1. All these thirteen appeals have been filed by the Department. Since a common issue is involved therein, they are being disposed of by this composite order.
2. Common grounds of appeals have been raised by the Department in all the appeals. As such, for the sake of convenience, the grounds in ITA No. 1/Del/2005 are being reproduced hereunder: 1. In the facts and circumstances of the case, the learned CIT(A), Meerut has erred in law in holding that it was a hire purchase agreement and charges received by the assessee are not in the nature of interest and thus, not liable to interest-tax liability.
2. In the facts and circumstances of the case, the learned CIT(A), failed to note that though the transaction is veiled as hire purchase agreement, in essence it is a financing transaction on which interest is earned, though called hire charges.
3. In the facts and circumstances of the case, the learned CIT(A), failed to note the fact that the mandatory initial deposits by the hirer is by way of securing the interest on the amount financed.
4. In the facts and circumstances of the case, the learned CIT(A), failed to appreciate the fact that registering the vehicle in the name of hirer indicates that the ownership no longer remains with the assessee company, which takes the rug out of the company's condition that it is a hire purchase transaction.
5. In the facts and circumstances of the case, the learned CIT(A), failed to appreciate that the remarks made in the documents of the registering authority do not evidence the ownership of the company but is simply an agreement to secure the amount financed by the company.
3. For convenience, the facts are also being taken from Interest-tax Appeal No. 1/Del/2005.
4. The AO passed an order under Section 8(2) of the Interest-tax Act, 1974. It was held that hire charges/financing commission was liable to be taxed for the purpose of charging interest-tax. In the asst. yr.
1992-93, the assessee, M/s Visharad Automobiles Financiers (P) Ltd., Meerut, filed a return of income showing chargeable interest of Rs. 49,620. The AO, however, held that an amount of Rs. 4,53,956 represented hire charges/financing commission, i.e. 50 per cent of total shown in the P&L a/c. As such, interest chargeable to tax was worked out at Rs. 5,03,276. The assessee went up in appeal before the learned CIT(A) who, relying on the first appellate order for the asst.
yr. 1992-93 in the case of Simmi Motor & General Finance (P) Ltd., confirmed the assessment order. This remained the same for the asst.
yrs. 1993-94 and 1994-95. The assessee filed Interest-tax Appeals Nos.
77 to 79/Del/1998 before the Tribunal. Vide order dt. 27th Feb., 2003 (copy on record), the Tribunal observed that in all the three assessment years, the AO had filled in the particulars of the assessee in a cyclostyled manner. No basis had been given by the AO as to why 50 per cent of the hire charges/financing commission in the asst. yr.
1992-93, was chargeable to tax, whereas in the other two years, the entire amount be includible. It was noted that as per CBDT Circular No.738, dt. 25th March, 1996, (1996) 131 CTR (St.) 53, hire purchase transactions entered into by the hire purchase companies and other credit institutions are generally in the nature of interest of financing transactions and hence the hire charges earned on these transactions would be in the nature of interest chargeable to tax under the Interest-tax Act. It was further noted that the CBDT Circular No.760, dt. 13th Jan., 1998 (1998) 144 CTR (St.) 37 was issued clarifying that the AO, in pursuance to the earlier circulars, had started treating all the hire purchase transactions as mere financing transactions without distinguishing between a true hire purchase transaction and a financing transaction in the form of a hire purchase transaction. This circular advised that in the case of transactions which are in substance in the nature of hire purchase, the receipts of hire purchase would be in the nature of interest. If the transactions are, in substance, in the nature of financing transactions, the hire charges would be treated as interest subject to interest-tax. As to what constitutes a transaction in the nature of hire purchase was clarified vide paras 3 and 4 of the said circular, which were reproduced by the Tribunal, as follows: 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 asset.
(iii) 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. 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 Ltd. v. State of Kerala 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 intention of the appellant in obtaining the hire purchase and the allowed agreement was to secure the return of loan advances to their customers, and no real sale of the vehicle was intended by the customers to the appellants. The transactions were merely financing transaction....
5. The Tribunal noted that vide para 5 of the above CBDT circular, it stood clarified that instead of routinely treating all hire purchase transactions as merely financing transactions, the AO may be advised to examine such transactions in the above light and charge interest-tax in such of those transactions as are not in the nature of hire purchase.
The Tribunal noted that in the three years before it, the AO had not applied his mind to the issue at all and had completely overlooked the mandate of the CBDT circular and that the CIT(A) had also upheld the order of the AO mechanically, without going into the transactions separately. As such, the Tribunal restored the matter to the file of the AO to be decided afresh in the light of the CBDT circular, on allowing a reasonable opportunity of being heard to the assessee.
