the assessee-company and the hirers and that the finance charges were, therefore, chargeable to tax under the Interest-tax Act, 1974. By holding so, he upheld the action of the AO. The relevant observations of the CIT(A) are contained in paras 11 to 14 of the order, which are not required to be reproduced.
6.8. The assessee has taken ground Nos. 1 to 6 in this appeal to assail the observations/findings of the learned CIT(A). The main contention of the assessee in these grounds is that the assessee was doing hire-purchase transaction and the learned CIT(A) was not justified in holding that profit on hire-purchase is liable to interest-tax.
7. Since the assessee has taken ground Nos. 7(a) and 7(b) as additional ground and further since these additional grounds are legal grounds, we proceed to take up these legal grounds before we take up the original grounds of appeal and the issue involved therein.
"7. Because, the reassessment proceedings under Section 10(a) of the Act cannot be said to have been validly initiated as- (a) there existed neither any material which could lead to the formation of belief that "chargeable interest" for the asst. yr.
1994-95 had escaped assessment." 9. This ground challenges the action of the AO in initiating reassessment proceedings under Section 10(a) of Interest-tax Act. The AO issued notice dt. 27th April, 1998, which finds place at page No. 1 of the paper book (Vol. III) filed by the assessee. A copy of the reasons for issuing notice under Section 10 of the Interest-tax Act, 1974, has also been filed, which finds place at page No. 2 of the paper book.
10. Shri S.K. Garg, the learned counsel for the assessee, submitted that there was no basis for initiating proceedings for reassessment in the case of the assessee. According to him, the provisions contained under Section 10(2) of the Interest-tax Act, are analogous to the provisions contained under Section 147/148 of the IT Act, 1961. He further submitted that the notice under Section 10 of the Interest-tax Act, required the assessee to submit the return within a period of 30 days and since the notice dt. 27th April, 1998, issued under Section 10 of the Interest-tax Act, required the assessee to deliver a return in the prescribed form before the expiry of seven days from the date of service of notice, the notice cannot be said to be a legally valid notice, because it unduly curtails the time limit to which the assessee was entitled under the law. The learned senior Departmental Representative on the other hand submitted that since the assessee had failed to furnish the return under the Interest-tax Act, the learned AO was fully competent to initiate the proceedings for reopening the assessment. The learned Senior Departmental Representative also invited our attention to the reasons recorded by the AO before reopening the assessment.
11. We have carefully considered the facts and relevant material relating to this issue. A perusal of the order dt. 27th April, 1998 (copy available at page 2 of the paper book) (Vol. III) filed by the assessee shows that the AO has held that the chargeable interest had escaped assessment. We consider it proper to reproduce the reasons for issuing notice under Section 10 of the Interest-tax Act recorded by the AO which are as under : "The main business of the assessee-company is of financing through hire-purchase and also doing leasing of the vehicles on hire-purchase transactions as cases is charging finance charges as well as repayment of principal amount which is taken in the balance sheet as capital receipts. The finance charges is nothing but interest charged on the money financed to the hirer which is taken in the P&L a/c as revenue receipts. The total chargeable interest has been shown in the P&L a/c.
As per provisions of the Interest-tax Act, 1974, the assessee-company is liable to pay the interest-tax as per Section 5 of the interest-tax, for assessment year under consideration assessee has not filed the interest-tax return stipulated in Section 7 of the Interest-tax Act, 1974. Therefore, I have reason to believe that chargeable interest of Rs. 13,25,079.31 has escaped the assessment within the meaning of Section 10(a) of the Interest-tax Act, 1974. Issue notice under Section 10 of the Interest-tax Act, 1974." 12. A perusal of the above, goes to demonstrate that the AO had applied mind and held that there were reasons to believe that chargeable interest had escaped assessment within the meaning of Section 10(a) of the Interest-tax Act. The reasons so recorded by the AO are, in our view, very specific and not vague and, in our opinion, these reasons serve a solid basis for reopening the assessment.
13. So far as the contention of the learned counsel for the assessee that the notice provided only seven days time instead of 30 days time is concerned, we do not find any force in this submission, because no time-limit has been provided under Section 10 of the Interest-tax Act.
It may also be pointed out that time-limit of 30 days for filing the return is laid down under Section 7 of Interest-tax Act, but the object of that section is different from that of Section 10. It may be pointed out that the notice dt. 27th April, 1998, has been issued under Section 10 of the Interest-tax Act and not under Section 10 r/w Section 7 of the Act. The learned counsel for the assessee, Shri Garg cited several decisions to canvass the point that the notice under Section 10 of the Interest-tax Act being akin to notice under Section 148 of the IT Act, 1961, is a jurisdictional notice and, therefore, if the notice is invalid, the entire assessment order and proceedings of assessment stand vitiated. So far as this legal position is concerned, there cannot be any dispute. However, the situation is different. Under the IT Act, 1961, the provisions of Section 148, before 1989, contained a clause in accordance with which the notice was to be issued requiring the assessee to file the return "within the period not being less than 30 days". By the Finance Act (No. 2) of 1996, these words have been omitted and the amended provisions of Section 148 as it stands now does not contain this time limitation. So far as, Section 10 of Interest-tax Act is concerned unlike unamended Section 148, it does not contain any time limitation. Thus, the authorities cited before us, which related to the interpretation of unamended provision of Section 148 are not applicable to the present matter. In view of this difference, most of the cases cited before us on this point are distinguishable and not relevant. Thus, this ground taken before us fails.
