By TIOL News Service

ALLAHABAD, JAN 22, 2014: THE issues before the Bench are - Whether in case the total amount of hire that hirer pays to assessee exceeds the price at which the vehicle was purchased from the dealer, excess can be termed as interest, Whether in case promissory note is executed by the hirer in favour of assessee for total hire payable for the motor vehicle as colateral security and the assessee company is given right to negotiate the said Demand Promissory Note in favour of their bankers or any other party for valuable consideration and also sue upon the same, the said assessee is a financing concern and Whether in case notice issued u/s 10 is invalid, it would render the entire assessment proceeding invalid. And the verdict favours the Revenue.

Facts of the case

The assessee company is engaged in the business of "financing and leasing." On hire purchase transaction the assessee charged "finance charges" as well as interest on repayment of principal amount, which was shown in the balance sheet as capital receipt. During assessment, AO held that finance charges received by the assessee were nothing but interest charges on the money financed to the hirer and, therefore, it was chargeable interest as defined under Section 2 (5) read with Section 2(7) and consequently the charging provision of Section 4 got attracted. The AO held the assessee to be a finance company. On appeal, CIT(A) upheld the AO's assessment order. On further appeal, Tribunal set aside the order of the authorities below and observed that the transactions involved were in the nature of contract of hire purchase having an element of bailment as well as that of sale. Therefore, the hire purchase transactions in the present case cannot be considered as transactions of money lending or advancing of loans. Consequently, provisions of the Act, 1974 were not applicable.

Before the HC, the Revenue's counsel had submitted that assessee was a "credit institution" u/s 2 (5-A) and thus a financial company as defined u/s 2(5-B). The amount collected by it was interest u/s 2(7) and was a chargeable interest u/s 2(5). The assessee was liable to pay tax on such amount in view of Section 4. It was submitted that customers purchased vehicles through the assessee company and got it financed from it. As per the audited accounts/financial statements, assessee company was engaged in the business of financing and leasing. It was submitted that real nature of the transaction was financing by the assessee company and hirer was the real purchaser of vehicles. It was submitted that the assessee company had not disclosed the purchases of vehicles to the sales tax department. No sales tax return had been filed by it. It was not a dealer or trader of the articles financed by it. In its audited accounts filed with the income tax returns, the assessee had shown the finance charges as revenue receipts. The auditor had certified that assessee was not a trading company and it had followed the norms issued by RBI for NBFC. It was only after the hirer had exercised his purchasers rights to identify the product, hirer approaches the assessee company for reason that it needs someone who can pay the price of vehicle or a substantial part thereof on his behalf. The hirer pays the financed amount in installment and also pays the price for this facility. It was submitted that, therefore, transaction of the assessee company had all the features of a loan transaction. It was submitted that vehicle was registered in the name of assessee company. An agreement was entered into between the hirer and the assessee company only by way of a security for repayment of loan.

On the other hand, the assessee's counsel submitted that assessee purchased vehicles which were registered by the prescribed authority in the name of hirer. It was submitted that the transaction entered between assessee and hirer was a transaction of hire purchase which does not fall within the ambit of Section 4. It was submitted that assessee company was not a financial company within the meaning of section 2(5-A/B). It was submitted Tribunal had considered the provisions of the Act of 1974, CBDT Circular No. 738, CBDT Circular No. 760 and the terms of hire purchase agreement and thereafter recorded the findings of fact. It was further submitted that Tribunal held that the intention of the parties was that it was a pure arrangement of hire purchase. The principal business activity of the assessee being hire purchase trading, it cannot be treated to be financing activity and thus it will not be correct approach to say that profit on hire purchase trading was "interest of loan and advances" within the meaning of Section 2(7).

Held that,

++ we find that ITAT has failed to examine the agreement in totality and the documents to discover the real nature of the transaction which was emphasised by the CBDT vide Circular No. 760 dated 13.1.1998 and also by SC in the case of Sundaram Finance Ltd. We also find that the ITAT has neither considered nor has upset the findings recorded by the CIT(A). The findings recorded by the CIT (A) based on evidences were very crucial to be read with the agreement so as to find out the real nature of the transactions entered between the assessee and the hirer. ITAT has also failed to consider the principles regarding hire purchase transactions and loan transactions. We find that CIT (A) has recorded the finding of fact that the assessment order describes the nature of transactions entered into by the appellant and the appellant does not challenge the accuracy of this description. In the description it has been narrated that a potential hirer or customer, desirous of acquiring a vehicle but unable or unwilling to pay the entire price from his own funds, approaches the appellant with a proposal. He requests the appellant to buy and hire to him the vehicle required by him. The potential hirer or customer identifies the vendor or the dealer from whom the vehicle should be purchased. He also specifies the vehicle that should be purchased. The choice in these areas is entirely that of the customer or the potential hirer. On acceptance of the proposal by the appellant company, the hirer pays the initial hire money. The appellant company buys the vehicle, from the dealer identified by the hirer. The hirer gets the vehicle from the dealer. An agreement is entered into between the appellant company and the hirer to hire the motor vehicle to the Hirer. The Hirer agrees to pay to the appellant company, a certain sum as initial payment by way of 'hire'. He also agrees to pay to the appellant company the "total amount of hire" in pre-determined instalments (generally monthly instalments, the frequency and interval of which are determined at the time of the agreement). The Hirer gets an option to purchase the hired motor vehicle from the appellant company on payment of the total amount of hire plus Re.1/-. On payment of this additional amount of Rs. 1/- over and above the total amount of hire paid in instalments, the hiring comes to an end and the appellant company makes over all their rights, title and interest in the motor vehicle to the Hirer;

