Supreme Court: Non- Banking Financing & Leasing Companies are not liable to pay interest tax on interest component under Hire-Purchase Agreement

Supreme Court: Non- Banking Financing & Leasing Companies are not liable to pay interest tax on interest component under Hire-Purchase Agreement

The Apex Court ruled that non-banking financing and leasing companies are exempted from paying tax on the interest component included in the hire-purchase instalment paid under the hire purchase agreement. The division bench comprising of Justices Sanjiv Khanna and M M Sundresh assessed the issue as to whether the appellants/assessees- Muthoot Leasing and Finance Limited and another were liable to pay tax under the Interest-Tax Act, 1974 on the interest component included in the hire-purchase instalments paid under the hire purchase agreement.

In the present case the appellants/assessees initially in the civil appeal were 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. They are also credit institutions within the meaning of Section 2(5-A) of the Interest-Tax Act, 1974.

The appellants argued that under the hire purchase agreement, they hired a vehicle to a consumer and received hire-purchase instalments against it but not interest on loans and advances. Additionally, they contended that according to the hire-purchase agreements during the hiring process the hirer must pay rent to the owner as per the amount mentioned in the agreement on the dates mentioned therein. Consequently, they pleaded that they are not liable to pay interest tax.

The Income Tax Appellate Tribunal (ITAT) accepted the plea of the appellants – assessees that they were not liable to pay interest tax on the interest component imbedded in the hire-purchase instalment. The ITAT referred to Circular No. 760 dated 13 January, 1998 issued by the Central Board of Direct Taxes and observed that the hire-purchase agreement is a composite transaction, and has elements of bailment and sale. Relying on the terms and conditions of the hire-purchase agreement, the ITAT held that hire-purchase agreements are distinguishable from loans and advances. The hire instalments are something different and more, and not the interest on loans and advances that is chargeable to interest tax.

Upon hearing and examining, the Apex Court was of the view that the ITAT relied on the provisions of the Hire-Purchase Act, 1972, which, was palpably wrong as the said enactment was never enforced and was subsequently repealed vide the Hire-Purchase (Repeal) Act, 2005. The bench observed that hire purchase agreement has two key elements- first, an element of bailment and second, an element of sale wherein the element of sale the element of sale fructifies when the option to purchase is exercised by the intending purchaser after fulfilling the terms of the agreement. Till then, the goods are given on hire. "A hire-purchase, an element of interest is inbuilt, but what is payable is the hire amount and not interest per se. The hirer has an option to return the vehicle or the goods taken on hire. It is not a simple transaction of giving a loan or advance on which interest is payable," the Court added.

The Court further discussed the meaning of Section 2(7) which has been interpreted in two decisions of the Supreme Court, first in the case of Commissioner of Income Tax, Kanpur vs. Sahara India Savings and Investment Corporation Limited (2009) and State Bank of Patiala Through General Manager vs. Commissioner of Income Tax, Patiala (2015). Both the judgments gave very limited and restricted meaning to Section 2(7) of the Interest Tax Act, 1974 as interest directly arising 'on' loans and advances, and not any other interest, be it interest earned on investment or interest payable on delayed payment of the discounted bill of exchange.

The Apex Court stressed on the fact that High Court should not have interfered with findings recorded by the ITAT as those findings are treated as conclusive. The Court recorded that the High Court can intervene with the findings of fact while deciding a substantial question of law when the findings are not supported by the material on record, to perverse. However, the High Court must frame a separate substantial question of law with strict parameters in order to intervene with the findings of fact by the ITAT.

The Apex Court highlighted that taxation depends upon the language of the charging section and what is brought to tax within the four corners of the charging section. Therefore, one should be careful and cautious when applying the ratio of judgments relating to one tax enactment as a precedent in a case relating to another tax enactment. "This rule of caution is important and should not be overlooked, more so when the language of the enactment and the object and purpose of the enactment are different," the Court noted.

Based on the above observations, the Supreme Court allowed the present appeals and set aside the impugned judgments.