M/S. MUTHOOT LEASING AND FINANCE LIMITED AND ANOTHER versus COMMISSIONER OF INCOME TAX on 3 January 2023

M/S. MUTHOOT LEASING AND FINANCE LIMITEDAND ANOTHER

v.

COMMISSIONER OF INCOME TAX

(Civil Appeal Nos. 10201-10202 of 2010)

JANUARY 03, 2023

[SANJIV KHANNA AND M. M. SUNDRESH, JJ.]

Interest Tax Act,1974 – s.2(5-A) and s.2(5-B) – Hire-purchaseagreements – Appellants-assessees are credit institutions withinmeaning of s.2(5-A) – Whether appellants-assessees liable to paytax on interest component included in hire-purchase instalments paidunder hire-purchase agreements – ITAT referred to CBDT CircularNo. 760 dated 13th January 1998 and observed that hire-purchaseagreement is a composite transaction, and has elements of bailmentand sale and appellants-assessees are not liable to pay interest taxas hire instalments are not interest on loans and advances that ischargeable to interest tax – High Court reversed the finding of ITAT,observing that hire-purchase instalment includes “finance charges”,which is nothing but interest, and therefore, interest tax is leviableon the interest component – The transaction, though styled as ahire-purchase agreement, the High Court held, is in fact a financeagreement for purchase of a vehicle – Reliance placed by appellant-assessee on Circular No. 760 dated 13th January 1998 issued byCBDT was rejected by the High Court – On appeal, held: Given thedictum and ratio in the cases of Sahara India Savings and InvestmentCorporation Limited and State Bank of Patiala Through GeneralManager, the view taken by High Court is not correct – In CircularNo. 760 dated 13th January 1998, the CBDT observed that theyconsidered the issue and were advised that in case of transactionswhich are, in substance, in the nature of hire-purchase, the receiptsof hire charges would not be in the nature of interest – Intransactions which are, in substance, in the nature of financingtransactions, the hire charges should be treated as interest, subjectto interest tax – To determine the distinction between the twotransactions, the assessing officers were required to consider theissue on merits taking, inter alia, into account – (i) the terms of theagreement; (ii) the nature of the arrangement between the supplier

317

A

B

C

DEF

G

H

Aof the asset, the hire-purchase company and the end user of theasset; and (iii) the intention of the parties which manifests itself inthe fixation of the initial payment, the method of determination ofhire-purchase price etc – However, when hire-purchase companypays the price or a substantial part thereof on behalf of such hirerwho is real purchaser but does not pay the full price, then suchBagreement is in nature of a security for re-payment of the loan andis essentially a loan transaction – High Court reversed finding ofITAT without framing a specific substantial question of law andthus, interference with findings of fact was unwarranted – Orderspassed by ITAT deleting the additions made by assessing officer inCcase of appellant, set aside – Motor Vehicles Act 1988 – s.51.

Interest Tax Act,1974 – s.2(7) – Interpretation & scope of –Interest recovered under hire-purchase agreement, if falls unders.2(7) – Held: s.2(7) has been interpreted in two decisions, that is,in the cases of Sahara India Savings and Investment CorporationDLimited and State Bank of Patiala Through General Manager, whichhave given a very limited and restricted meaning to s.2(7) of the Actas interest directly arising “on” loans and advances, and not anyother interest, be it interest earned on investment or interest payableon delayed payment of the discounted bill of exchange.

Conclusion

EHire-Purchase – Elements – Held: A hire-purchase agreementhas two elements – an element of bailment and an element of sale –Any transfer or sale made by the hirer or any violation of the hire-purchase agreement can lead to civil as well as criminalconsequences.FTaxation – Taxation matters – Interference by High Court withfindings of fact recorded by the ITAT – Scope – Held: Findings offact generally recorded by the ITAT are treated as conclusive – TheHigh Court can interfere with the findings of fact while deciding asubstantial question of law when the findings are not supported bythe material on record, so as to be treated as perverse – For this,Gthe High Court must frame a separate substantial question of lawand only then interfere with the findings of fact by the ITAT, whileapplying the strict parameters.