14. Through this ground, the assesses has challenged the validity of the notice on the ground of issuance and service. This ground is reproduced below : "7. Because the reassessment proceedings under Section 10(a) of the Act cannot be said to have been validly indicated as- (b) nor the related notice dt. 27th April, 1998, has been validly issued and served on the appellant." 15. The learned counsel for the assessee, Shri Garg, submitted that the notice was not validly issued and served on the appellant and consequently, the assessment order dt. 5th June, 1998, is liable to be declared as null and void. The learned counsel pointed out that the notice under Section 10 of the Interest-tax Act, being a jurisdictional notice should have been served on a proper person i.e. the principal officer of the company or the director or authorized representative. In this regard, he invited our attention to the letter dt. 13th Nov., 2000, an affidavit of Shri Ishwar Chand, dated Nil, and copy of notice dt. 27th April, 1998, which documents have been filed by the assessee on 4th Dec., 2000, during the course of hearing of this appeal. The learned counsel has also placed reliance on the following cases : (i) Continental Commercial Corporation v. ITO (1975) 100 ITR 171 (Mad);Hans Raj Dhingra v. Union of India and Ors. (1975) 98 ITR 397 (Cal); 16. The learned senior Departmental Representative on the other hand, submitted that the objection relating to service of notice was neither taken by the assessee before the AO nor before the CIT(A). According to him, the assessee even filed return in response and in compliance to the notice issued to it. The learned senior Departmental Representative further pointed out that the notice was validly served upon the representative of the assessee. In support of his contention, he placed reliance on the report of ITO dt. 30th Jan., 2001, a copy of which has been filed by the Department with the paper book dt. 19th July, 2001.
The Department has also filed documents/report in rebuttal to the affidavit of Shri Ishwar Chand.
17. We have carefully considered the facts and circumstances relating to this issue. In view of the provisions contained under Section 10 of the Interest-tax Act, the notice is to be served on the assessee. The service has to be, of course, on the assessee itself or on its representative or agency or its employee. As revealed out on scrutiny of notice dt. 27th April, 1998, the notice was received on behalf of the assessee on 5th May, 1998. The signatures of the recipients have also been made below the endorsement of receipt as is clear from paper No. 3 of the paper book. The person, who received the notice has neither disclosed the full name nor has indicated his designation, However, the fact remains that he received the notice on behalf of the assessee. Not only this, the assessee filed returns in response to this notice and also attended assessment proceedings before the AO. In his letter dt. 30th Jan., 2001, available at p. 2 of the paper book of Department. The Dy. CIT, Kanpur, has clarified that in the assessee's group of cases, all works relating to income-tax proceedings, is being looked after by their employees to Tax Department and services of notices, orders, etc. are being effected on them. This practice is not uncommon. It is usually observed that employees of a particular company or firm receive notices and make their signatures endorsing the receipt and the Departmental officials do not enquire about their authority or power of attorney. What is relevant is the conduct of the assessee in acquiescing in such practice. If the assessee continues to give impression that such officials or employees are duly and regularly representing it, then the Departmental officials are bound to be led or misled by such conduct. This representation of the assessee is further found to be supported by the conduct of the assessee in making compliance of the notice on the basis of such receipt. In the present case, it is established on record that the assessee had filed return in compliance to the notice, which was received on its behalf by its employees. Not only this, the assessee continued to be represented during assessment proceedings and never raised any objection on this count. It is significant to point out that neither during the assessment proceedings nor during first appellate proceedings, the plea regarding improper service was taken by the assessee. It may also be pointed out that the assessee had filed reply dt. 1st June, 1998 and 2nd June, 1998, but in these replies, no objection has been taken about the improper service of notice. The appeal was filed by the assessee and in the appeal also no ground was taken to challenge the validity of notice. It was only on 12th Oct., 2000, that the ground was taken for the first time before the Tribunal and subsequent to that the documents/evidences in support of this ground was adduced. This conduct of the assessee shows that the additional ground has been taken as an afterthought.
18. So far as the affidavit of Shri Ishwar Chand, director of the assessee-company is concerned, it is true that no affidavit has been filed by the Department in rebuttal to this affidavit, but it may be very difficult for the Department to ascertain and depose about the authority of the person, who received the notice. However, the reports of the Department, against this affidavit controvert the contents of the notice. Under these circumstances, we are of the view that the assessee had fully acquiesced by its conduct in acknowledging the receipt of notice through its employee and, thus, the service should be deemed to be a proper service.