++ it is undisputed that the vehicles were registered in the name of the respective customers. However, in the registration certificate a remark in terms of agreement was to be recorded to the effect that vehicle is held by the registered owner under a hire purchase agreement with the assessee. A "Sale Letter" was executed, reciting that the customer had on the date of the application for loan sold to the financier the motor vehicles. The ITAT completely ignored the discussion and findings of fact recorded by CIT (A) in paragraphs 8 and 11 to 15 which will show that despite some difference in the pattern of transactions in the two cases, the principle that emerges from the Supreme Court's decision in the case of Sundaram Finance Ltd. are fully applicable to the facts of the case. It was pointed out by the Assessing Officer that sale of vehicles have not been shown by the respondent assessee in its profit and loss account and no sales tax return has been filed by it. In its audited account, filed with the income tax returns, the respondent assessee has shown the finance charges as revenue receipts. The auditor has certified that the respondent assessee is not a trading company. The auditor has also certified that the respondent assessee has followed the norms issued by the Reserve Bank of India for non-banking financial companies (NBFC). This shows that the respondent assessee is a finance company engaged in financing of vehicles. There is no evidence that respondent assessee is a trader dealing in purchase and sale of vehicles. Thus the hirer is the real purchaser of vehicles from the dealer. He selects the vehicle for purchase and also the dealer from whom it was to be purchased. At this stage the respondent assessee does not come into picture. After the hirer identified the vehicle and the dealer i.e. the seller then he approached the respondent assessee for finance due to his inability to purchase out of his own funds. At this stage the respondent assessee extended the facility of finance to hirer on willingness of the hirer to pay a price for this facility. The total amount of hire that hirer pays to the respondent assessee exceeds the price at which the vehicle was purchased from the dealer. This is more than that part of the purchase consideration which was paid by the respondent assessee to the dealer as finance to the hirer. The excess amount so paid by the hirer to the respondent assessee is nothing but interest on loan. The amount so invested by the respondent assessee in the purchase of vehicles is the amount of loan advanced by it to the hirer. As per Clause (10) of the agreement a promissory note was also executed by the hirer in favour of the assessee company for total hire payable for the motor vehicle as per "Schedule B" as colateral security and the assessee company was given the right to negotiate the said Demand Promissory Note in favour of their bankers or any other party for valuable consideration and also sue upon the same. All these facts supported by the findings of fact recorded by the CIT(A) when tested on the principles of law laid down by SC in the case of Sundaram Finance Ltd., the only conclusion that can be reached is that the transactions entered by the respondent assessee with the customer/hirer is a loan transaction and the finance charges were nothing but interest. In view of this we are of the view that the CIT (A) has correctly held that the finance charges are in the nature of interest liable to interest tax under the Act of 1974;

++ so far as the challenge to the validity of reassessment proceedings u/s 10 as raised in Appeal No. 109 of 2002, 247 of 2012 and 246 of 2012 is concerned, we find that in paragraph 8 and 14 of the impugned order the ITAT has noted the grounds No. 7(a) and 7 (b) of the assessee's that because the reassessment proceedings U/s 10 (a) cannot be said to have been validly initiated as there existed neither any material which could lead to the formation of belief that "chargeable interest" for the A.Y. 1994-95 had escaped assessment. Nor the related notice dated 27.4.98 has been validly issued and served on the appellant." The ITAT elaborately discussed the afore noted grounds in paragraphs no. 8 to 23 of the impugned order and recorded its finding in paragraph 12 and 13 with regard ground no. 7 (a) and in paragraphs 17, 18 and 21 with regard to ground no. 7 (b) and thus rejected both the grounds in appeal of the assessee. It was noted by the Tribunal, AO had applied mind and held that there were reasons to believe that chargeable interest had escaped assessment within the meaning of Sec. 10(a). The reasons so recorded by the A.O. are, in our view, very specific and not vague and, in our opinion, these reasons serve a solid basis of reopening the assessment. So far as the contention of Counsel for the assessee that the notice provided only seven days time instead of 30 days time is concerned, we do not find any force in this submission, because no time limit as been provided u/s 10. It may also be pointed out that time limit of 30 days for filing the return is laid down u/s 7 of Interest Tax Act, but the object of that Section is different from that of Section 10. It may be pointed out that the notice dated 27.4.1998 has been issued u/s 10 of the Interest Tax Act and not u/s 10 read with Sec. 7 of the Act. The Counsel for the assessee, coted several decisions to canvass the point that the notice u/s 10 of the Interest Tax Act being akin to notice u/s 148 of the I.T.Act, 1961, is a jurisdictional notice and, therefore, if the notice is invalid, the entire assessment order and proceedings of assessment stand vitiated. So far as this legal position is concerned, there cannot be any dispute. However, the situation is different. Under the Income Tax Act, 1961, the provisions of Sec. 148, before 1989, contained a clause in accordance with which the notice was to be issued requiring the assessee to file the return "within the period not being less than 30 days". By the finance Act (No.2) of 1996, these words have been omitted and the amended provisions of Sec. 148 as it stands now does not contain this time limitation. So far as Sec. 10 of Interest Tax Act is concerned unlike un-amended Section 148, it does not contain any time limitation. Thus, the authorities cited before us , which related to the interpretation of un-amended provision of Sec. 148 are not applicable to the present matter. In view of this difference, most of the cases cited before us on this point are difference, most of the cases cited before us on this point are distinguishable and not relevant. Thus, this ground taken before us fails;