Taxation matters – Precedents – Rule of caution when applyingthe ratio of judgments relating to one tax enactment as a precedentH

M/S. MUTHOOT LEASING AND FINANCE LIMITED v.COMMISSIONER OF INCOME TAX

in a case relating to another tax enactment – This rule of caution isimportant and should not be overlooked, more so when the languageof the enactment and the object and purpose of the enactment aredifferent.

Constitution of India – Art.141 – SLP – Dismissal of – Held:If the dismissal is in limine and at the admission stage, it would notconstitute a binding precedent u/Art.141 of the Constitution.

Allowing the appeals, the Court

HELD : 1. A hire-purchase agreement has two elements –an element of bailment and an element of sale. The element ofsale fructifies when the option to purchase is exercised by theintending purchaser after fulfilling the terms of the agreement.Till then, the goods are given on hire. One can argue that in ahire-purchase, an element of interest is inbuilt, but what is payableis the hire amount and not interest per se. The hirer has an optionto return the vehicle or the goods taken on hire. It is not a simpletransaction of giving a loan or advance on which interest is payable.The transaction(s) in commercial and legal sense are far morecomplex with corresponding rights of the parties. Even if thehirer is recorded as the owner of the vehicle under Section 51 ofthe MV Act, the name of the appellant – assessee is also recordedin the registration book, which is in recognition of the hire-purchase agreement. The registered owner under the MV Actmay be liable in case of accidents/traffic challans, etc. But this, inno way, dilutes the right of the appellants – assessees in respectof the title of the property, that is, the vehicle. Any transfer orsale made by the hirer or any violation of the hire-purchaseagreement can lead to civil as well as criminal consequences.Given the dictum and ratio in Sahara India Savings and InvestmentCorporation Limited and State Bank of Patiala Through GeneralManager, the view taken by the High Court of Delhi in M/s G.E.Capital Transportation, as followed by the High Court of Delhi inCommissioner of Interest Tax v. M/S G.E. Capital Transportation iscorrect and the view taken by the High Court of Kerala in theimpugned judgment is not in consonance with the above decisionsof this court. [Para 14][329-C-H]

A

B

CD

E

F

G

H

A

B

CD

E

F

G

H

A2. In Circular No. 760 dated 13th January 1998, the CBDTobserved that they considered the issue and were advised thatin case of transactions which are, in substance, in the nature ofhire-purchase, the receipts of hire charges would not be in thenature of interest. In transactions which are, in substance, in thenature of financing transactions, the hire charges should beBtreated as interest, subject to interest tax. To determine thedistinction between the two transactions, the assessing officerswere required to consider the issue on merits taking, inter alia,into account – (i) the terms of the agreement; (ii) the nature ofthe arrangement between the supplier of the asset, the hire-Cpurchase company and the end user of the asset; and (iii) theintention of the parties which manifests itself in the fixation ofthe initial payment, the method of determination of hire-purchaseprice etc. However, when the hire-purchase company pays theprice or a substantial part thereof on behalf of such hirer who isthe real purchaser but does not pay the full price, then suchDagreement is in the nature of a security for re-payment of theloan and is essentially a loan transaction. [Para 16][331-F-H;332-A-B]

3.1. The judgment in Sundaram Finance Limited relates tothe true nature of hire in hire-purchase agreements as in theEcontext of the sales tax enactment. In the present case, however,one is dealing with and interpreting Section 2(7) of the Act, whichhas been interpreted in two decisions, that is, in the case of SaharaIndia Savings and Investment Corporation Limited and State Bankof Patiala Through General Manager, which have given a veryFlimited and restricted meaning to Section 2(7) of the Act asinterest directly arising “on” loans and advances, and not anyother interest, be it interest earned on investment or interestpayable on delayed payment of the discounted bill of exchange.[Para 17][332-B-E]G3.2. Taxation depends upon the language of the chargingsection and what is brought to tax within the four corners of thecharging section. Therefore, one should be careful and cautiouswhen applying the ratio of judgments relating to one tax enactmentas a precedent in a case relating to another tax enactment. Thisrule of caution is important and should not be overlooked, moreH

so when the language of the enactment and the object andpurpose of the enactment are different. [Para 18][332-E-F]