5.1 In the second round, by virtue of the assessment order dt. 22nd Dec, 2003, i.e. the order giving rise to the appeal leading to the passing of the impugned order dt. 30th Nov., 2004, the AO observed, inter alia, that as per the definition of "interest" in the Interest-tax Act, "interest" means interest on loans and advances and includes commitment charges on unutilized portion of any credit sanctioned for being availed of and it has specifically excluded two items out of this scope, i.e., discount on treasury bills and interest referred to in Sub-section (1B) of Section 42 of RBI Act. According to the AO, this means that whatever be the amount received as interest, may be under any nomenclature, it would be liable to tax under the Interest-tax Act, other than the mentioned two items. The AO was of the view that the modus operandi of the assessee was that the interest charged by the assessee on the amounts advanced for the certain given period and the original amounts advanced were added together and then the amount was divided in the settled number of instalments; that thus, the hire charges received by the assessee were principal and interest and nothing else; and that the same had been correctly shown in the P&L a/c as hire and purchase financing commission/hire charges. The AO further observed that in Section 2(5A) of the Interest-tax Act, the definition of "credit institution" included "any other financial company"; that Section 2(5B) defined "financial company" and according to this section, a hire purchase company was treated as a financial company; that as such, a hire purchase company came within the definition of "credit institution". The AO observed that Section 4 of the Interest-tax Act was the charging section regarding interest-tax, which meant that a hire purchase company or a credit institution were liable for charging interest-tax under the Interest-tax Act for the amount they had received as hire charges/financing commission. It was also noted that Section 7 of the Interest-tax Act fixed the responsibility of submitting the return of chargeable interest on the principal officer of every credit institution. The AO further noted that vehicles were purchased by the actual owners directly from the manufacturer or dealer. The assessee company only part financed the same. The vehicles were registered directly in the name of the owners and it was only on the application of the assessee company that the registering authority made an entry in the certificate of registration.
Thus, financing company would not become the owner. As such, the AO treated the hire charges in question as interest chargeable to interest-tax and brought it to tax. 5.2 In appeal before the learned CIT(A), the assessee submitted as follows: The same matter for the asst. yr. 1995-96 to asst. yr. 2000-01 were dealt by the AO who added the income from hire purchase as interest income and imposed interest-tax on the total income.
Your Honour for the asst. yrs. 1995-96 and 2000-01 for the assessee company had decided the issue thereby deleting the income of hire purchase from the income as interest income. Your Honour also considered the income from the Government securities as the income being exempt from the clutches of Interest-tax Act. The copies of the Appeal No. 230/2001-02 decided on 23rd May, 2003 for the asst.
yr. 1995-96 and Appeal No. 10/2003-04 decided on 26th June, 2003 for the asst. yr. 2000-01 are enclosed.
For the asst. yr. 1995-96 in the original return the AO had considered the income from hire purchase as the income exempt from the interest-tax, however, the learned CIT, Meerut had found the order of the AO as erroneous and prejudicial to the interest of Revenue and after considering the Circular No. 760 (1998) 144 CTR (St) 37 of the CBDT had set aside the order with the directions to AO to frame the assessment afresh. The AO did not consider the explanations of the assessee as acceptable, hence the hire charges were brought to tax under the Interest-tax Act. Likewise interest income from Government securities were i.e. IVP, NSC etc. had also been charged under Interest-tax Act.
Your Honour after granting opportunity to assessee had decided the matter in favour of assessee company and deleted the hire purchase income from interest-tax. Also your Honour had decided in favour of assessee company that the income from assessee company that the income from Government securities is not interest and was not taxable under Interest-tax Act.
The copies of the orders as discussed above for the asst. yr.
1995-96 and asst. yr. 2000-01 are enclosed. The same are relied by the assessee as your Honour have discussed at length each and every circular as well the decisions of Tribunal Hyderabad Bench in the case of N.K. Leasing & Construction (P) Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 261 : (2001) 79 ITD 658 (Hyd).
The assessee company wants to add further that the hire purchase cases are done mostly for 24 to 36 months and the income of a case is reflected in three assessment years. The income for the asst. yr.
1992-93 is reflected in that year as well as in the years 1993-94 and 1994-95. Similarly for the asst. yr. 1993-94 it will reflect till 1995-96 and for the asst. yr. 1994-95 it will reflect till 1996-97 and so on. The income as has been held by your Honour as exempt, the same should also be exempt for other years.
The matter for the asst. yr. 1993-94 and asst. yr. 1995-96 are the same as in the asst. yr. 1992-93. It is therefore requested to kindly treat the same for the latter assessment years.
6. By virtue of the impugned order, the learned CIT(A) allowed the appeals of the assessee for all the three assessment years, observing, inter alia, as follows: ...The AO has not examined the transactions in the light of Hon'ble Tribunal's directions as also in the light of Board's Circular No. 760, dt. 13th Jan., 1998 (1998) 144 CTR (St.) 37. The AO has referred to hire charges which means he had treated all the transactions as hire purchase transactions and in view of Board's Circular No. 760, dt. 13th Jan., 1998 such charges were not to be subjected to the interest-tax. So far as the hire charges are concerned the same have been held as not chargeable to interest-tax vide appellate order in the assessee's own case for the asst. yr.
1995-96. Since the facts, basis of addition and written submissions are the same, I hold for the findings given in asst. yr. 1995-96 will hold good in these two years as well.
7. Accordingly, the Department has preferred Interest-tax Appeal No.1/Del/2005 before us. Admittedly, the fact situation in the other twelve appeals remains much the same.
8. The short issue before us is as to whether the hire charges received by the assessee are liable to interest-tax under the Interest-tax Act, or not. The transaction which fetches this interest to the assessee is that the buyer of the vehicle takes the possession thereof directly from either the manufacturer or the dealer. The role of the assessee is only to finance the transaction. According to the assessee, this transaction is not a financing transaction so as to attract the charge of the interest-tax under the Interest-tax Act. On the other hand, the Department maintains that if such kind of transactions cannot be termed as pure and simple financing transactions, no transaction at all can be brought within the ambit of a financing transaction. All financing transactions, as such, would be only hire purchase transactions and the provisions of Interest-tax Act would, therefore, be rendered otiose and redundant.