19. So far as the authorities filed by the learned counsel for the assessee on this issue are concerned, the same are distinguishable. In the case of V.V.S. Alloys Ltd. v. Asstt. CIT ITA No. 1376/All/97, order dt. 30th Nov., 1999, the issue related to validity of the notice under Section 158BC. The Tribunal after examining the various provisions of IT Act, including the provisions contained under Section 282 of IT Act, held that the service of notice was not proper. It may be pointed out that that case related to a company and in view of the provisions contained under Section 282(2) of IT Act, the service was required to be done on the principal officer of the company. So far as the Interest-tax Act is concerned, the provisions contained under Section 282 of the IT Act are not applicable. Section 10 of Interest-tax Act, also does not require that the service should be effected on the principal officer in the case of the company.
In the case of Benarsi Silk Mills v. CIT (1961) 42 ITR 220 (All) (sic), no notice was served under Section 22(2) upon the assessee and further no notice was served under Section 34 of the Act at any time and the assessee submitted a voluntarily return and the issue was as to whether by voluntarily return and the issue was as to whether by voluntarily submitted the return under Section 22(3) before the completion of the assessment, the assessee could be considered to have waived the issue of notice under Section 34. The Hon'ble Allahabad High Court answered the issue in negative.
In the case of Asstt. CIT v. Ram Chandra Pandey, the order of Tribunal dt. 6th June, 1992, rendered in ITA No. 646/Alld/90 to 649/Alld/90, 733 & 734/Alld/90, the assessee was an individual and the notice was not served upon him but on some visitor to the family at the assessee's address. This fact could not be denied by the Revenue. On that basis, it was held that there was no proper service of notice upon the assessee and the mere fact that even if the assessee appeared in proceedings without service of the notice, the same would not be sufficient.
In the case of Continental Commercial Corpn. (supra), related to the jurisdiction of the Hon'ble High Court under Article 226 of the Constitution and it was held that submission to the jurisdiction by the assessee will not confer any jurisdiction on any authority, who has not jurisdiction at all. In the present case, the jurisdiction of the authority concerned has not been challenged. So far as the assumption of jurisdiction on the basis of issuance and service of notice is concerned, in view of the above, narrated facts, we find that the service was proper and sufficient and, therefore, the jurisdiction was properly exercised.
In the case of CIT v. Bhanji Kanji's Shop (supra), the notice was served on a person, named, as Kumbhar Nameri, who was neither accredited agent of the assessee nor an authorized agent for receiving the notice, but it was found that the assessee filed return in pursuance to that notice, the Tribunal held that the notice must have been received by the assessee. The Hon'ble High Court upheld the approach of Tribunal and further held that it would be taking to hyper-technically a view to hold that the notice served on the employee like Kumbhar Nameri, which is ultimately received by the assessee himself could not be said to be properly served on the assessee. It was also observed that- "If there is a procedural irregularity in the service of notice, if the assessee admits that he received the notice or from the facts it may be found that he must have received the notice even later on, the contention urged on behalf of such an assessee that the notice was improperly served must be rejected. The very fact that in the instant case, the assessee filed the return, indicates that the notice must have been received by him." In the case of Agricultural company, Rampur (supra), the Hon'ble Delhi High Court following the decision of Hon'ble Gujarat High Court in the case of Bhanji Kanji's shop (supra), held that the notice accepted by an Accounts Officer, who was looking after the work on behalf of the assessee-firm and returns were filed by the assessee-firm in pursuant thereto, showed proper service of notice.
In the case of Mahendra Kumar Agarwal (supra), the Hon'ble Patna High Court has also adopted the same approach. In that case, the notices under Section 148 were served on the clerks in the colliery, who were not authorized to receive the notices It was found that the petitioner and his brother had acted on those notices. The Hon'ble Patna High Court, in view of this fact, held that the proceedings were not invalid for want of proper services of notice.
In the case of Dr. H.R. Raj (supra), the Hon'ble M.P. High Court has taken the similar view. The relevant observations of the Hon'ble High Court are extracted below.
"The assessee did not dispute before the Tribunal that he in fact received the notice. The assessee participated throughout in the assessment proceedings before the ITO without raising any objection.
Even if there was any procedural irreguality in the service of notice in that it was not served by the serving officer on the assessee personally or agent empowered to receive service that irregularity loses all significance once it is held that the notice was in fact received by the assessee and was acted upon by him before the ITO without raising any objection. Such a procedural irregularity in service of the notice under Section 148 cannot be held to invalidate the assessment. The view taken by us is fully supported by the decision of the Gujarat High Court in the case of CIT v. Bhanji Kanji's Shop (supra). In that case, it was observed that (headnote) "even if there is a procedural irregularity in the service of a notice of reassessment, if the assessee admits that he had received the notice, or from the facts it can be found that he must have received the notice, the contention on behalf of such an assessee that the notice was improperly served must be rejected".
