1. Liability of credit institutions to pay tax under the Interest-Tax Act, 1974, on the interest component included in hire-purchase instalments. (Para 2 , 3 )
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2023 Supreme(SC) 6
SUPREME COURT OF INDIA
SANJIV KHANNA, M.M. SUNDRESH, JJ.
M/s. Muthoot Leasing and Finance Limited and Another – Appellants
Versus
Commissioner of Income Tax – Respondent
Civil Appeal Nos. 10201-10202 of 2010 with Civil Appeal No. 10203 of 2010, Civil Appeal No. 10204 of 2010, Civil Appeal Nos. 10205-10206 of 2010, Civil Appeal No. 10207 of 2010, Civil Appeal No. 4903 of 2014, Civil Appeal No. 4904 of 2014, Civil Appeal No. 4905 of 2014, Civil Appeal No. 4906 of 2014, Civil Appeal No. 4907 of 2014 and Civil Appeal No.... of 2023 (Arising Out of Special Leave Petition (Civil) No. 4441 of 2011)
Decided On : 03-01-2023
Advocates appeared:
For the Appellant(s) : Mr. A. Raghunath, AOR Ms. Ritika Sinha, Adv. Mr. V. K. Monga, AOR Mr. E. M. S. Anam, AOR
For the Respondent(s): Mr. N Venkataraman, ASG Mr. Rupesh Kumar, Adv. Mr. Shashank Bajpai, Adv Mr. Chinmayee Chandra, Adv. Mr. Shantnu Sharma, Adv. Mr. Shraddha Deshmukh, Adv. Mr. Raj Bahadur Yadav, AOR Mr. G.S. Gerwal, Adv. Mr. Hitesh Dwivedi, Adv. Mr. Akhileshwar Jha, Adv. Mr. E.Vinay Kumar, Adv. Mr. Ravish Kumar Goyal, Adv. Mr. Nitin Sharma, Adv. Mr. A. N. Arora, AOR Mrs. Anil Katiyar, AOR Mr. A. Raghunath, AOR
For the Appellant(s) : Mr. A. Raghunath, AOR Ms. Ritika Sinha, Adv. Mr. V. K. Monga, AOR Mr. E. M. S. Anam, AOR
For the Respondent(s): Mr. N Venkataraman, ASG Mr. Rupesh Kumar, Adv. Mr. Shashank Bajpai, Adv Mr. Chinmayee Chandra, Adv. Mr. Shantnu Sharma, Adv. Mr. Shraddha Deshmukh, Adv. Mr. Raj Bahadur Yadav, AOR Mr. G.S. Gerwal, Adv. Mr. Hitesh Dwivedi, Adv. Mr. Akhileshwar Jha, Adv. Mr. E.Vinay Kumar, Adv. Mr. Ravish Kumar Goyal, Adv. Mr. Nitin Sharma, Adv. Mr. A. N. Arora, AOR Mrs. Anil Katiyar, AOR Mr. A. Raghunath, AOR
IMPORTANT POINT
“Interest” element cannot be compared to consideration for lease/hire which is in nature of remuneration (consideration) for hire.
Headnote:
Interest-Tax Act, 1974 – Section 2(7) – Liability to pay tax on interest component included in hire-purchase instalments paid under hire-purchase agreement – Taxation depends upon language of charging section and what is brought to tax within four corners of charging section – “Interest” element cannot be compared to consideration for lease/hire which is in nature of remuneration (consideration) for hire – Impugned judgments set aside – Additions made by assessing officer set aside and orders passed by ITAT deleting additions in case of appellant and other cases upheld. (Paras 18 and 21)
Result: Appeals allowed.
Judgement Key Points
Key Points: - The scope of taxability under the Interest-Tax Act, 1974 on the interest component embedded in hire-purchase instalments (!) - The definition and interpretation of "interest" under Section 2(7) of the Act, especially post-amendment and in relation to loans and advances (!) (!) (!) - The conflict among higher court decisions (Sahara India, State Bank of Patiala) and Kerala High Court on whether hire-purchase instalments contain interest taxable under the Act (!) (!) (!) - The role of CBDT Circulars 738 (1996) and 760 (1998) in distinguishing finance transactions from true hire-purchase transactions for tax purposes (!) - The significance of the four-corners of the charging section and cautious application of ratios from other tax enactments to this Act (!) - The factual findings of ITAT and the High Court’s reversal, and the Supreme Court’s ultimate decision to set aside the impugned judgments and uphold ITAT’s deletions of additions in these cases (!) (!) (!)
What is the liability to pay tax under the Interest-Tax Act, 1974 on the interest component included in hire-purchase instalments in hire-purchase agreements?
What constitutes "interest" under Section 2(7) of the Interest-Tax Act, 1974 in the context of hire-purchase transactions, and how should it be applied to the facts of these cases?
How should the court treat the distinction between hire-purchase charges as hire charges versus interest, and what is the proper approach to assessing such tax in light of CBDT circulars and prior judgments?
Legal Category Hierarchy
Table of Contents
2. Whether hire-purchase instalments constitute interest on loans and advances chargeable to tax or are composite payments comprising hire charges and sale elements. (Para 4 , 7 )
3. The definition of interest under the Act is narrow and restrictive, covering only interest arising directly from loans and advances, excluding composite hire-purchase transactions. (Para 10 , 11 , 12 , 13 , 14 , 17 , 18 )
4. Interest taxable under Section 2(7) of the Interest-Tax Act, 1974, must arise directly from loans and advances, excluding hire charges in hire-purchase agreements. (Para 12 , 13 , 14 , 17 )
5. Appeals allowed; impugned judgments set aside and additions made by the assessing officer deleted. (Para 21 )
6. What is the scope of the term interest under Section 2(7) of the Interest-Tax Act, 1974?
The definition is narrow and exhaustive, meaning interest is taxable only if it arises directly from loans and advances, including commitment charges and discounts on promissory notes and bills of exchange. (Para 11 , 12 , 13 )
7. Are hire-purchase instalments chargeable to interest tax under the Interest-Tax Act, 1974?
No, hire-purchase agreements are composite transactions involving bailment and sale. The payments are hire charges for the use of the asset, not interest on loans and advances. (Para 14 , 18 )
8. How does the definition of interest under the Interest-Tax Act, 1974, differ from the Income Tax Act, 1961?
The Interest-Tax Act uses a narrower definition requiring interest to arise directly on loans and advances, whereas the Income Tax Act's broader definition includes interest arising in respect of any moneys borrowed. (Para 13 )
9. When can a High Court interfere with the findings of fact recorded by the Income Tax Appellate Tribunal (ITAT)?
Findings of fact by the ITAT are generally conclusive. A High Court may only interfere if the findings are perverse and not supported by material on record, provided a specific substantial question of law is framed. (Para 19 )
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;
xx xx xx”
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
