The judgment clarifies that transactions styled as hire purchase agreements can constitute loans for tax purposes if the real nature aligns more with loan transactions than hire purchase arrangements.

1. The only question arising in the connected appeals filed by the Revenue against the order of the Income Tax Appellate Tribunal is whether the 'finance charges' collected by respondent - companies under hire purchase agreements attract tax under the Interest Tax Act , 1974 as amended by Finance (No. 2) Act of 1991. According to the Revenue, 'finance charges' collected by the respondents for vehicle financing is nothing but 'interest' at flat rate loaded along with loan amount and collected in instalments and therefore, the same is assessable under the Act. The case of the respondents on the other hand is that hire purchase transactions are outside the scope of the and so much so, finance charges collected cannot be assessed as interest. We have heard Senior Counsel Sri. P. K. R. Menon appearing for the appellant and Senior Counsel Sri. P. Balachandran and other counsel appearing for the respondents.

2. Admittedly respondents being hire purchase finance companies are specifically covered by the definition 'credit institution' which are liable to pay interest tax on interest covered by S.2(7) of the Act. In fact, atleast some of the respondents have paid tax on certain other receipts of interest and consequently have no dispute that they are not assessable under the Act. The short question arising for consideration is whether 'finance charges' recovered by them from motor vehicle financing business is interest as defined under S.2(7) of the Act. For easy reference, 'interest' as defined under S.2(7) is extracted hereunder:
'S.2(7). 'interest' means interest on loans and advances made in India and includes--
(a) commitment charges on unutilised 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 (IB) of S.42 of the Reserve Bank of India Act, 1934 (2) of 1934);
 (ii)  discount on treasury bills.'
Admittedly the 'finance charges' involved in these cases are from vehicle financing business. Along with 'finance charges' recovered in the vehicle financing business, respondents have also claimed exemption on 'service charges' recovered in the same business. The Assessing Officer examined the nature of the two receipts and though granted exemption on service charges received, found that the amount received and accounted as 'finance charges' is nothing but interest collected at flat rate and threrefore, he levied tax on the same. In other words, the finding of the Assessing Officer is that vehicle financing under the so called hire purchase arrangement is nothing but 'loan or advance' made by the respondents and interest accounted under the name finance charges is assessable under the Act. The nature of transaction which is same for all assessees as found by the Assessing Officer in the assessment of the respondent in ITA 230/2002 is as follows:
'The sanction letter (copy of letter dt. 23/10/98 addressed to Shri. Peter Paul filed as specimen) shows that the hirer has given application to the assessee requesting for hire purchase finance of the amount specified therein. The hire purchase agreement (agreement dt. 23/10/98 in the case of Shri. Peter Paul filed as specimen) also shows that the hirer had requested the assessee (owner) for finance for purchase of a new vehicle and the assessee has agreed to finance for the purchase on the terms and conditions stipulated in the hire purchase agreement. It is evident from the above that the assessee has advanced money to the hirer for the purchase of the vehicle in response to a specific request made by him for finance and the transaction is essentially in the nature of financing transaction. If transactions of this type will not fall within the category of financing transaction it is difficult to conceive which transaction will fall within this