The case of the Gujarat High Court was followed by the Patna High Court in Mahendm Kumar Agarwalla v. ITO 1975 (1976) 103 ITR 688 (Pat). We respectfully agree with the view taken in these cases." The issue also came before the Hon'ble Madras High Court in the case of A.K.M. Govindaswamy Chettiar (Decd.) and Ors. v. ITO (supra), and the Hon'ble Court after placing reliance on the cases mentioned above, held as under: The assessee in the instant case did not raise any objection at any time before the ITO that the notice was not served on the assessee personally or was not served on the agent who was empowered to receive notices. The objection raised regarding the validity of service of notice has lost its significance when the assessee acted upon the notice, filed the return in pursuance of the reassessment notice and participated in the reassessment proceedings. We, therefore, hold that Tribunal has come to the correct conclusion in holding that the notice under Section 148 of the Act was validly served on the assessee. We have already held, on the merits of the case, that the addition made in the reassessment proceedings was justified. Accordingly, our answer to both the questions of law referred to us is in the affirmative and against the assessee.
However, in the circumstances of the case, there will be no order as to costs." 21. The facts of the above cited cases are similar to the facts of the case before us and, therefore, these authorities are fully applicable to the instant case, inasmuch as the receipt of the notice on behalf of the assessee was not denied and acted upon by the assessee, who filed return on the basis of such notice and also participated in the proceedings as indicated above. The following decisions also support the above view : 22. The learned counsel for the assessee has made reference to several cases and it is neither possible nor desirable to deal with each case separately, because these authorities are distinguishable on facts and are not applicable to the facts of the present case.
24. The above findings shall apply mutatis mutandis in all the appeals except in ITA No. 4/Luck/2000 in which appeal, the assessee has not taken these additional grounds.
25. These grounds challenge the findings of the CIT(A) in holding that the transactions entered into between the assessee-company and the hirers are in reality loan transaction and hire purchase agreement act only as security for repayment of loans. As also the findings that the charges collected by the company were nothing, but the interest charged on the loan transactions and such interest was chargeable to tax under the Interest-tax Act.
Since the grounds challenging the above findings of the CIT(A) are argumentative in nature on this issue, we do not consider it proper to reproduce the grounds of appeal here.
26. The learned counsel for the assessee, Shri S.K. Garg reiterated the arguments raised by the assessee before the CIT(A), which are contained in reply letters dt. 1st June, 1998, and 2nd June, 1998, copies of which have been placed in the paper book of the assessee. He further submitted that the assessee, who was operating from Jabalpur, Madhya Pradesh, purchased vehicles from authorised dealers of Telco and gave the same on hire-purchase agreement to the hirers. According to him, a transaction of hire-purchase is transaction of bailment and eventually and transaction of sale at the option of the hirer. The learned counsel, in support of his arguments made reference to the terms of hire-purchase agreement, a copy of which has also been placed in the paper book at pp. 22 to 28, auditors report along with enclosures, copies of which are available at pp. 29-34 on the paper book, the provisions of Interest-tax Act, the provisions of Hire Purchase Act, 1972, copy available at pages 82 to 95 of the paper book, and the various other documents filed in the paper book of the assessee. The learned counsel also made reference to the various circulars of CBDT Instruction No. 1425 of CBDT dt. 16th Nov., 1981 on TDS under Section 194A and various other documents. He also placed reliance on the following decisions : (ii) Kunnul Nooruddin v. The Jai Bharat Credit Inv. Co. Ltd. [Case No. 81 of Bombay High Court dt. 15th Nov., 1983]; (v) Harita Finance Ltd. v. Asstt. CIT [ITA No. 29/Mad/1997 Tribunal Madras Bench dt. 29th June, 1998].
27. The learned senior Departmental Representative on the other hand, supported the order of the AO and that of the CIT(A) and submitted that most of the decisions referred to by the CIT(A) in the impugned order are found not applicable. According to them, the finance charges relating to the so-called hire-purchase transactions are, in fact, interest charges on loans and advances, and the same have been rightly held to be chargeable under the Interest-tax Act.
28. We have carefully considered the facts and circumstances relating to the issues involved in the above grounds, the material to which our attention was invited, the case laws referred to by the parties and the rival submissions. The main controversy involved in these grounds may be put in the shape of the following issue : "Whether finance charges on account of hire-purchase transactions, entered into between the assessee-company and the hirers are to be treated as profit or as interest charges, charegeable to Interest-tax Act." 29. For proper adjudication of this issue, we have to go through the terms of agreement of hire-purchase, which are decisive factors to ascertain the nature of the transaction of hire-purchase carried out and executed by the assessee-company. However, before dealing with the factual matrix of the matter, we consider it proper to refer to the relevant statutory provisions and the Board's Circular letters, which may be referred in brief as follows : Section 2(5) of this Act defines "chargeable interest" and Sub-section (5A) defines "credit institution", which means banking company to which Bank Regulations Act, 1949, applies, a public financial institution as defined in Section 4A, a State Financial Corporation and any other financial company.
