IMPORTANT POINT
“Interest” element cannot be compared to consideration for lease/hire which is in nature of remuneration (consideration) for hire.

JUDGMENT :

Sanjiv Khanna, J.

Leave granted in Special Leave Petition (Civil) No. 4441 of 2011.

2. The common question which arises for consideration in this batch of Civil Appeals is: whether the appellants – assessees are liable to pay tax under the Interest-Tax Act, 1974,¹[For short, ‘the Act’], on the interest component included in the hire-purchase instalments paid under the hire-purchase agreement?

3. The facts, in brief, are that the appellants – assessees are non-banking finance and leasing companies registered with the Reserve Bank of India. Some of the appellants – assessees have been reclassified as hire-purchase finance companies. It is not disputed that the appellants – assessees are credit institutions within the meaning of Section 2(5-A) of the Act, which reads as follows :

“(5-A) “credit institution” means,—

(i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in Section 51 of that Act);

(ii) a public financial institution as defined in Section 4-A of the Companies Act, 1956 (1 of 1956);

(iii) a State financial corporation established under Section 3 or Section 3-A or an institution notified under Section 46 of the State Financial Corporations Act, 1951 (63 of 1951), and

(iv) any other financial company;”

It is also imperative to mention Section 2(5-B) of the Act, which defines a “financial company” and includes within its ambit hire-purchase finance companies :

“(5-B) “financial company” means a company, other than a company referred to in sub-clause (i), (ii) or (iii) of clause (5-A), being—

(i) 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;

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4. The contention of the appellants – assessees is that under a hire-purchase agreement, they hire out a vehicle to the customer and receive hire-purchase instalments, and not interest on loans and advances. As per the findings of fact recorded by the Income Tax Appellate Tribunal,²[For short, ‘ITAT’], the hirer has acknowledged that the appellants – assessees are the owners of the vehicle. As per the hire-purchase agreements, the hirer must pay rent to the owner during the hiring as per the sums mentioned in the agreement on the dates mentioned therein. Further, the hirer has to take proper care of the vehicle and keep it in good condition. He has to also pay all rents, rates, taxes and outgoings payable. The hirer must keep the vehicle in his sole custody and possession at the address mentioned in the agreement, or such other place as the owner has previously consented to in writing. The owner or any person authorised by him in writing is entitled to inspect the vehicle at all reasonable times during the period of hire. The hirer may, at any time, determine the hire-purchase agreement by delivering the vehicle at his own cost to the owners. If the hirer fails to pay the hire instalments within the stipulated time, becomes insolvent, pledges or sells, or attempts to pledge or sell or otherwise alienate or transfer the vehicle, or does or suffer any act or thing whereby, or in consequence of which, the vehicle may be distrained, seized or taken into execution under legal process, or breaks or fails to perform or observe any condition as mentioned in the hire-purchase agreement, the owner is entitled to forthwith determine the agreement and, thereupon, entitled to enter the place where the vehicle is kept and seize, remove and retake possession thereof. The owner is also entitled to sue for all the instalments due, damages for breach of the agreement, and the cost in retaking possession of the vehicle. The owners, if agreeable, may permit the hirer to have the registration of the vehicle in his own name, provided that the hirer shall transfer the registration in the name of the owner whenever required to do so by the owner, especially when the hirer commits breach of