++ we have carefully considered the facts and circumstances relating to this issue. In view of the provisions contained u/s 10 of the Interest Tax Act, the notice is to be served on the assessee. The service has to be, of course, on the assessee itself or on its representative of Agency or its employee. As revealed out on scrutiny of Notice dated 27.4.1998, the notice was received on behalf of the assessee on 5.5.98. The signatures of the recepiants have also been made below the endorsement of receipt as is clear from the paper book. The person, who received the notice has neither disclosed the full name nor has indicated his designation. However, the fact remains that he received the notice on behalf of the assessee. Not only this, the assessee filed returns in response to this notice and also attended assessment proceedings before the A.O. The DCIT, Kanpur, has clarified that in the assessee's group of cases, all works relating to income tax proceedings,is being looked after by their employees of Tax Department and services of notices, orders etc. are being effected on them. This practice is not un-common. It is usually observed that employees of a particular company or firm receive notices and make their signatures endorsing the receipt and the Departmental Officials do not enquire about their authority or power of attorney. Particular company or firm receive notices and make their signatures endorsing the receipt and the Department officials do not enquire about their authority or power of attorney. What is relevant is the conduct of the assessee in acquiescing in such practice. If the assessee continues to give impression that such official or employees are duly and regularly representing it, then the Departemental Officials are bond to be led or misled by such conduct. This representation of the assessee is further found to be supported by the conduct of the assessee in making compliance of the notice on the basis of such receipt. In the present case, it is established on record that the assessee had filed return in compliance to the notice, which was received on its behalf by is employees. Not only this, the assessee continued to be represented during assessment proceedings and never raised any objection on this count. It is significant to point out that neither during the assessment proceedings nor during first appellate proceedings, the plea regarding improper service was taken by the assessee. It may also be pointed out that the assessee had filed reply dt. 1.6.98 and 2.6.98, but in these replies, no objection has been taken about the appeal also no ground was taken to challenge the validity of notice. It was only on 12.10.2000 that the ground was taken for the first time before the Tribunal and subsequent to that the documents/evidences in support of this ground was adduced. This conduct of the assessee shows that the additional ground has been taken as an after thought;

++ so far as the affidavit of Shri Ishwar Chand, Director of the assessee company is concerned, it is true that no affidavit has been filed by the Department in rebuttal to this affidavit, but it may be very difficult for the Department to ascertain and depose about the authority of the person, who received the notice. However, the reports of the department, against this affidavit controvert the contents of the notice. Under these circumstances, we are of the view that the assessee had fully acquiesced by its conduct in acknowledging the receipt of notice through its employee and thus, the service should be deemed to be a proper service. The facts of the above cited cases are similar to the facts of the case before us and, therefore, these authorities are fully applicable to the instant case, inasmuch as the receipt of the notice on behalf of the assessee was not denied and acted upon by the assessee, who filed return on the basis of such notice and also participated in the proceedings as indicated above. We do not find any infirmity in the afore quoted findings recorded by the ITAT. The findings so recorded by the ITAT are findings of fact based on evidences. In view of these facts, we do not find any substance in the challenge made by the assessee in Appeal No. 109 of 2002, 247 of 2012 and 246 of 2012. In view of the above discussions, the impugned order of the ITAT in so far as it held the transaction in question to be hire purchase transaction and finance charges to be not liable to interest tax, is set aside and the order of the CIT(A) is upheld. The Appeal No. 109 of 2002, 247 of 2012 and 246 of 2012 filed by the assessee is dismissed.

(See 2014-TIOL-84-HC-ALL-IT)