4.1. Findings of fact generally recorded by the ITAT aretreated as conclusive. The High Court can interfere with thefindings of fact while deciding a substantial question of law whenthe findings are not supported by the material on record, so as tobe treated as perverse. For this, the High Court must frame aseparate substantial question of law and only then interfere withthe findings of fact by the ITAT, while applying the strictparameters. In the present case, the High Court did not frame aspecific substantial question of law and thus, the interference withthe findings of fact is unwarranted. This is not to say that the taxauthorities are not entitled to examine the surrounding facts andcircumstances to ascertain the true character and nature of thetransaction, regardless of the nomenclature given by the parties.[Para 19][333-C-E]

4.2. In the present case, at this distinct point of time, itwould not be appropriate to pass an order of remand. It is to bealso noted that the Act has ceased to operate with effect from31st March 2000. 21. The impugned judgment is accordingly setaside. The additions made by the assessing officer are set asideand the orders passed by the ITAT deleting the additions in thecase of appellant and other cases are upheld. [Paras 20, 21][333-G; 334-A]

Commissioner of Income Tax, Kanpur v. Sahara IndiaSavings and Investment Corporation Limited (2009) 17SCC 43 and State Bank of Patiala Through GeneralManager v. Commissioner of Income Tax, Patiala (2015)15 SCC 483 : [2015] 12 SCR 243 – relied on.

The Commissioner of Income Tax, Cochin v. M/s.Muthoot Leasing & Finance Limited [Judgment dated10[th] March, 2008 of High Court of Kerala in ITA No.269 of 2002] – overruled.

State Bank of Mysore v. Commissioner of I.T.,Karnataka-I, Bangalore (1989) 175 ITR 607 – heldoverruled.

AB

C

D

E

F

G

H

SUPREME COURT REPORTS

ACommissioner of Income Tax v. CholamandalamInvestment and Finance Co. Ltd. (2008) 296 ITR 601– held approved.

K.L. Johar and Co. (In Both Appeals) v. DeputyCommercial Tax Officer, Coimbatore III (In BothBAppeals) AIR 1965 SC 1082 : [1965] 2 SCR 112;Sundaram Finance Limited v. State of Kerala andAnother AIR 1966 SC 1178 : [1966] 2 SCR 828;Commissioner of Interest Tax, New Delhi v. M/s G.E.Capital Services India [Decision of Supreme CourtCdated 16[th] May, 2008 in SLP(C) No. 14202 of 2008]and Association of Leasing and Financial ServiceCompanies v. Union of India and Others (2011) 2 SCC352 : [2010] 13 SCR 381 – referred to.

Case Law Reference

D

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.10201-10202 of 2010.

F

From the Judgment and Order dated 10/03/2008 of the High Courtof Kerala at Ernakulam in ITA Nos.230 and 269/2002.

With

Civil Appeal Nos.10203, 10204, 10205-10206, 10207 of 2010, 4903,G4904, 4905, 4906, 4907 Of 2014 And Slp (Civil) No.4441 of 2011.

Rupesh Kumar, Shashank Bajpai, Chinmayee Chandra, A.Raghunath, Ms. Ritika Sinha, V. K. Monga, E. M. S. Anam, A. N. Arora,Mrs. Anil Katiyar, Advs. for the appearing parties.

H

The Judgment of the Court was delivered by SANJIV KHANNA, J.

1. Leave granted in Special Leave Petition (Civil) No. 4441 of2011.

2. The common question which arises for consideration in thisbatch of Civil Appeals is: whether the appellants – assessees are liableto pay tax under the Interest-Tax Act, 1974[1] on the interest componentincluded in the hire-purchase instalments paid under the hire- purchaseagreement?

3. The facts, in brief, are that the appellants – assessees are non-banking finance and leasing companies registered with the Reserve Bankof India. Some of the appellants – assessees have been reclassified ashire-purchase finance companies. It is not disputed that the appellants –assessees are credit institutions within the meaning of Section 2(5-A) ofthe 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 institutionreferred to in Section 51 of that Act);

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

(iii) a State financial corporation established under Section 3 orSection 3-A or an institution notified under Section 46 of the StateFinancial 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, whichdefines a “financial company” and includes within its ambit hire-purchasefinance companies:

“(5-B) “financial company” means a company, other than acompany referred to in sub-clause (i), (ii) or (iii) of clause (5-A),—being 1For short, ‘the Act’.