Section (5B) defines financial company and in terms of this definition, a hire-purchase finance company, that is to say, a company, which carries on as its principal business, hire-purchase transactions or the financing of such transactions is also included in the definition of a financial company.
"2(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 (18) of Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), 30. The CBDT issued a Circular No. 738, dt. 25th March, 1996, and clarified that the finance charges accruing or arising to hire-purchase finance company are in the nature of interest as defined in Section 2(7) of the Interest-tax Act, and, therefore, chargeable to Interest-tax Act.
However, by another Circular No. 760, dt. 13th Jan., 1998, the CBDT again clarified the position : 2. The Board have since considered the issue and are advised that in the 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. On the other hand, if the transactions are in substance in the nature of financing transactions, the hire charges should be treated as interest subject to interest-tax.
3. As to what constitutes a transaction in the nature of hire-purchase, the AO should consider the issue on merits taking into account, inter alia the following facts and circumstances : (ii) The nature of the arrangement between the supplier of the asset, the hire-purchase company and the end user of the assets.
(iii) The intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of hire-purchase price, etc. When a hirer is the real purchaser of the asset but does not pay the full purchase price and the hire-purchase company pays the price or a substantial part thereof on behalf of such hirer, and a hire-purchase agreement is entered into merely as an arrangement, then such agreement is a security for repayment of the loan and is essentially a loan transaction.
4. In this connection, the AO should keep in mind the tests laid down by the Supreme Court in the case of Sundaram Finance v. State of Kerala AIR "If there is a bona fide and completed sale of goods evidenced by documents, interior to end independent of subsequent and instinct 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 intention of the appellant in obtaining the hire-purchase and the allied agreements was to secure the return of loan advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions......." 5. Accordingly, instead of routinely treating all hire-purchase transaction as mere financing transactions, the AO may be advised to examine each transaction in the above light and charge interest-tax in such of those transactions which are not in the nature of hire-purchase." 31. In view of the above mentioned legal position and the latest circular of the Board No. 760 referred above for deciding the controversy, it has to be seen as to whether the transactions are, in substance, in the nature of hire-purchase or in the nature of financing transactions. If on examination of relevant material, the transaction is found to be in the nature of finance transactions, then interest on such financing transactions shall be chargeable to Interest-tax Act.
Hence, for proper examination of the nature of transaction involved, we have to study the relevant agreements and other connected circumstances.
32. So far as the hire-purchase agreements entered into between the assessee-company and the hirer are concerned, on a careful and close examination of various clauses, we find that the intention of the parties in executing the agreement is not to advance or take loan, but to give and take the vehicle on lease on certain conditions including the condition that on total payment of charges, the hirer shall have the option to get the vehicle transferred in his name. The examination of various clauses of the hire-purchases agreement goes to show that the ownership of the vehicle remains with the hire-purchase trader and not with the hirer, although, on certain terms and conditions, the hirer is allowed to retain the possession of the vehicle and to use the same. It may be specifically pointed out that the assessee-company has not advanced loan for the purchase of the vehicle by the hirer as the vehicle is initially and originally purchased by the hire-purchase trader (i.e., by the assessee-company) and not by the hirer. Thus, the transaction cannot be said to be a money-lending transaction or financing transactions. In fact, it is a lease of the vehicle by the hire-purchase trader to the hirer and the hire charges are for the use of the vehicles and for the damages caused to it. The trader remains owner of the vehicles for all purposes and the hirer simply has the option to purchase the vehicle in the last. A close scrutiny of other documents executed by the hirer simply shows that these are executed only for securing the payment of instalments. The above conclusions are based on the following terms of the hire-purchase agreement : (b) Whereas the owners are full owners of the motor vehicle with fittings tools, accessories and additions, more particularly described in the Schedule 'A' hereto hereafter collectively called the motor vehicle.
(c) And Whereas the guarantor along with the hirer has approached the owner to hire out the said motor vehicle to the hirer on the guarantor for the due performance of the clause, terms and conditions of this agreement by the hirer.
(d) And Whereas the hirer and the guarantor have completed and signed the owners "Proposal Form" (which is the basis of agreement with respect to hirer's means, properties and other assets as being absolutely true and correct which has induced the owners to enter into this agreement and whereas they have declared that they shall neither sell, alienate, encumber nor charge their property or any part thereof till such time their liability in fully discharged under this agreement and the owners the first and per amount lien on all the assets stated by the hirer and guarantor in the proposal form for any amount due to the owners under this agreement.
