Hire charges from genuine hire-purchase arrangements do not fall within the definition of interest under the Interest-tax Act.

N.K.Sud, J.

1. This order will dispose of two appeals, viz., I. T. A. Nos. 194 and 195 of 2004 filed by the assessee under Section 21 of the Interest-tax Act, 1974 (for short "the Act"), read with Section 260A of the Income-tax Act, 1961, against the common order of the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar (for short "the Tribunal"), dated March 31, 2004, relating to the assessment years 1992-93 and 1993-94.

2. For the assessment year 1992-93, the assessee had filed its return under the Act on February 21, 1992, declaring chargeable interest as under :

174_MN_2..htm

3. This return was subsequently revised on November 10, 1993, declaring chargeable interest at nil. The assessee claimed that the hire-purchase charges were not covered under the provisions of Section 4(2) of the Act as the same pertained to arrangements for use of finance. It was contended that the charges could not termed as interest as in such arrangements, no principal sum is advanced or lent by the hire-purchase company to the hirer of the vehicle whereas the definition of interest under the Act envisages giving of loan and advance. Reliance for this purpose was placed on the instructions of the Central Board of Direct Taxes contained in Circular No. 1425-K No. 275/9/80-IT(B) dated November 16, 1981.

4. For the assessment year 1993-94, the return was filed on December 23, 1993, declaring net chargeable interest at nil. In the statement of computation of chargeable interest the following note was given :

"The assessee derives income from hire-purchase charges, and the same is not covered within the definition of chargeable interest under the Interest-tax Act."

5. In part III of the return, under the head "Other sums not included in chargeable interest and claimed to be not taxable," the following amounts had been mentioned :

174_MN_2(1)..htm

6. The assessment for the assessment year 1992-93 was completed on March 31, 1995. The Assessing Officer held that the hire charges receipts constituted interest within the meaning of Section 2(7) of the Act. For this purpose, reliance was placed on the decision of the Supreme Court in Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489 ; AIR 1966 SC 1178. The Assessing Officer also held that the circular of the Board dated November 16, 1981, on which reliance had been placed by the assessee was only in respect of the requirement of tax deduction under Section 194A of the Income-tax Act, 1961, and had no application to the Interest-tax Act. He referred to the subsequent circular of the Board, viz., F. No. 133/9289/ 91-TPL dated March 6, 1992, in which it had clarified that hire-purchase financial companies entering into hire-purchase agreements with hirers would fall within the scope of Section 4(2) of the Act and would, therefore, be liable to tax. Accordingly, he completed the assessment and computed chargeable interest as under :

174_MN_2(2)..htm

7. Similarly, the assessment for the assessment year 1993-94 was completed on March 14, 1996, and the chargeable interest was computed as under :

174_MN_2(3)..htm

8. The assessee preferred appeals before the Commissioner of Interest-tax (Appeals), Jalandhar. The appeal for the assessment year 1992-93 was dismissed vide order dated February 29, 1996 and the findings of the Assessing Officer that the hire charges fell within the scope of the definition of "interest" under Section 2(7) of the Act and were liable to tax under Section 4(2) of the Act were upheld. The Commissioner of Interest-tax (Appeals) analysed the hire-purchase transactions in two cases, namely, Roor Singh and Pardeep Kumar, and held that the hire-purchase arrangement was basically an arrangement of advancing money by the assessee to the customers or on their behalf to the dealer and recovering the money so advanced through instalments after calculating interest chargeable on the principal amount. He further observed that the hire-purchase agreement and the endorsement in the reg