A

B

C

D

E

F

G

H

324SUPREME COURT REPORTS

A(i) a hire-purchase finance company, that is to say, a companywhich carries on, as its principal business, hire-purchasetransactions or the financing of such transactions; xx xx xx”

B4. The contention of the appellants – assessees is that under ahire- purchase agreement, they hire out a vehicle to the customer andreceive hire-purchase instalments, and not interest on loans and advances.As per the findings of fact recorded by the Income Tax AppellateTribunal[2], the hirer has acknowledged that the appellants– assesseesare the owners of the vehicle. As per the hire-purchase agreements, theChirer must pay rent to the owner during the hiring as per the sumsmentioned in the agreement on the dates mentioned therein. Further, thehirer 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. Thehirer must keep the vehicle in his sole custody and possession at theDaddress mentioned in the agreement, or such other place as the ownerhas previously consented to in writing. The owner or any personauthorised by him in writing is entitled to inspect the vehicle at allreasonable times during the period of hire. The hirer may, at any time,determine the hire-purchase agreement by delivering the vehicle at hisEown cost to the owners. If the hirer fails to pay the hire instalmentswithin the stipulated time, becomes insolvent, pledges or sells, or attemptsto pledge or sell or otherwise alienate or transfer the vehicle, or does orsuffer any act or thing whereby, or in consequence of which, the vehiclemay be distrained, seized or taken into execution under legal process, orbreaks or fails to perform or observe any condition as mentioned in theFhire-purchase agreement, the owner is entitled to forthwith determinethe agreement and, thereupon, entitled to enter the place where thevehicle is kept and seize, remove and retake possession thereof. Theowner is also entitled to sue for all the instalments due, damages forbreach of the agreement, and the cost in retaking possession of theGvehicle. The owners, if agreeable, may permit the hirer to have theregistration of the vehicle in his own name, provided that the hirer shalltransfer the registration in the name of the owner whenever required todo so by the owner, especially when the hirer commits breach of any of 2 For short, ‘ITAT’.

H

the conditions of the agreement, due to which the owners are obliged toseize the vehicle.

5. On these facts, the ITAT accepted the plea of the appellants –assessees that they are not liable to pay interest tax on the interestcomponent imbedded in the hire-purchase instalment. The ITAT referredto Circular No. 760 dated 13[th] January 1998 issued by the Central Boardof Direct Taxes[3] and observed that the hire-purchase agreement is acomposite transaction, and has elements of bailment and sale. Relyingon the terms and conditions of the hire- purchase agreement noted above,the ITAT held that hire-purchase agreements are distinguishable fromloans and advances. The hire instalments are something different andmore, and not the interest on loans and advances that is chargeable tointerest tax.

6. The ITAT had also relied on the provisions of The Hire-PurchaseAct, 1972, which, in our opinion, is palpably wrong as the said enactmentwas never enforced and was subsequently repealed vide the Hire-Purchase (Repeal) Act, 2005.

7. The High Court of Kerala in the case of The Commissionerof Income Tax, Cochin v. M/s. Muthoot Leasing & Finance Limited[4]by the impugned judgment dated 10[th] March 2008 set aside and reversedthe finding of the ITAT, observing that the hire- purchase instalmentincludes “finance charges”, which is nothing but interest, and therefore,interest tax is leviable on the interest component. The transaction, thoughstyled as a hire-purchase agreement, the High Court held, is in fact afinance agreement for purchase of a vehicle. The hirer, as a borrower,had been charged a flat rate of interest. The hirer, on payment ofinstalments, had the option to purchase the vehicle for one rupee, whichwas an empty formality, because the vehicle was already registered inhis name. As per Section 51 of the Motor Vehicles Act, 1988[5], theregistering authority is required to enter the details of the hire-purchaseagreement in the certificate of registration. The respondent – assesseetherein had the license to repossess the vehicle on default, but to getownership they had to apply for change in name under the provisions of 3 For short, ‘CBDT’.

4 ITA No. 269 of 2002.

5 For short, the ‘MV Act’.

AB

C

DE

F

G

H

Athe MV Act. Reliance placed by the appellant – assessee on CircularNo. 760 dated 13[th] January 1998 issued by the CBDT was rejected,observing that the CBDT had earlier issued Circular No. 738 dated 25[th]March 1996 clarifying that the interest recovered under the hire-purchaseagreement falls under Section 2(7) of the Act. For arriving at theconclusion, reliance was placed on the decision of this Court in SundaramBFinance Limited v. State of Kerala and Another[6], a decision whichwe will subsequently examine.