9. To begin with, Section 2(7) of the Interest-tax Act, 1974, defines "interest" as follows: 2(7) 'interest' means interest on loans and advances made in India and includes-- (a) commitment charges on unutilized 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 (1B) of Section 42 of the RBI Act, 1934; 9.1 Therefore, "interest" in Section 2(7) of the Interest-tax Act, 1974, means interest on loans and advances made in India, other than the two items mentioned in the section.
9.2 Section 4 of the Interest-tax Act, 1974, is the charging section.
As per Section 4(2) interest-tax, would be charged in respect of chargeable interest of every credit institution.
9.3 Chargeable interest has been defined in Section 2(5) to mean total amount of interest referred to in Section 5, computed in the manner laid down in Section 6.
10. "Credit institution", under Section 5(a) of the Interest-tax Act, 1974 means, inter alia, "any other financing company" which, in turn, has been defined in Section 2(5B) of the Act. Undisputedly, the assessee is a financing company within the meaning of Section 2(5B)(i), being a hire purchase financing company, carrying on hire purchase transaction as its principal business.
10.1 In short, if the interest being earned by the assessee company comes within the scope of "interest" as defined in Section 2(7) of the Interest-tax Act, 1974 and falls within "chargeable interest" under Section 2(5) of the Act, it shall be chargeable to interest-tax.
10.2 Section 5 of the Act, loosely states that the chargeable interest shall be the amount of interest accruing or arising to the credit institution in the previous year.
10.3 So, the broad apparent picture which emerges is that the assessee is a credit institution being a financing company, being a hire purchase financing company; that interest earned by it is interest chargeable to interest-tax, i.e. it is "chargeable interest" and that therefore, the AO was correct in bringing this interest to charge of interest-tax, whereas the learned CIT(A) erred in cancelling the said assessment order.
11. The dispute between the parties has been raging for quite some time now. The assessee terms these transactions to be hire purchase transactions and contends that such transactions do not fall within the ambit of those transactions as result in accrual or arising of financing charges, which are the subject-matter of the Interest-tax Act. The Department, on the other hand, has maintained that such hire purchase transactions are nothing other than financing transactions entered into by the company carrying on the business of financing and that the charges accrued or arisen from such transactions are in the nature of interest as defined in Section 2(7) of the Interest-tax Act, which interest is chargeable to interest-tax. The dispute was first underlined by the CBDT Circular No. 738, dt. 25th March, 1996. This led the AOs to treat all hire purchase transactions as financing transactions. The Board, therefore, was constrained to issue Circular No. 760, dt. 31st Jan., 1998, advising that in the case of hire purchase transactions, the matter of hire charges would not be in the nature of interest, whereas in the case of financing transactions, hire charges should be treated as interest subject to interest-tax. In advising so, the AOs were required to keep in mind the basis laid down by the Hon'ble Supreme Court in the case of Sundaram Finance Ltd. v.State of Kerala 11.1 In Sundaram Finance Ltd. (supra), the assessee company was carrying on the business of financing the purchases of motor vehicles on the security of those vehicles. The scheme adopted by the assessee company was that the customer, who purchased the motor vehicle from the dealer directly, paying part of the price therefor, applied to the assessee for a loan of the balance of the price to be paid by the assessee directly to the dealer. The assessee paid the amount and as security for repayment thereof, took a promissory note, a "sale letter" reciting that the customer had, on the date of his application for loan, sold the motor vehicle to the assessee, a bill and a receipt for the amount describing it as the value of the vehicle sold to the appellant, on undertaking to keep the vehicle insured against comprehensive risks, an agreement called the hire purchase agreement, under which the assessee as "owner" agreed to let out to the customer as "hirer", and the customer agreed to take on hire, the motor vehicle for a specific term, and also a letter to the motor vehicle authority informing it that the vehicle was the subject-matter of a hire purchase agreement between the customer as owner and the assessee, and requesting it to make a note thereof in the registration certificate standing in the name of the customer. Under the agreement of hire purchase the customer agreed to pay the stipulated rent, to take proper care of the vehicle, to keep it insured and not to assign, sell, pledge, charge or underlet it or part with possession thereof. The agreement was to stand determined, and the assessee could seize the vehicle and take possession thereof, on the happening of certain specified contingencies such as failure of the customer to pay any instalment of hire in time, or his breaking or failing to perform or observe any conditions of the agreement. Upon determination of the agreement all instalments previously paid were to be forfeited. Under Clause (6) of the agreement, on the customer paying the entire amounts due, the vehicle became the sole and absolute property of the customer.