(e) Clause I--The owners are the absolute owners of the motor vehicle with fittings, tools, tyres and accessories, inclusive of the body, already built or to be built by the hirer. The body built by the hirer at his own expense, shall always be an internal part of the motor vehicle and shall also be the sole and absolute property of the owners. In the event of repossession by the owners the hirer will not raise any objection on the ground that the body has been built by him.
(f) The owners hereby agree to let, the hirer hereby agrees to take on hire the motor vehicle, particularly described in the Schedule 'A' hereto subject to the Terms and conditions hereinafter contained, which shall be part and parcel of this agreement.
(g) Clause IV, if the hirer shall duly perform and observe the terms and conditions of this agreement and shall have paid to the owners the total amount by way of hire as stipulated in the Schedule B and earlier and has also paid all other dues and expenses due to the owners, under the terms and conditions of this agreement, the hirer will have the option to purchase the said motor vehicle on payment of Re. 1 and on such payment the hiring will come to an end. The owner will then make over all their rights, title and interest in the motor vehicle to the hirer and until the owners transfer the motor vehicle to the Hirer shall remain the absolute property of the owners.
(h) The hirer shall be at liberty at any time during the continuance of this agreement to terminate the hiring by returning the motor vehicle to the owners in Jabalpur in the order and condition in which it was delivered to the hirer (fair wear and tear excepted) at his own cost but this shall be without prejudice to any claim the owners may have against the hirer in respect of this agreement.
(i) Without prejudice to the other rights of the owners may terminate, with or without notice the hiring of the motor vehicle and forthwith retake and recover possession of the same." 33. Coming to the nature of hire-purchase transactions, as discernible and as decipherable from the above agreement and in view of the above terms and conditions, the following conclusions may be drawn : (i) The article hired by the hirer is owned by the assessee-company.
The ownership arises from the purchase of the articles from its suppliers, who draw the bill in the name of the company.
(ii) The ownership of article is also acknowledged by the hirer takes the article on hire.
(iii) The agreement provides that on payment of all the dues and hire purchase price the hirer will acquire an option to purchase the article.
(iv) The possession of the article is delivered to the hirer on behalf of the company.
(v) The hirer has to pay hire-purchase price and other dues and for his agreement to do so, the article is delivered to him for use by him.
(vi) During the period of hire, he pays the official money and other charges as stipulated in the agreement.
(vii) The property in the article is to be passed to the hirer on the payment of last instalment.
(viii) The hirer has right to terminate the agreement during the continuation of hire and even before the property in article passed to him.
34. We, therefore, conclude that the intention of the parties as discernible from the agreement appears to be that it is a pure arrangement of hire-purchase and the principal business activity of the assessee being hire-purchase trading cannot be treated to be financing activity. There may be an element of financing in these transactions, but it cannot be said that they are exclusively and solely financing transactions. The process of the hire-purchase transaction involves choice of article required by the hire-purchase of such article by him from the hire-purchase trader and his choice to purchase the vehicle not at the initial stage, but at the last stage, which shows that it is not the financing activities simplicitor, but activity of hire-purchase alone.
34.1. There is another point involved, which is referable to the treatment of the accounts. The assessee-company has compared balance sheet and P&L a/c. In Schedule "D", which is hire-purchase trading account, cost of article in stock is shown at commencement to, which is added the cost of the article purchased in the year of account, and from the total of this, the cost of article realized in the year of account is deducted and closing stock of articles on hire is carried forward. Thus, only profit on hire-purchase is credited to P&L a/c by the company on hire-purchase trading account. Thus, it will not be correct approach to say that profit on hire-purchase trading is "Interest on Loans & Advances" within the meaning of Section 2(7) of the Interest-tax Act.
35. In the case of The Instalment Supply Ltd. v. STO (supra), the Hon'ble Supreme Court of India has made the following observations after considering the nature of these transactions : "The person desiring to purchase a motor vehicle enters into a hire-purchase agreement with the petitioner company. It may be useful to give within a short compare the terms of the agreement.
The company charges the hirer an initial deposit by way of premium as a consideration for granting the lease of the vehicle, which deposit becomes to absolute property of the company, the premium charges as aforesaid is a substantial amount, being usually 25 per cent of the price in respect of new vehicles. The hirer undertakes to pay instalments and when all the instalments are paid, the vehicle becomes the property of the hirer at his option, on payment of rupee one to the company, as a consideration for the option, until all the stipulated instalments have been paid and the option exercised as aforesaid, the vehicle remains the property of the company as owners. The hirer is delivered possession of the vehicle and he remains responsible to the company for damage or destruction or loss. The hirer has to pay interest at the rate of one per cent per mensem on all sums overdue. Until the option of purchase is exercised by the hirer he is at liberty to return the vehicle and to put an end to the hiring agreement, on certain terms. Thus, under the agreement the hirer has the use of the vehicle which is entrusted to him as the property of the company, and it is given to the hirer to become the purchaser of the vehicle as aforesaid, but he is not bound to do so." 35.1. In the case of Kunnul Nooruddin v. The Jayabharat Credit & Investment Co. Ltd. (supra), the Hon'ble Bombay High Court considered the nature of the transaction and held as under : "2. The agreement of hire-purchase in the present case cannot, in any view of the matter, be considered as a transaction of money-lending. The vehicle was purchased directly by 1st respondent.