8. The High Court of Delhi in Commissioner of Interest Tax v.M/s G.E. Capital Transportation[7], decided on 1[st] September 2006, hastaken a different view, observing that the assessees therein having notCearned any interest on loan or advance, no component of the hire-purchase instalment paid by the customer/hirer towards the hire ischargeable to interest tax under the Act. At this stage, it may be relevantto state that the special leave petition preferred by the Commissioner ofIncome Tax, New Delhi against the decision of the Delhi High Court inDa connected matter, in the case of Commissioner of income Tax, NewDelhi v. M/s G.E. Capital Services India[8], was dismissed by this Courton 16[th] May 2008. The dismissal being in limine and at the admissionstage, would not constitute a binding precedent under Article 141 of theConstitution of India.

E9. Section 2(7) of the Act, post amendment with effect from 1[st]October 1991, reads as under:

“(7) “interest” means interest on loans and advances made inIndia and includes—

F(a) commitment charges on unutilised portion of any creditsanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn ormade in India, but does not include—G

(i) interest referred to in sub-section (1-B) of Section 42 of theReserve Bank of India Act, 1934 (2 of 1934); 6 AIR 1966 SC 1178.

7 ITA No. 1275 of 2006.

8 SLP(C) No. 14202 of 2008.

H

(ii) discount on treasury bills;”

10. There are two direct decisions of this Court interpreting Section2(7) of the Act vide Commissioner of Income Tax, Kanpur v. SaharaIndia Savings and Investment Corporation Limited[9]; and State Bankof Patiala Through General Manager v. Commissioner of IncomeTax, Patiala[10], which are relevant, and thus, we would refer to them insome detail.

11. In Sahara India Savings and Investment CorporationLimited (supra), this Court noticed that prior to 1[st] October 1991, theword “interest” in Section 2(7) was defined so as to include any amountchargeable to income tax under the head “Interest on Securities”. Postthe amendment, the words “amount chargeable to income tax… underthe head ‘Interest on Securities’” stood deleted. The Act, this Courtheld, had been enacted with twofold purposes, namely, as an anti-inflationary measure and for revenue collection. With this objective inmind, the court proceeded to examine and interpret Section 2(7) of theAct to hold that the expression “interest” must be given a restrictivemeaning as interest on “loans and advances, including commitmentcharges, discount on promissory notes and bills of exchange, but not toinclude interest referred to in Section 42(1-B) of the Reserve Bank ofIndia Act, 1934 as well as discount on treasury bills”. Section 2(7) definestaxable interest in the first part and confines the interest only to loansand advances, and in the second part includes, by specific mandate,commitment charges and discounts on promissory notes and bills ofexchange. Interpreting the provision in this manner, it was held that thelegislature, in its wisdom, had extended the meaning of the word “interest”in the second part to two items, namely, commitment charges anddiscounts on promissory notes and bills of exchange. In the said case,the respondent – assessee had made investments in bonds and debentures.It was held that interest on these bonds and debentures bought by therespondent – assessee therein, as and by way of “investment”, is nottaxable as interest under Section 2(7) of the Act as they do not qualifyand could not be treated as “interest on loans and advances”.

12. In State Bank of Patiala Through General Manager (supra),this Court had examined the cleavage of opinion between different High 9 (2009) 17 SCC 43.

10 (2015) 15 SCC 483.