The question was whether when by operation of Clause (6) of the agreement the rights of the assessee were extinguished, there resulted a sale of the vehicle in favour of the customer which was taxable under the Travancore-Cochin General Sales-tax Act. The majority view of the three Judges' Bench of the Hon'ble Supreme Court was that the intention of the assessee in obtaining the hire purchase and the allied agreements was to secure the return of loans advanced to the customer and no real sale of the vehicle was intended by the customer to the assessee. The motor vehicle purchased by the customer was and remained at all material times, registered in his name. The so-called "sale letter" was merely a formal document which was not made effective by registering the vehicle in the name of the assessee. The assessee's right to seize the vehicle was merely a licence to ensure compliance with the terms of the hire purchase agreement. The transaction was merely a financing transaction and there was no sale when the rights of the assessee under the agreement were extinguished by operation of Clause (6) of the agreement.
12. Before us, the arguments of the Department, as made by the learned Departmental Representative, Shri Mishra, have largely been based on the above decision of the Hon'ble Supreme Court, as advised by the CBDT, vide Circular No. 760, dt. 13th Jan., 1998, to be followed by the AOs, in distinguishing between hire purchase equipment and financing agreement for the purpose of the Interest-tax Act, 1974.
12.1 Shri Mishra has vehemently argued that the agreements under consideration before us are merely sham agreements. The transactions themselves are nothing else, but a financing act. They can, in no manner, be said to be hire purchase transactions. The modus operandi of the assessee is amply evident from the narration given to the AO. In fact, it is a circuitous method adopted by the assessee to circumvent the levy of interest-tax on interest which is chargeable to tax within the meaning of Section 4 of the Interest-tax Act and was rightly put to tax by the AO and the CIT(A) has erred in believing the assessee's story and cancelling the tax genuinely due to the Department. Shri Mishra has submitted that neither hire purchase agreement nor financing agreement have been defined in the Interest-tax Act. That being so, we have to take the ordinary dictionary meaning of both these kinds of transactions. In a hire purchase agreement, if the financier is the owner of an asset, there should be some payment and it is only after the last payment that the hirer becomes the owner. On the other hand, in a financing agreement, the hirer is the owner of the asset and he, on his turn, approaches the financing company for finance. Shri Mishra placed reliance on the following case laws:Instalment Supply (P) Ltd. v. Union of India 12.2 So, according to the learned Departmental Representative, what is material in such transactions is to see as to who is the actual owner of the asset. In the present cases, the assessee is definitely not the owner of the vehicles. Admittedly, the hirer had directly purchased the vehicle either from the manufacturer or the dealer. The role of the assessee was only that of financing the transaction of purchase of vehicle. The agreements have been created later in order to facilitate avoidance of the levy of interest-tax. Therefore, the orders of the learned CIT(A) are liable to be quashed.
13. On the other hand, the learned Counsel for the assessee has argued that the transactions in question are hire purchase transactions fair and simple. The Department is unnecessarily trying to complicate the matter. True, neither hire purchase agreement nor financing agreement finds any definition in the Interest-tax Act, 1974. However, recourse cannot be taken to the dictionary meaning in this regard. This is so because of the existence of a special enactment, known as the Hire Purchase Act, 1972. This, as per the learned Counsel for the assessee, is the Act/enactment governing the agreements under consideration.
These agreements have been termed in accordance with the said Hire Purchase Act of 1972. It is well settled, that a special enactment overrides the general law. In the present case, the provisions of the Hire Purchase Act are clearly in operation. The decision of the Hon'ble Supreme Court in the case of Sundaram Finance Ltd. (supra) has no application. This judgment was delivered on 30th Nov., 1965. The Hire Purchase Act, on the other hand, came into force w.e.f. 1st June, 1973.
Section 2(c) of the Hire Purchase Act defines "hire purchase agreement" to mean the 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 possession of the goods is delivered by the owner thereof to a person on a condition that such person pays the agreed amount in periodical instalments and the property in which the goods is to pass to such person on the payment of the last of such instalments, and such person has a right to terminate the agreement at any time before the property so passes.
13.1 Section 2(f) of the Hire Purchase Act defines "owner" to mean the person who lets or delivers or has delivered the possession of goods, to a hirer under the hire purchase agreement.
13.2 The learned Counsel for the assessee argued that the assessee clearly falls within the definition of "owner" as laid down in Section 2(f) of the Hire Purchase Act. Therefore, there is noway that the transactions in question may be termed as financing transactions rather than hire purchase transactions. The assessee being the owner of the goods i.e. the vehicles, the element of financing the purchase, becomes secondary. The important thing to be seen is that the transaction is of a hire purchase transaction and not a financing transaction. All these agreements were duly considered by the learned CIT(A) while passing the impugned order. This had to be done because despite clear directions from the Tribunal, the AO did not follow them. Moreover, the Delhi Bench of the Tribunal in Interest-tax Appeal No. 37/Del/2000, for the asst. yr. 1997-98, in the case of Rakshit Motor & General Finance (P) Ltd., has considered the matter at length and has decided the issue in favour of the assessee, while passing the order dt. 11th Oct., 2004. A copy of the said Tribunal order has been placed on record. The learned Counsel for the assessee has submitted that in that order the Tribunal, while deciding the matter in favour of the assessee, has held that the decision of the Hyderabad Bench of the Tribunal in the case of N.K.Leasing & Construction (P) Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 261 : (2001) 79 TTD 658 (Hyd), and that of the Lucknow Bench of the Tribunal in the case of Commercial Motors Finance Ltd. v. Asstt. CIT (2002) 76 TTJ (Luck) 918 : (2002) 82 TTD 176 (Luck) were directly applicable. The CIT(A) was, therefore, not justified in upholding the action of the AO in treating the hire charges as liable to interest-tax.