Under the terms of the hire-purchase agreement the 1st respondent remained the owner of the said vehicle. Under Clause 5 of the said agreement the petitioner is liable to pay the owners monthly hire charges as set out in the said clause..... under Clause 9, Sub-clause (h), of the said agreement the hirer is required to declare to the registering authority that the vehicle is in his possession under this agreement and to have necessary endorsement to that effect made by the said authority. The agreement is clearly an agreement of hire-purchase. It is an agreement of bailment of the said vehicle with a provision for its sale to the petitioner as provided in the said agreement. It cannot be considered as an agreement of money-lending covered by the Bombay Money Lenders Act, 1946. There is, therefore, no substance in the petitioner's contention that the agreement is illegal as it is contrary to the provisions of the Bombay Money Lenders Act, 1946." 35.2. The issue also came for the consideration of the Hon'ble Supreme Court of India though in the different context in the case of K.L.
Johar & Co. v. Dy. CTO, Coimbatore, III and Ors. (supra). In that case also, the Hon'ble Supreme Court of India made the following observations : "Hire-purchase agreement are not conditional sales. A hire-purchase agreement has two elements : (1) element of bailment, and (2) element of sale, in the sense that it contemplates as eventual sale.
The element of sale fructifies when the option is exercised by the intending purchaser after fulfilling the terms of the agreement. The taxable event under the Act is the sale of goods and until that taxable event takes place there can be no liability to pay tax.
Therefore, though eventually most cases of hire-purchase may result in sales by the exercise of the option and the fulfilment of the terms of the agreement, tax is not exigible at the time when the hire-purchase agreement is made, for at that time the taxable event has not taken place, it can only be regular when the option has been exercised and all the terms of the agreement fulfilled and the sale actually takes place." 35.3. The case of K.L. Johar & Co. (supra) related to transactions of hire-purchase between a finance company and the customers. The purchaser i.e. the customer purchased the motor vehicles and thereafter the purchase money was financed by the financier company. The hire-purchase agreement was entered between the financing company and the purchaser laying down certain stipulations. In that case, the ST authorities assessed the finance company to sales-tax on the ground that the hire-purchase transaction was a sale liable to sales-tax at the time of execution of the agreement. The Hon'ble High Court held that there were two sales involved in the transaction. It also held that the transaction can be treated as sales at the time of agreement was entered into. The Hon'ble Supreme Court, reversing the view of the Hon'ble High Court held that the sales took place only when the option was exercised and not at the time of agreement. The Hon'ble Supreme Court after making reference to its earlier decision in the case of Gannon Dunkerley's case (1959) SCR 379, held that the nature of transaction of sale should be considered after determining the sale price, which should be worked out on the basis of hire-purchase agreement and particularly the portion of instalment, which is paid to purchase the vehicle.
36. The issue as to whether the hire-purchase agreement is a financing transaction or transaction of hire-purchase simplicitor came for the consideration of the Hon'ble Supreme Court of India in the case of Sunderem Finance Ltd. v. State of Kerala and Anr. (supra). In that case, the appellants were carrying on business of financier. The motor vehicle was purchased by the customer and was also registered in his name and remained at all material time so registered in its name. There was hypothecation of the vehicle in favour of the appellants as a security for repayment of the loan. The customer also executed the promissory note for the amount paid by the appellants to the dealer of the vehicle. There was also a sale letter. However, the customer remained owner-qua the world at large and on conditions of performing the covenents had a right to continue to remain in possession. The right of the appellants was liable to be extinguished by payment of amount due to them under the terms of the hire-purchase agreement, even before the dates fixed for payment. On these facts, the intention of the appellants in obtaining the hire purchase and the allied agreement was found to secure the return of loans advanced to their customers. It was also found that no sale of vehicle was intended by the customer to the appellants. On this basis, it was held that the transactions were merely financing transaction.
