| SooperKanoon Citation | sooperkanoon.com/71369 |
| Court | Income Tax Appellate Tribunal ITAT Hyderabad |
| Decided On | Dec-14-2000 |
| Judge | H Sidhu, R K Gupta |
| Appellant | N.K. Leasing and Construction (P) |
| Respondent | Deputy Commissioner of Income Tax |
2. These appeals emanate from the assessment order passed by the AO under Section 8(3) of the Interest-tax Act.
"1. The learned CIT(A) IV erred in holding that the assessee-company is a "Credit institution" within the meaning of Section 2(5A) of the Interest-tax Act and as such it is liable to Interest-tax.
2. He failed to note that hire-purchase is not the principal business of the assessee-company, but it is only one of the main objects of the assessee-company.
3. He ought to have held that the assessee-company is entitled to the benefits under Circular No 760 of CBDT. 4. He was not justified in holding that the hire transactions have to be treated as financing transaction and as such the hire charges have to be treated as interest liable to interest-tax." 4. As per the statement of facts, assessee was engaged in the business of leasing, hire-purchase finance and real estate. During the year, the appellant-company earned "hire charges" amounting to Rs. 11,59,216, which according to the appellant was not chargeable to tax under the Interest-tax Act, as it did not constitute interest within the meaning assigned to this word under that Act, whereas the meaning assigned to this word under that Act, whereas the AO has held the said "hire charges" as interest chargeable to tax. Further, the appellant has also earned interest on loans and advances amounting to Rs. 4,82,141, which also was not considered as chargeable interest by the assessee-company on the ground that it does not fall within the meaning of "credit institution." The stand of the assessee has been with respect to "hire charges" that the liability to pay interest-tax arises only in case of a "credit institution" and it was not a "credit institution." Pleas of the assessee were not accepted by the AO and made the appellant liable to interest-tax on chargeable interest in a sum of Rs. 9,36,455 for asst. yr. 1992-93, Rs. 17,04,194 for asst. yr. 1993-94 and Rs. 16,41,567 for asst. yr. 1994-95 respectively. Aggrieved against the said order, the assessee went in appeal before the learned CIT(A) and reiterated these argument before him but could not find favour and the appeals were rejected by his consolidated order, which is the subject-matter of appeal before us.
5. On the date of hearing, learned counsel for the assessee Shri A.Satyanarayana reiterated that the activity carried on by the assessee inter alia included the activity of hire-purchase transaction and it should be treated as distinct from hire-purchase financing. It was argued by him that the "hire charges" received by the appellant-company did not fall within the meaning of interest under Section 2(7) of that Act. Therefore, there was no liability of interest-tax. It was further argued by him that appellant is not a "credit institution" also as defined under Section 2(5A) of that Act as none of the clauses of that section is applicable to the appellant-company. According to him, the appellant-company cannot be treated as a financial company also, as it was not hire-purchase finance company and its principal business was not in respect of hire-purchase transactions or the financing of such transactions. It was argued by him that in order to see as to whether the principal business of the company was that of hire-purchase financing, it has to be seen not with reference to a particular year but should be seen in the light of the facts obtaining in preceding years and succeeding years. Since according to him, there were several other objects given in the memorandum of association of the appellant-company and hire-purchase being one of such activities, the same alone cannot be construed as the principal business of the appellant-company and, therefore, it cannot be regarded as a "credit institution" under the specific meaning assigned to it under the Interest-tax Act, 1974. He argued that the interest was received from sister concerns and it was ,not in the ordinary course of carrying on its business. Therefore, it should not be taken as chargeable interest and should not be exigible to tax. He heavily relied upon Circular No.760, dt. 13th Jan., 1998 reported in (1998) 229 ITR 42 (St) to emphasise that even Board has clarified that interest-tax is not leviable on the hire charges collected by a hire-purchase company. In the end, he made a prayer for reversing the orders of the authorities.