13.3 In the synopsis filed in the case of Diamond Mutual Finance (P) Ltd., the assessee has contended that the matter stands covered in favour of the assessee by the following decisions also:Deep Hire Purchase (P) Ltd. v. CIT (2) Muthoot Leasing & Finance Ltd v. Jt. CIT (2003) 79 TTJ (Coch) 773 : (2003) 84 ITD 477 (Coch).
(3) Delhi Bench decision dt. 31st March, 2005 in Interest-tax Appeal No. 61/Del/2003 for the asst. yr. 1995-96 in the case of Dy. CIT v. Sargodha Finance Co. Ltd. (4) Decision of the Delhi Bench of the Tribunal, camp at Meerut, passed on 28th March, 2005, in Interest-tax Appeal Nos. 4 to 6/Del/2003, for the asst. yrs. 1997-98 to 1999-2000 in the case of Asstt. CIT v. Manisha Motor & General Finance (P) Ltd. 14. In Interest-tax Appeal Nos. 4 and 5/Del/2005, a further argument has been taken by the assessee, that the amounts received have been, in the past as well as in the subsequent years, treated as financing charges and not as interest. It has been pointed out that in the assessee's own case, for the asst. yr. 1995-96, the learned CIT(A) vide order dt. 26th June, 2003, following the decision in N.K. Leasing & Construction (P) Ltd. (supra), decided the matter in favour of the assessee. It has been pointed out that the Tribunal has repeatedly decided this issue in favour of the assessee in various cases.
Attention has been drawn to the cases at pp. 33 to 34, 35 to 37 and 38 to 43 of the paper book in the case of Diamond Mutual Finance (P) Ltd. These are copies of the aforementioned Tribunal orders. Attention has also been drawn to pp. 44 and 45 of the paper book, which is a copy of the assessment order for the asst. yr. 1992-93 in the case of Anashakt Motor Finance (P) Ltd., where the AO himself treated the agreement as a hire purchase agreement.
14.1 In the case of Rakshit Motor & General Finance (P) Ltd. (supra), the assessee has also placed on record and relied on the "Non-banking Financial Companies (Reserve Bank) Directions, 1977". It has been contended that as per Direction 2(1)(e), a non-banking financial company has been defined as follows: (1)(xi) "Non-banking financial company" means any non-banking institution which is a loan company or an investment institution or hire purchase financing company or equipment leasing company or a mutual benefit financial company.
14.2 Direction 2(1)(i) of the above Directions defines "loan company" to mean any company which is a financial institution carrying on as its very business providing of finance whether by making loans or advances or otherwise for any activity other than its own but not to include an equipment leasing company or a hire purchase financing company or housing finance company.
14.3 As per Direction 2(1)(f) of the above Directions, (a) "hire purchase finance company" means any company which is a financial institution carrying on as its principal business of hire purchase transaction.
14.4 The stand of the assessees is that the Revenue has failed to appreciate the difference between a "loan company" and a "hire purchase company" and has taken the business of the assessee to be that of a loan company and has treated the hire charges earned by these assessees to be interest chargeable to interest-tax under the Interest-tax Act.
14.5 Further, the assessee has placed reliance on the CBDT Instruction No. 1425, dt. 16th Nov., 1981. This pertains to TDS on financial charges. It is pointed out that under these instructions, the Board has taken into consideration the definition of interest, as given in Section 2(28A) of the IT Act. This is so, according to the assessees, due to the fact that the agreed amount payable by the hirer in periodical instalments cannot be characterized 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.
14.6 It is then contended on behalf of the assessees that the Department should maintain a consistent stand rather than adopting vascillating ones.
15. In his counter, the learned Departmental Representative has broadly reiterated the arguments initially made. It has been stressed that in these matters, the Department has challenged the very agreement and, therefore, none of the case laws relied on by the assessees is applicable and that therefore, the orders of the AO are entitled to be revived, while quashing the orders of the learned CIT(A).
16. The Department has placed heavy reliance on the decision of the Hon'ble Supreme Court in the case of Sundaram Finance Ltd. v. State of Kerala and Anr. (supra). In this case, the majority decision was that the intention of the assessee in obtaining the hire purchase and the allied agreements was to secure the return of loans advanced to the customer and no real sale of the vehicle was intended by the customer to the assessee. The motor vehicle purchased by the customer was and remained at all material times registered in his name. The so-called "sale letter" was merely a formal document which was not made effective by registering the vehicle in the name of the assessee. The assessee's right to seize the vehicle was merely a licence to ensure compliance with the terms of the hire purchase agreement. The transaction was merely a financing transaction and there was no sale when the rights of the assessee under the agreement were extinguished by operation of Clause (6) of the agreement. The thrust of the arguments of the learned Departmental Representative, as such, is that the agreements under consideration presently before us are none other than the financing agreements and cannot be termed as hire purchase agreements, howsoever they were worded.
16.1 The rebuttal of the learned Counsel for the assessees to this is that the judgment in the case of Sundaram Finance Ltd. (supra) was delivered on 30th Nov., 1965. After passing of this judgment, the Hire Purchase Act, 1972 has come into existence and that it is in force w.e.f. 1st June, 1973. Therefore, the present agreements are specific agreements under the said Act. That being so, Sundaram Finance Ltd. (supra) does not have any applicability whatsoever to the present case.