A

B

CDEFG

H

ACourts on whether the fixed percentage charge leviable on default inpayment of discounted bills of exchange should be treated as interestwithin the meaning of Section 2(7) of the Act. The amount credited onthis account had been booked by the appellant Bank therein in its interestaccount. Agreeing with the assessee therein, this Court observed thatthe definition of ‘interest’ in the Act is a narrow one, and is exhaustiveBas it is a “means and includes” definition. The reasoning of the KarnatakaHigh Court in State Bank of Mysore v. Commissioner of I.T.,Karnataka-I, Bangalore[11] that discounting of a bill is a form of advanceor loan and hence, compensation paid on delayed payment of money

due thereon is interest on loans and advances, was overruled asCoverlooking the limited coverage in Section 2(7) of the Act. There is adistinction between loans and advances, and discounted bills of exchangedrawn or made in India. If discounted bills of exchange were also to betreated as loans and advances made in India, there would be no need toextend the definition of “interest” to include discount on bills of exchange.DThis Court, accordingly, agreed with the views expressed by some otherHigh Courts, including Madras High Court in Commissioner of IncomeTax v. Cholamandalam Investment and Finance Co. Ltd.[12], that thecharacter of an overdue bill is not synonymous with the loans andadvances and, therefore, it will not fall within the ambit and scope ofinterest under part one of Section 2(7) of the Act. It was observed thatEthe right to charge for overdue interest by the assessee Banks thereindid not arise on account of any delay in repayment of any loan or advance,but arose on account of default in the payment of amounts due under adiscounted bill of exchange. A subject can be brought to tax only by aclear statutory provision in that behalf. Interest is chargeable to tax underFthe Act only if it arises “directly” from a loan or advance and not otherwise.Accordingly, interest payable “on” a discounted bill of exchange cannotbe equated with interest payable “on” a loan or advance.

13. The decision in State Bank of Patiala Through GeneralManager (supra) also draws distinction between the broad definition ofGthe expression “interest” in the Income Tax Act, 1961 vide Section 2(28-A), to observe that the expression used under the Act, that is the Interest-Tax Act, 1974, is much narrower and restricted. Under the Income Tax 11 (1989) 175 ITR 607.

12 (2008) 296 ITR 601.

H

Act, 1961, interest can be payable in any manner whatsoever. Secondly,the expression “in respect of” includes interest arising even indirectlyout of a money transaction, unlike the word “on” contained in Section2(7) of the Act, which connotes a direct arising of payment of interestout of a loan or advance. Thirdly, “any moneys borrowed” must becontrasted with “loan or advances”. The former expression would includemoneys borrowed by means other than by way of loans or advances.Thus, the Act, unlike the Income Tax Act, 1961, is focused on a verynarrow taxable event which does not include within its ken interest payableon default in payment of amounts due under a discounted bill of exchange.

14. A hire-purchase agreement has two elements – an element ofbailment and an element of sale. The element of sale fructifies when theoption to purchase is exercised by the intending purchaser after fulfillingthe terms of the agreement. Till then, the goods are given on hire. Onecan argue that in a hire-purchase, an element of interest is inbuilt, butwhat is payable is the hire amount and not interest per se. The hirer hasan option to return the vehicle or the goods taken on hire. It is not asimple transaction of giving a loan or advance on which interest is payable.The transaction(s) in commercial and legal sense are far more complexwith corresponding rights of the parties. Even if the hirer is recorded asthe owner of the vehicle under Section 51 of the MV Act, the name ofthe appellant – assessee is also recorded in the registration book, whichis in recognition of the hire-purchase agreement. The registered ownerunder the MV Act may be liable in case of accidents/traffic challans,etc. But this, in no way, dilutes the right of the appellants – assessees inrespect of the title of the property, that is, the vehicle. Any transfer orsale made by the hirer or any violation of the hire-purchase agreementcan lead to civil as well as criminal consequences. Given the dictum andratio in Sahara India Savings and Investment Corporation Limited(supra) and State Bank of Patiala Through General Manager (supra),the view taken by the High Court of Delhi in M/s G.E. CapitalTransportation[13] (supra), as followed by the High Court of Delhi inCommissioner of Interest Tax v. M/S G.E. Capital Transportation[14],is correct and the view taken by the High court of Kerala in the impugnedjudgment is not in consonance with the above decisions of this court.

