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

Citation: [2023] 1 S.C.R. 317 · Decided: 03-01-2023 · Supreme Court of India · Bench: SANJIV KHANNA · Disposal: Appeal(s) allowed

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Judgment (excerpt)

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M/S. MUTHOOT LEASING AND FINANCE LIMITED
AND 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-purchase
agreements – Appellants-assessees are credit institutions within
meaning of s.2(5-A) – Whether appellants-assessees liable to pay
tax on interest component included in hire-purchase instalments paid
under hire-purchase agreements – ITAT referred to CBDT Circular
No. 760 dated 13th January 1998 and observed that hire-purchase
agreement is a composite transaction, and has elements of bailment
and sale and appellants-assessees are not liable to pay interest tax
as hire instalments are not interest on loans and advances that is
chargeable 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 leviable
on the interest component – The transaction, though styled as a
hire-purchase agreement, the High Court held, is in fact a finance
agreement for purchase of a vehicle – Reliance placed by appellant-
assessee on Circular No. 760 dated 13th January 1998 issued by
CBDT was rejected by the High Court – On appeal, held: Given the
dictum and ratio in the cases of Sahara India Savings and Investment
Corporation Limited and State Bank of Patiala Through General
Manager, the view taken by High Court is not correct – In Circular
No. 760 dated 13th January 1998, the CBDT observed that they
considered the issue and were advised that in case of transactions
which are, in substance, in the nature of hire-purchase, the receipts
of hire charges would not be in the nature of interest – In
transactions which are, in substance, in the nature of financing
transactions, the hire charges should be treated as interest, subject
to interest tax – To determine the distinction between the two
transactions, the assessing officers were required to consider the
issue on merits taking, inter alia, into account – (i) the terms of the
agreement; (ii) the nature of the arrangement between the supplier
   [2023] 1 S.C.R. 317
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SUPREME COURT REPORTS
[2023] 1 S.C.R.
of the asset, the hire-purchase company and the end user of the
asset; and (iii) the intention of the parties which manifests itself in
the fixation of the initial payment, the method of determination of
hire-purchase price etc – However, when hire-purchase company
pays the price or a substantial part thereof on behalf of such hirer
who is real purchaser but does not pay the full price, then such
agreement is in nature of a security for re-payment of the loan and
is essentially a loan transaction – High Court reversed finding of
ITAT without framing a specific substantial question of law and
thus, interference with findings of fact was unwarranted – Orders
passed by ITAT deleting the additions made by assessing officer in
case 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 under
s.2(7) – Held: s.2(7) has been interpreted in two decisions, that is,
in the cases of Sahara India Savings and Investment Corporation
Limited and State Bank of Patiala Through General Manager, which
have given a very limited and restricted meaning to s.2(7) of the Act
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.
Hire-Purchase – Elements – Held: A hire-purchase agreement
has 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 criminal
consequences.
Taxation – Taxation matters – Interference by High Court with
findings of fact recorded by the ITAT – Scope – Held: Findings of
fact generally recorded by the ITAT are treated as conclusive – The
High Court can interfere with the findings of fact while deciding a
substantial question of law when the findings are not supported by
the material on record, so as to be treated as perverse – For this,
the High Court must frame a separate substantial question of law
and only then interfere with the findings of fact by the ITAT, while
applying the strict parameters.
Taxation matt

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