17. The rival contentions have been considered along with the material placed on record. First of all, it is seen that in Appendix HI of the Hire Purchase Act, 1972, agreement forms have been given. Form No. 6 is the agreement form relating to hire purchase agreement regarding a car through a financing company. It is seen that all the agreements before us are in the shape of this form. Thus, all the hire purchase agreements, before us are, doubtlessly, agreements under the Hire Purchase Act, 1972, i.e. hire purchase agreements. It is trite law that to determine the actual nature of an agreement, the Court has to see the form and not the shape of the agreement. A perusal of each of the hire purchase agreements before us shows that these are hire purchase agreements. The hirer has an option to purchase them in accordance with the terms of the agreement. As to the nature of the agreements, the agreements are elaborate and self-speaking. They constitute none other than hire purchase agreements within the meaning of Section 2(c) of the Hire Purchase Act, 1972. Apropos the contents of the agreements, as rightly pointed out by the learned Counsel for the assessees, this matter has been considered at length in N.K. Leasing & Construction (P) Ltd. v. Dy. CIT (supra). Therein, the Tribunal observed as follows: (relevant portion at p. 671 of the report): Hire purchase thus, has an element of sale in it, but not a concluded element of sale. It merely provides the hirer with an option to buy but does not cast an obligation to buy. Kasal Narayan v. Laxmi Narasimhan AIR 1955 Hyd 104 (FB). Therefore, if we see and scan the hire purchase agreement so entered into by the appellant with the hirers in the light of the above principles emerging out from the characteristics of a typical hire purchase transaction, the inescapable conclusion that emerges is that it contains all the attributes of a hire purchase agreement and it cannot be said to be an agreement for the repayment of loan with the security of vehicle as contended by Revenue throughout. Vehicle is not sold to the hirer at the time of delivery and it is sold on the conclusion of the payment of all hire charges, if the hirer exercised his option to buy. Learned AO's contention in the assessment order that there was no completed sale supports the case of the assessee than that of Revenue. Merely because registration is made in the name of the hirer, it cannot be said that the vehicle has been sold conclusively to the hirer, as this has to be seen and read in conjunction with the overriding clause contained in the hire purchase agreement to the effect that subject-matter of hire shall remain the property of the appellant. If the explicit clauses contained in the agreement are disregarded, there cannot be a hire purchase transaction and the Hire Purchase Act, 1972 passed by the legislature shall be a paper legislation, which cannot be imputed by any means. Hire purchase arrangement may be a mode of financing a transaction but such arrangement is recognized by the law and is backed up fully by a special enactment. Therefore, when there is a special enactment recognizing and regulating a particular clause of transactions and transactions fulfilling the ingredients enshrined under that enactment, there remains no scope whatsoever to give a different meaning to those transactions.
17. Therefore, apparent implication of the above analysis is that though hire purchase charges may be understood as something else as understood by Revenue but cannot be said to be interest on loans and advances for the purposes of Interest-tax Act, because a hire purchase transaction is neither a loan nor an advance. The authorities below have tried to explode the very facade of the transaction and record the hiring as a sham or a camouflaged way of loans and advances but they have not been able to do so with the help of overwhelming documentary evidence. Applying the same principle that apparent is the real unless proved otherwise by the person who says it is not, we find that the authorities below have failed to bring sufficient material on record in support of their contention that hire charges are nothing but interest on loans and advances. Burden cast on the Revenue in this regard was very heavy and onerous. Merely because the words 'amount of loan' are mentioned on the guarantee form, by itself is 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. Case law relied by Revenue has no application in the instant case. Therefore, in our considered opinion, hire purchase transactions entered into by the appellant company, are the hire purchase transactions resulting into hire charges to the appellant company, which are not covered within the meaning of the word 'interest' under the Interest-tax Act.
Therefore, we uphold the plea of the assessee that the hire charges earned by it in the three years involved before us are not interest within the meaning of Section 2(7) of the Interest-tax Act, 1974 and cannot be accordingly subjected to interest-tax.
18. The learned Counsel for the assessees have argued that it is the Hire Purchase Act, 1972, which is the governing piece of legislation qua the present agreements, and that being so, the Sundaram Finance Ltd. decision is not applicable, since it pertained to the agreements entered into before the enactment of the Hire Purchase Act, 1972.
18.1 The said argument made on behalf of the assessee, we find, is correct. This is so, because Section 31 of the Hire Purchase Act, 1972 provides that it shall not apply in relation to any hire purchase agreement made before the commencement of the said Act. Otherwise, the argument on behalf of the Department is the substance and not the shape of a document which determines its nature, is correct. However, this argument goes against and not in favour of the Department. A perusal of each of the agreements shows their nature to be that of hire purchase agreement and not tax beneficiary agreement. As correctly observed in N.K. Leasing & Construction (P) Ltd. (supra), the hire purchase agreements do contain an element of sale, though they may not contain the element of a completed sale. This falls true in the case of the present agreements. The clauses of the agreements, in this regard, are amply eloquent.