13 ITA 1275 of 2006.

14 ITA 1280 of 2006.

AB

C

D

E

F

G

H

A15. However, the learned counsel for the Revenue has relied onSundaram Finance Limited (supra), which decision had also beenrelied upon by the High Court of Kerala in the impugned judgment. Thesubmission is that there is a conflict in the ratios. Before we consider theratio of the judgment in Sundaram Finance Limited (supra), we wouldrefer to the decision of the Constitution Bench of this Court in K.L.BJohar and Co. (In Both Appeals) v. Deputy Commercial Tax Officer,Coimbatore III (In Both Appeals)[15]. In the decision, this Court hadreferred to the concept of hire-purchase in the context of sales tax liabilityunder the Madras General Sales Tax Act, 1939, to observe that the hirer

can exercise the option of purchase only when he fulfils the terms of theCagreement, and till then there is no sale at all. The argument, which wasaccepted by the High Court of Madras, that because in most cases suchoption is exercised by the hirer, the tax was leviable immediately, wasflawed, as the taxable event had not taken place. In the said case also,one of the contentions raised was that only one rupee had to be paid asDthe price for the transfer of the vehicle since the entire amount was paidas hire. This contention was not accepted, for it overlooked the essenceof the hire-purchase agreement, which was that the hire includes notonly what would be payable really as hire but also that a part of it wastowards the price. These observations are relevant in the context of thepresent case as they refer to and explain the true nature of hire in hire-Epurchase agreements, albeit in the context of the sales tax enactment.However, this court also observed that even in the absence of legislativeguidance, the sales tax authorities may split the hire into two parts. Thisdecision was followed in the case of Sundaram Finance Limited (supra)with the majority judgment authored by J.C. Shah, J. observing that theFdecision of the Constitution Bench in K.L. Johar and Co. (supra) dealtwith the agreements where the financier has paid the balance amount tothe erstwhile owner of the goods and thereupon obtained the hire-purchase agreement from the customer, under which the customerbecomes the owner of the goods on payment of all the instalments of theGstipulated hire and exercising his option to purchase the goods on paymentof a nominal price. In another form of hire-purchase transactions, goodsare purchased by the customer who, in consideration of executing ahire-purchase agreement and allied documents, remains in possessionof the goods, subject to the liability to pay the amount paid by the financier on behalf of the customer to the owner or the dealer. The financierobtains the hire-purchase agreement which gives him a license to seizethe goods in the event of failure by the customer to abide by the conditionsof the hire-purchase agreement. The true effect of a transaction may bedetermined from the terms of the agreement considered in light of thesurrounding circumstances. In some cases, the real bargain would be aloan on the security of the goods. If there is a bona fide and completedsale of goods, evidenced by documents, anterior to and independent of asubsequent and distinct hiring to the vendor, the transaction may not beregarded as a loan transaction, even though the reason why it was enteredinto was to raise money. Recording the aforesaid, the appeal of theassessee in Sundaram Finance Limited (supra) was allowed by themajority observing that they were carrying on business of financiers andnot dealing with motor vehicles. The motor vehicle purchased by thecustomer was registered in his name and remained, at all material times,so registered in his name. The sale letter was a formal document whichwas not made effective by registering the vehicle in the name of theassessee and even the insurance of the motor vehicle had to be effectedas if the customer was the owner.

16. Before we examine the reasoning and context in which theelucidation was made, we would like to refer to two circulars issued bythe CBDT. The CBDT had, vide Circular No. 738 dated 25[th] March1996, opined that hire-purchase transactions are generally in the natureof finance transactions entered into by the companies engaged in thebusiness of financing, and finance charges accruing or arising to hire-purchase finance companies are in the nature of interest as defined inSection 2(7) of the Act and hence, chargeable to interest tax. However,in the subsequent Circular No. 760 dated 13[th] January 1998, the CBDTobserved that they considered the issue and were advised that in case oftransactions which are, in substance, in the nature of hire-purchase, thereceipts of hire charges would not be in the nature of interest. Intransactions which are, in substance, in the nature of financingtransactions, the hire charges should be treated as interest, subject tointerest tax. To determine the distinction between the two transactions,the assessing officers were required to consider the issue on meritstaking, inter alia, into account – (i) the terms of the agreement; (ii) thenature of the arrangement between the supplier of the asset, the hire-purchase company and the end user of the asset; and (iii) the intention ABC

DEF

GH

332SUPREME COURT REPORTS

Aof the parties which manifests itself in the fixation of the initial payment,the method of determination of hire-purchase price etc. However, whenthe hire-purchase company pays the price or a substantial part thereofon behalf of such hirer who is the real purchaser but does not pay thefull price, then such agreement is in the nature of a security for re-Bpayment of the loan and is essentially a loan transaction. Reference wasmade to the judgment in the case of Sundaram Finance Limited(supra).

