M/s. Muthoot Leasing and Finance Ltd. and Anr. Vs. Commissioner of Income Tax
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
Judges Name: Hon’ble Judges, Justice Sanjiv Khanna J, Justice M.M. Sundresh J
Order dated: 03.01.2023
Facts of the Case:
- The Appellants – Assesses are non-banking finance and leasing companies registered with the Reserve Bank of India. Some of the Appellants – Assesses have been reclassified as hire-purchase finance companies.
- The Appellant – Assesses contend that under a hire-purchase agreement, when they hire out a vehicle to the customer, they receive hire-purchase instalments and these are not considered to be interests on loans and advances. 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. Hence, if the hirer fails to pay the hire instalments within the stipulated time 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.
- Taking all the facts at hand, the Income Tax Appellate Authority had accepted the plea of the plea of the Appellants – Assessees that they are not liable to pay interest tax on the interest component imbedded in the hire-purchase instalment. The ITAT referred to Circular No. 760 : MANU/DTCR/0002/1998 dated 13th 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 noted above, 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.
- The High Court of Kerala in the case of The Commissioner of Income Tax, Cochin v. M/s. Muthoot Leasing & Finance Limited by the impugned judgment dated 10th March 2008 set aside and reversed the finding of the ITAT, observing that the hire-purchase instalment includes “finance charges”, which is nothing but interest, and therefore, interest tax is leviable on the interest component.
- Aggrieved by this order, the present Civil Appeal, arising out of a Special Leave Petition, has been filed by the Appellant – Assesses before the Supreme Court.
Hon’ble Supreme Court observed/held as follows:
- The Supreme Court upheld the judgment passed by the Income Tax Appellate Authority, which held that hire purchase agreements have no interest element involved.
- The Apex Court had discussed in detail, the cases of Commissioner of Income Tax, Kanpur v. Sahara India Savings and Investment Corporation Limited (MANU/SC/1841/2009) and State Bank of Patiala Through General Manager v. Commissioner of Income Tax, Patiala (MANU/SC/1325/2015), to decide whether an element of interest exists within hire purchase agreements.
- A hire-purchase agreement has two elements – an element of bailment and an 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. One can argue that in a hire-purchase, an element of interest is inbuilt, but what is payable is the hire amount and not interest per se.
- 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.
- The order of the High Court was quashed, the impugned judgments were set aside and the orders of the Income Tax Appellate Authority in the instant case and other cases were upheld.