19. Another argument raised by the learned Departmental Representative was that the reliance by the assessees on the Hire Purchase Act, 1972 is ipso facto misconceived, since the definition of 'owner' as given in Section 2(f) of the said Act does not take into its fold persons like the assessees, since this definition envisages delivery by the owner to a hirer, whereas in the present cases, the factum of delivery of the vehicles having been handed over to the hirer by the assessee is conspicuous by its absence. In all these cases, invariably the vehicles were never delivered to the assessee. It was the hirer, who took the delivery of the vehicle directly from the manufacturer or the dealer.
19.1 This stance of the Department, in our considered view, is entirely fallacious. Section 2(f) defines "owner" to mean the person, who lets, or has let, delivers or has delivered possession of goods, to a hirer under a hire purchase agreement. Clause (1) of the agreements before us runs as follows: (1) The owners being the absolute owner of the motor vehicle, with fittings, tools and accessories and conditions more particularly described in the Schedule No. 2 hereto and hereinafter collectively called, "the vehicle" agree to let and the hirer agrees to take on hire the vehicle from the (sic) hereof, subject to the terms and conditions herein contained and hereto annexed and which shall be taken and read as integral part of this agreement.
It is thus abundantly clear that by the very first clause, the agreement under consideration provides that the assessees agree to let the vehicle, from the very day of the agreement, to the hirer. Added to this and in juxtaposition thereto, as per Section 2(e), "hirer" means the person who obtains or has obtained possession of goods from an owner under a hire purchase agreement. The above quoted clause No. 1 of the agreement envisages the transfer of the possession from the owner to the hirer. It also envisages, simultaneously, the acceptance of such transfer by the hirer. That being the position, it cannot be said, by any means, that the assessees are not "owner" within the meaning of Section 2(f) of the Hire Purchase Act, 1972.
20. Furthermore, in view of the express provisions of the Interest-tax Act, 1972, as considered at length in N.K, Leasing (supra), it cannot be said that the agreements under consideration are financing agreements and not hire purchase agreements. Contrary to the learned Departmental Representative's argument that in the absence of definition of hire purchase agreement under the Interest-tax Act, the dictionary meaning thereof has to be taken into consideration, once there is in force a specific enactment with regard to the hire purchase agreements and hire purchase agreements have been specifically defined thereunder, it is that latter definition which has to be taken into account and none other. This discussion clearly leads us to hold that the Department is wrong when it contends that the agreements in question are sham agreements, engineered to suit any design nurtured by the assessee to evade interest-tax.
21. In the course of hearing, the Bench had put a specific query to Shri Sapra, one of the learned Counsel for the assessees, as to whether the depreciation has been claimed by the assessees. The assessees being the alleged owners, it would be but natural for them to claim depreciation for the vehicles which are assets belonging to the assessees. In this regard, the reply of Shri Sapra has been in the negative. Now this is a direct pointer to the fact that the assessees, in fact, are not the owners of the vehicles and the agreements in question are only a facade being put up as a front to avoid levy under the IT Act, or it would seem to be so. It has been contended on behalf of the assessees that in fact, the assessees are not entitled to depreciation on the vehicles, because the stock has been shown as current assets in the balance sheet and that they are not fixed assets.
This is as per Schedule VI of the Companies Act, 1956. We have seen the balance sheets filed before us in the case of Visharad Automobile Financiers (P) Ltd. The contention of the learned Counsel for the assessees is found to be correct. It cannot be denied that Schedule VI of the Companies Act, 1956 is mandatory for the preparation of the balance sheet of the company. As per the schedule, the "owners on hire under hire purchase agreements", are to be shown under the head "Current assets" whereas the loans and advances are required to be shown under the head "Loans and advances". Though the assessee has not shown the vehicles in its balance sheet as its stock, the amount earned has been depicted as 'current assets'. Further, the assessee's auditors, in the TAR, at items 18 on p. 3 thereof, have categorically stated that the assessee company is a hire purchase finance company and has complied with all the regulations of hire purchase business.
22. Then, uncontrovertedly, according to the Directions 2(1)(e) of the Non-Banking Financial Companies (Reserve Bank) Directions, 1977, a non-banking financial company has been defined as any hire purchase, finance, housing finance, investment, loan or mutual benefit financial company and equipment leasing company but does not include an insurance company or a stock exchange or stock broking company. As such, a hire purchase company, like the assessees before us, is as per the above Directions, a non-banking financial company. This is distinguished from a loan company, which has been defined in directions 2(1)(i) of the above Directions to mean any company which is a financial institution carrying on as its principal business providing of finance whether by making loans or advance or otherwise for any activity other than its own but does not include equipment leasing company or housing finance company. Evidently, therefore, as per the above directions, a non-banking financial company which includes a hire purchase company, is entirely different from a loan company. Incidentally, a hire purchase financing company has been defined in Direction 2(1)(f) to mean any company, which is a financial institution carrying on as its principal business, hire purchase transaction. For this reason also, the view of the Department is misconceived when it treats the hire charges earned by the assessees as interest within the meaning of Interest-tax Act, 1974.
23. It will not be out of place to mention here that even the Companies Act, 1956 (Section 37) does not consider hire purchase transaction as loans and advances.
24. Still further, as rightly pointed out, Article 366(29A) of the Constitution of India recognizes a hire purchase as a sale of goods.