5.1. On the other hand, learned Sr. Departmental Representative Shri C.P. Ramaswamy, argued that hire-purchase agreements though designated as hire-purchase agreements are in substance agreements for financing the transactions. He emphasised that what is to be seen is the substance of an agreement and not the form thereof and, according to him, if various terms and conditions given in the agreement are read in conjunction with and if viewed in the context of the facts of the transactions, it will come out that hire-purchase agreement was a camouflaged way of converting a loan transaction. According to him, it was pure and simple financing transaction and hire charges are nothing but interest, which falls within the definition of interest exigible to interest-tax under the Interest-tax Act, 1974. It was further argued by him in support of his contention that even on the guarantee form, the words "amount of advance" are mentioned, which clearly shows the intention of the appellant-company and the true character of the transaction to be in the nature of financing. He relied on the decision of the Hyderabad Bench of the Tribunal in Dy. CIT v. Nagarjuna Investment Trust Ltd. (1998) 62 TTJ (Hyd)(SB) 33 . (1998) 65 TTD 17 (Hyd)(SB) According to him, hire charges are nothing but are equated monthly instalments based on the sum of digits method or internal rate of return method. Accordrng to him, assessee's case is covered by Board Circular No. 738 dt. 25th March, 1996 reported in (1996) 218 ITR 131 (St).
6. Countering the arguments of the learned counsel for the assessee, Shri Rarnaswarny further drew our attention to the definition of "interest given under Section 2(7) to emphasise that there is no such exclusion out of interest as sought to be made out by the appellant in respect of the interest arising on the advances made to the sister concerns. Therefore he concluded his argument by making a strong plea that orders passed by the authorities below are in accordance with law and appellant was very much a "credit institution." as it was a financial company and no interference was called for.
6.1. In reply, learned counsel for the assessee, submitted that the decision of the Special Bench of the Tribunal in Dy. CIT v. Nagarjuna Investment Trust Ltd. (supra) is on an altogether different footing and is not even delivered in relation to the Interest-tax Act. He further emphasised that the company is a hire-purchase company whereas the respondent company in the case reported in (1998) 62 TTJ (Hyd)(SB) 33 : (1998) 65 ITD 17 (Hyd)(SB) (supra) was a finance company. Therefore, reliance of learned Departmental Representative, according to him on the said decision is misplaced. He made further submission to the effect that Board Circular No. 760 supra, had to be issued by it because Department was treating all hire-purchase companies alike whereas those companies which are engaged in hire-purchase transactions were not chargeable to interest-tax, as clearly made out by CBDT in the said circular. He made a prayer for the reversal of the orders passed by the authorities below.
7. We have considered the rival submissions and have gone through the orders passed by the authorities below. We have gone through the copies of draft agreement of hire-purchase submitted to us by the learned counsel for the assessee.
8. The question which needs to be addressed in the instant case is as to whether the appellant is liable to pay interest-tax on the hire charges and interest income within the provisions of Interest-tax Act, 1974, In order to resolve this controversy, following aspects need to be examined, as the reply of the above said main question is dependent upon the replies of the following questions : 1. Whether appellant can be treated as a "credit institution" within the meaning of Section 2(5A) of the Interest-tax Act as, if it is not "credit institution" there shall not be exigibility of the interest-tax at all under the IT Act, 1974.
2. Whether interest income included in the other income on the loans and advances stated to have been give to the sister concerns can be covered within the definition of "chargeable interest", attracting the rigours of the levy of interest-tax under the Interest-tax Act, 1974.
3. Whether the "hire charges" earned by the assessee can be said to be "hire charges" and can be brought within the meaning of "chargeable interest" and can be made exigible to the levy of interest-tax, as aforesaid.
9. Though the appellant had submitted that it was engaged in the business of leasing, hire-purchase finance and real estate, yet P&L a/c for the years under consideration clearly shows, recorded by learned CIT(A), that the hire-purchases are the principal business of the appellant. However, Revenue has challenged the nature of hire-purchase agreement in the instant case, as an agreement for the repayment of loan. This contention of the Revenue has been dealt with us later in this order.
10. Section 2(5A) defines the "credit institution", inter alia' to mean "any other financial company", as mentioned in Clause (iv) of that section. 'Financial company' has been defined under Sub-section (5B) of Section 2 of the said Act, inter alia, to include a hire-purchase finance company, that is to say, a company which carried on as its principal business, hire-purchase transactions or the financing of such transactions. It includes inter alia, within its ambit a loan company, that is to say, a company which cames on as its principal business, the business of providing finance, whether by making loans or advances or otherwise. Therefore, whether assessee is treated as a hire-purchase finance company, or a loan company as contended by Revenue, it will be "financial company" and in turn, it will be a "credit institution" if its principal business is shown to be one of hire-purchase transactions or financing of such transactions or providing finance. The term "principal business" has not been defined under the Interest-tax Act nor under the IT Act. Therefore, its meaning has to be understood in its grammatical sense. 'Principal' denotes 'dominant' or 'main' or 'substantial', meaning thereby that it shall have to be seen as to what constitutes dominant out of the total business activities carried on by the assessee. There may be several parameters eeg turnover, profits or capital employed with reference to which a finding can be recorded as to what was the principal business said to be carried on by the assessee in a given set of facts.