37. In that case, the Hon'ble Supreme Court considered the nature of various hire-purchase agreements. On class of such transaction was of hire, where the owner was knowingly to look to the purchaser of the goods to recover the balance of the price and the financier, who paid the amount undertook the recovery. In this form, the goods were purchased by the financier from the dealer and the financier obtained a hire-purchase agreement from the customer under which a later became the owner of the goods on payment of all instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The other class of such transaction was when a person, desiring to purchase goods and not having sufficient money on hand borrowed the amount needed from the third person and paid it over to the vendor. This transaction, according to the Hon'ble Supreme Court, between the customer and the lender will unquestionably be a loan transaction. The Hon'ble Supreme Court also observed that a hire-purchase agreement is a more complex transaction. So far as the hire-purchase transaction simplicitor is concerned, the Hon'ble Supreme Court made the following observations : ".........But, a hire-purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters find 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, the hirer being under no legal obligation to buy has an option either to turn 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 a transaction in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire-purchase agreement with the financier, but in substance evidence a loan transaction, subject to a hiring agreement under which the lencer (sic) is given the licence to seize the goods." In view of the above observation, the Hon'ble Supreme Court in that case held that the customer executed promissory note for the amount paid by the appellants to the dealer of the vehicle only as a security for the loan. According to the Hon'ble Supreme Court, the so-called sale letter was a formal document, which was not made effective by registering the vehicle in the name of the appellants and their right to seize the vehicle was merely a licence to ensure compliance with the terms of the hire purchase agreement. The Hon'ble Supreme Court was, thus, of the view that the intention of the appellant in obtaining the hire-purchase and allied agreements was to secure return of money advanced to the customers.
38. If we examine the facts of the case before us, as stated earlier, the vehicles were purchased by the assessee-company. The transaction of sale by the assessee-company are entered and independent to the transaction of hire-purchase. The hirer did not himself purchase the vehicles directly from the vendor nor the vehicle was registered in his name as owner. Thus, the transaction of sale was first transaction between the assessee-company and the vendor. The hire purchase transaction is subsequent to that. Thus, these facts distinguished the present case from the facts in the case of Sunderam Finance Ltd. (supra) and, therefore, on the facts of this case. It cannot be said that in substance hire-purchase transaction in the present case is merely loan transaction.
39. The nature of hire-purchase transaction was considered in depth in the context of the provisions of Interest-tax Act in the case of Harita Finance Ltd. (supra) by the Tribunal, Madras Bench, and the Bench after examining the agreement, the circulars of the Board and relevant case laws held that the term "chargeable interest" as defined in Sub-section (5) of Section 2 was though enlarged by the Finance Act (No. 2) of 1991, so as to include the financial institutions in its ambit, but no amendment was made in the definition of term 'Interest' as given in Sub-section (7) of Section 2 of Interest-tax Act, which meant that the term "Interest" will continue to have the same meaning as was assigned to it earlier before the said amendment. According to the Bench, therefore, the charges in hire-purchase transaction will not come in the ambit of interest, which is subject-matter of taxation in the Interest-tax Act. Since the facts of the case before the Madras Bench of Tribunal, respectfully following the said decision, we held that the charges collected by the assessee-company under hire-purchase transaction are not covered within the definition of "Interest" as given in Section 2(7) of the Interest-tax Act.
40. The above approach finds support from the letter of CBDT dt. 16th Nov., 1981, on the point of deduction of TDS under Section 194A of the IT Act, 1961. The relevant instruction of the Board is reproduced below : "In a hire-purchase contract the owner delivers goods to another person upon terms on which the hirer is to hire them at a fixed periodical rental. The hirer has also the option of purchasing the goods by paying the total amount of agreed hue at any time or of returning the same before the total amount is paid. It may be pointed out that pan of the amount of the hire-purchase price is towards the hire and part towards the payment of price. The agreed amount payable by the hirer in periodical instalment cannot, therefore, be characterised as interest payable in any manner within the meaning of Section 2(28A) of the IT Act, as it is not in respect of any money borrowed or debt incurred. In this view of the matter, it is clarified that the provisions of Section 194A of the IT Act, are not attracted in such transactions." 41. In view of the above discussion, we hold that the transactions involved are in the nature of contract of hire-purchase having an element of bailment as well as that of sale and, therefore, the hire-purchase transaction in the present case cannot be considered as transactions of money-lending or advancing of loans. We, therefore, decide the issue in favour of the assessee by holding that on these transactions, the provisions of Interest-tax Act are not applicable, because the transactions are, in substance, in the nature of hire-purchase transactions only.
42. We may observe here that the learned Departmental authorities have not properly appreciated the legal and factual aspects of the matter and therefore, we reverse the findings of the learned CIT(A) and decide the grounds in favour of the assessee.
43. Since the facts and circumstances involved in these seven appeals are identical to ITA No. 6/Alld/1999 and further since the same issue is involved and similar arguments have been made in these appeals by the parties, our findings recorded in ITA No. 6/All/99 shall also apply to these appeals. Consequently, ground Nos. 1 to 6 taken in ITA Nos. 7 to 12/Alld/99 are allowed and Ground/ No. 7 taken as additional ground fails. In ITA No. 4/Luc/2001, ground Nos. 1 to 6 are allowed, as the additional ground No. 7 is not taken in this appeal. The AO is therefore, directed to delete the additions made on account of chargeable interest under Interest-tax Act in all these appeals.
44. In the result, whereas the Interest-tax Appeal Nos. 6 & 7 to 12/Alld/1999 are partly allowed, the Interest-tax Appeal No. 4/Luc/2001 is allowed.