Once this is so, it would be a travesty of justice to consider such a transaction as a loan or advance of money for the purposes of bringing it within the ambit of the levy of the interest-tax under the Interest-tax Act, 1974. This is not, and can never be, the intention of the legislation.Instalment Supply Co. v.Union of India (supra), the Hon'ble Supreme Court held that if there is an obligation to buy or an option to buy the goods delivered to the hirer by the owner on the terms that the hirer on payment of the premium as also of a number of instalments, shall enjoy the use of the goods, which ultimately become his property, the transaction amounts to one of hire purchase, even though the title to the goods has remained with the owner and shall not pass to the hirer till a certain event has happened, namely, that all the stipulated instalments have been paid or that the hirer has exercised his option to finalise the purchase on payment of sum, nominal or otherwise. The Hon'ble Supreme Court was, therefore, of the view that a hire purchase agreement is not only a contract of bailment but it has also an element of sale added thereto.
26. In this regard, the contention of the learned Departmental Representative has been that in the present case, the delivery of the vehicles was taken straightway from the manufacturer/dealers to the hirer and it never reached the assessees, who want, despite this, to be termed as owners. We do not find this argument of the Department also to hold any water. As discussed hereinabove, the handing over of the possession/delivery is entirely in keeping with the hire purchase agreement entered into, in accordance with the Hire Purchase Act, 1972.
It is immaterial, therefore, that the delivery proceeded directly from the manufacturer/dealer to the hirer rather than via the assessee. The fact remains that as per the agreement, it is these assessees, who are the owners and not the hirers. Reading the observations of the Hon'ble Supreme Court in the case of Instalment Supply (P) Ltd. (supra) alongside this discussion, the outcome is that the agreements at hand are nothing other than hire purchase agreements.
27. In K.L. Johar & Co. v. Dy. CIT (supra), the Hon'ble Supreme Court has held that when all the terms of the agreement are satisfied and the option is exercised, a sale of the goods takes place, which till then had been hired. This, we find, is entirely in consonance with the provisions of the Hire Purchase Act, 1972 which, to reiterate, is the Act governing the agreements at hand.
27.1 Apropos Sundaram Finance Ltd. (supra), it has rightly been pointed out that this decision was rendered in the backdrop of an entirely different dispute from the one presently before us. There, firstly, the Hire Purchase Act, 1972 was not in operation. Further, in that case, the Hon'ble Supreme Court was in seizin of a matter pertaining to the Travancore Cochin General Sales-tax Act.
27.2 The matter has also been examined by the Hon'ble Bombay High Court in the case of CST v. Pashupati Trading Co. (supra). It has been held therein that it is the terms and conditions, which are decisive factors at the time of execution of the agreement. The property in the vehicle had passed to the hirer and upon exercise of option by the customers, the property passed to the customers, which constituted a sale.
Further, the Tribunal has also been holding this consistent view in favour of the assessee, such as, Commercial Motors Finance Ltd. v.Asstt. CIT (supra), Muthoot Leasing & Finance Ltd. v. Jt. CIT (supra), Delhi Bench of the Tribunal in the case of Rakshit Motor & General Finance (P) Ltd. v. Dy. CIT (supra), in Interest-tax Appeal No.37/Del/2000, for the asst. yr. 1997-98, vide order dt. 11th Oct., 2004, Tribunal Delhi camp at Meerut in Dy. CIT, Circle II, Meerut v. Sargodha Finance company Ltd., (supra) in Interest-tax Appeal No. 61/Del/2003, for the asst. yr. 1995-96, vide order dt. 31st March, 2005, the Tribunal, Delhi camp at Meerut in Asstt. CIT v. Manisha Motor & General Finance (P) Ltd., (supra), in Interest-tax Appeal Nos. 4 to 6/Del/2004, for the asst. yr. 1997-98 to 1999-2000, vide order dt. 28th March, 2005 and the Tribunal, Delhi Bench decision in the case of Trishul Motor & General Finance (P) Ltd. v. Dy. CIT, in Interest-tax Appeal No.21/Del/1999, for the asst. yr. 1996-97, vide order dt. 21st Sept., 2005. (Copies of all the above unreported orders have been placed on record before us).
28. It has further been contended on behalf of the assessee that in the case of Visharad Automobile Financiers (P) Ltd., interest-tax returns have been filed upto the asst. yr. 2000-01 and for the asst. yrs.
1995-96 to 2000-01, the Department has not preferred any appeal against the orders of the learned CIT(A), who has decided the issue in favour of the assessee. Likewise, the Department has also not preferred any appeal in the following cases: 28.1 Reliance on behalf of the assessees has also been placed on an assessment order dt. 7th April, 1994, for the asst. yr. 1992-93, in the case of Ananshakt Motor Finance (P) Ltd. (copy placed on record) where the AO has himself considered the charges received by the assessee not be liable to levy of interest-tax under the Interest-tax Act.
28.2 The Department, therefore, is obliged to keep a consistent stand, as has been held repeatedly by various Courts.
29. In view of the above discussion, having considered the matter from all angles, we find that the grievance of the Department is shorn of merit. The learned CIT(A) has, in all these cases, correctly decided the issue in favour of the assessees. The hire charges in question are not chargeable to interest-tax under the Interest-tax Act. Therefore, finding no substance in the grievance of the Department in all these appeals, we reject the same.
30. In the result all the appeals of the Department are hereby dismissed.