17. As noticed above, this judgment in Sundaram Finance Limited(supra) relates to the true nature of hire in hire-purchase agreements asCin the context of the sales tax enactment. In the present case, however,we are dealing with and interpreting Section 2(7) of the Act, which hasbeen interpreted in two decisions, that is, in the case of Sahara IndiaSavings and Investment Corporation Limited (supra) and State Bankof Patiala Through General Manager (supra), which have given avery limited and restricted meaning to Section 2(7) of the Act as interestDdirectly arising “on” loans and advances, and not any other interest, be itinterest earned on investment or interest payable on delayed payment ofthe discounted bill of exchange.

18. Taxation depends upon the language of the charging sectionEand what is brought to tax within the four corners of the charging section.Therefore, one should be careful and cautious when applying the ratioof judgments relating to one tax enactment as a precedent in a caserelating to another tax enactment. This rule of caution is important andshould not be overlooked, more so when the language of the enactmentand the object and purpose of the enactment are different. This ratio isFsomewhat expressed by this Court in Association of Leasing andFinancial Service Companies v. Union of India and Others[16], whereinin the context of levy of service tax by Section 65(105)(zm) read withsection 65(12) of the Finance Act, 1994, as amended, banking andfinancial services were brought to tax. In the context of the saidGenactment, this Court deemed it appropriate to distinguish betweenfinancial lease and operating lease and held that the services rendered inthe former case would be taxable, whereas the latter would fall out ofthe tax net. In this context, it was observed that non-banking financialcompanies are essentially loan companies, but they could, in addition 16H (2011) 2 SCC 352.

thereto, be in the business of equipment leasing, hire- purchase financeand investment. In case of bailment termed as “hire”, the bailee receivesboth possession of the chattel and the right to use it in return forremuneration. On the other hand, equipment leasing is long-term financingwhich helps the borrower to raise funds without outright payment in thefirst instance. Here, the “interest” element cannot be compared toconsideration for lease/hire, which is in the nature of remuneration(consideration) for hire.

19. Findings of fact generally recorded by the ITAT are treatedas conclusive. The High Court can interfere with the findings of factwhile deciding a substantial question of law when the findings are notsupported by the material on record, so as to be treated as perverse.[17]For this, however, the High Court must frame a separate substantialquestion of law and only then interfere with the findings of fact by theITAT, while applying the strict parameters. In the present case, the HighCourt did not frame a specific substantial question of law and thus, theinterference with the findings of fact is unwarranted. This is not to saythat the tax authorities are not entitled to examine the surrounding factsand circumstances to ascertain the true character and nature of thetransaction, regardless of the nomenclature given by the parties.

20. Given the aforesaid legal position, we may have even remandedthe matter to the assessing officer for fresh adjudication and to re-examine all the transactions in light of the aforesaid ratio and reasoning,keeping in mind the dictum laid in Sahara India Savings andInvestment Corporation Limited (supra) and State Bank of PatialaThrough General Manager (supra) to rule out cases where camouflageor subterfuge has been adopted to avoid payment of interest tax. Thiswould have entailed not only looking at the documents but also severalother factors, which would have meant getting information andascertainment of facts in detail from the assessee and the hirer. However,at this distinct point of time, we do not think that it would be appropriateto pass an order of remand. It is to be also noted that the Act has ceasedto operate with effect from 31[st] March 2000.

17See Karnataka Board of Wakf v. Anjuman-E-Ismail Madris-Un-Niswan, (1999) 6SCC 343; and C. Doddanarayana Reddy (Dead) By Legal Representatives and Othersv. C. Jayarama Reddy (Dead) By Legal Representatives and Others, (2020) 4 SCC 659.

ABC

D

E

F

G

H

A21. Recording the aforesaid, we allow the present appeals andset aside the impugned judgments. The additions made by the assessingofficer are set aside and the orders passed by the ITAT deleting theadditions in the case of the appellant – M/s. Muthoot Leasing and FinanceLimited and other cases are upheld. In the facts of the present case,there would be no order as to costs.B

Bibhuti Bhushan Bose

(Assisted by : Neha Sharma, LCRA)

Appeals allowed.

C

D

E

F

G

H