11. In the instant case, though learned counsel for the assessee has argued that assessee was engaged in the business of real estate and leasing also, apart from hire-purchase, but he has failed to show that its principal business was not that of hire-purchase. On the contrary, the P&L a/c for the years under consideration clearly shows that the hire-purchases are the principal business of the appellant and this finding of fact was recorded by learned CIT(A) in para 4 of his appeal order. This factual finding has not been rebutted by the learned counsel by showing to us any fact or figures from its P&L a/c or the balance sheet of the years under consideration or with the help of the documents of the earlier years, or the succeeding years, except making a sketchy and general arguments that its object clause in the memorandum of association include several objects e.g., leasing real estate so on so forth. It is settled law that the apparent is real unless proved by the person who alleges that it is not so. In the instant case, as pointed out above also, P&L a/c clearly shows that the hire charges constituted a dominant portion of the total income, thus constituting the hire-purchase business as the principal business carried on by the assessee. If the appellant wanted to negate this apparent state of fact, it ought to have come out with facts and figures of the years under consideration, or of the earlier years or succeeding years to prove that hire-purchase was not the principal business carried on by it. Though learned counsel, as stated above, has invited our attention to the main object clause of the memorandum of association to drive home his argument that there were several objects which could be pursued and in fact pursued by the appellant-company and hire-purchase being one of them, cannot be said to be the principal object or the business carried on by the assessee-company, but we are not impressed by this argument of the learned counsel inasmuch as he has failed to show to us in spite of a specific query posed from the Bench to support his contention with factual data to prove that hire-purchase was not the principal business. In the absence of any explanation supported with documentary evidence to show that hire-purchase business which was apparently the principal business was in fact not the principal business, we are unable to agree that the appellant was not a "financial company" and in turn was not a "credit institution". Therefore, this contention of the appellant is rejected.
12. Having rejected the first contention of the appellant, it has to be seen now in the light of the provisions of Section 5 of the Interest-tax Act, whether interest income, which is included in other income is exigible to interest-tax. Section 5 of the said Act defines the scope of chargeable interest and lays down that the chargeable interest of a credit institution shall be the total amount of interest accruing or arising to the credit institution in that previous year.
The only exception carved out from the said scope is in relation to interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking. Interest has been defined under Section 2(7) to mean interest on loans and advances made in India and includes other types of charges with which we are not concerned here. Therefore, from the plain reading of the text of the law, it is clear that the interest stated to be received by the appellant-company from its sister concerns and included in the other income are very much liable to be visited with the levy of interest-tax under the Interest-tax Act, 1974. We are not impressed by the argument of the learned counsel for the assessee that such interest income arose on the loans given to the sister concerns, not in the course of carrying on business and would thus not be liable to levy of interest-tax. It is not the case of the assessee that such loans and deposits were given to the sister concerns which were "credit institutions" or co-operative society engaged in the business of banking. We do not see any reason as to why such interest income should not suffer interest-tax under Interest-tax Act, 1974. Therefore, we uphold the action of the AO, confirmed by learned CIT(A) in charging interest-tax on the following interest amounts for the 3 years i.e., Rs. 3,26,411, Rs. 4,01,714 and Rs. 4,82,141.
13. Insofar as the levy of interest-tax on the hire charges earned by the appellant is concerned, it is stated that hire charges do not find mention in the plain text of the definition of the term "interest".
There can be no gainsaying that hire charges cannot be said to be interest on loans and advances in any manner unless it is shown that the hire charges have resulted from the execution of the agreements which are nothing but agreements of loans and advances and thus hire charges are nothing but interest. Hire charges per 56 are not the interest as clarified by the CBDT too, albeit in the context of Section 2(28A) of the IT Act and in the context of Section 194A of that Act, by way of issuing Instruction No. 1425 in F. No. 275/9/80-IT(B) dt. 16th Nov., 1981, which is reproduced hereunder, for the sake of convenience.
"In a hire-purchase contract the owner delivers goods to another person upon terms on which the hirer is to hire them on a fixed periodical rental. The hirer has also the option of purchasing the goods by paying the total amount of agreed hire at any time or of returning the same before the total amount is paid. It may be pointed out that part 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 instalments cannot, therefore, be characterised as interest payable in any manner with 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 these transactions." Similarly, CBDT in its Circular No. 9, dt. 23rd March, 1993, recognised the concept of hire charges, albeit in the context of allowability of depreciation and hire charges. The stand of the Board with respect to levy of interest-tax on the hire charges has been made clear by Board Circular No. 738, dt. 25th March, 1996, reported (supra) and Board Circular No. 760, dt. 13th Jan., 1998, reported (supra). In the earlier circular i.e., 738 (supra), it was oprned by the Board that the hire-purchase transactions are generally in the nature of financial transactrons. Therefore, as per that opinion, hire charges accruing or arising to the hire-purchase finance companies were to be treated as interest and chargeable to interest-tax. Later on, in partial modification of the said circular leading to the clarification, the Board came out with another circular i.e. Circular No. 760 in which the Board advised its AOs not to treat all hire-purchase transactions as loans and advances transactions. It was advised in the circular that the transactions which, in substance, are in the nature of hire-purchase, the receipt of hire charges in respect of such transactions would not be in the nature of interest. Certain guidelines were given to the AO to vet a hire-purchase agreement with reference to those parameters and arrive at a judicious conclusion as to whether a hire-purchase agreement is really a hire-purchase agreement or is an agreement to cover the repayment of a loan or an advance. Therefore, it is very much clear from the Board Circular and Instruction cited supra also that hire charges and interest are of two different and distinct character, so understood by CBDT too and hire charges cannot be termed as interest so as to be brought within the mischief of Section 2(7) or in other words, within the ambit and net of the Interest-tax Act, 1974.
14. According to the AO, hire-purchase agreement entered into by the assessee with the hirers, in substance, are not hire-purchase agreements but they were the agreements of sale of vehicles with further facility to pay purchase amount in instalment on the security of the vehicle. This, in our opinion, is a very serious construction put by the AO on the hire-purchase-agreement and this was confirmed by learned CIT(A) too and, therefore, it will be necessary for us to closely look at the nature of the agreements entered into by the assessee and referred to by the authorities below, as it will go a long way in appreciating the issue before us.
15. Copies of hire-purchase agreements placed before us were closely examined and we find certain salient features coming out from those agreements, which are summed up as under: 1. that the appellant shall be and remain the owner of the vehicle, i.e., the subject-matter of agreement and such vehicle shall be given on hire to the other party who is called "hirer". (Preamble, Clauses 1, 4,6,7,11, 13, 16, 22); 2. the hirer shall take the vehicle and shall pay monthly hire charges of a fixed sum apart from the initial down payment, (Clause 2); 3. hirer shall not become the owner of the vehicle until the full payments of the hire charges are made by him and option is exercised to buy by the hirer (Clauses 19&20), 4. the vehicle shall be registered immediately at the time of giving it on hire in the name of the hirer under the provisions of Motor Vehicles Act but hirer shall be under obligation to transfer registration in the name of owner on the commission of breach of conditions of the agreement, (Clause 27); 5. the hirer shall have option to buy the vehicle even during the currency of the hire-purchase agreement by paying all hire charges (Clause 19 & 20); 6. the hirer shall be at liberty to determine the agreement by returning the vehicle and by paying the uptodate hire charges (Clause 17); 7. the hirer shall use the vehicles along with the limitations placed vide various clauses, thus indicating that hirer shall not be the owner till the currency of the agreement (Clause 12); and 8. the owner shall be entitled to repossess the vehicles in case of breach of any of the conditions of the agreement together with the costs incidental (Clauses 14, 15&21).
16. In the light of these conditions and covenants contained in the hire-purchase agreement, we have to examine as to what is the nature of such agreement. Hire Purchase Act, 1972, defines a hire-purchase agreement as an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which ; (a) possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical instalments ; (b) property in the goods is to pass to such person on the payment of last of such instalment ; and (c) such person has a right to terminate the agreement at any time before the property so passes.
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 [K. Narayan v. Laxmi Naiaswhan 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 exercises 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 recognised by the law and is backed up fully by a special enactment. Therefore, when there is a special enactment recognising and regulating a particular class 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 camouflage 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 i.e. Rs. 6,10,044, Rs. 13,02,480 and Rs. 11,59,216 are not interest within the meaning of Section 2(7) of the Interest-tax Act, 1974 and cannot be accordingly subjected to interest-tax.