INCOME TAX

Interest-tax Act, 1974--Hire-purchase transactions--Taxability of hire-charges as interest_Instructions--Regarding.

Circular 760

Dated 13/1/1998

All Chief Commissioners of Income-tax,

All Directors General of Income-tax.

Subject : Interest-tax Act, 1974 Hire-purchase transactions Taxability of hire-charges as interest Instructions--Regarding.

In Board's Circular No. 738, dated 25-3-1996*, it was stated that hire-purchase transactions entered into by the hire-purchase companies and other credit institutions are generally in the nature of financing transactions and hence the hire charges earned in the transactions would be in the nature of interest chargeable to tax under the Interest-tax Act, 1974. Acting under these instructions, the Assessing Officers have been treating all the hire-purchase transactions as mere financing transactions without distinguishing between a true hire-purchase transaction and a financing transaction in the form of a hire-purchase transaction.

2. The Board have since considered the issue and are advised that in the 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. On the other hand, if the transactions are in substance in the nature of financing transactions, the hire charges should be treated as interest subject to interest-tax.

3. As to what constitutes a transaction in the nature of hire-purchase, the Assessing Officer should consider the issue on merits taking into account, inter alia, the following facts and circumstances :

(i) The terms of the agreement ;

(ii) The nature of the arrangement between the supplier of the asset, the hire-purchase company and the end-user of the asset.

(iii) The intention of the parties which manifests itself in the fixation of the initial payment, the method of determination of the hire-purchase price, etc. When a hirer is the real purchaser of the asset but does not pay the full purchase price and the hire-purchase company pays the price or a substantial part thereof on behalf of such hirer, and a hire-purchase agreement is entered into merely as an arrangement, then such agreement is a security for repayment of the loan and is essentially a loan transaction.

4. In this connection, the Assessing Officer should keep in mind the tests laid down by the Supreme Court in the case of Sundaram Finance  Ltd. v. State of Kerala, AIR 1966 SC 1178, wherein it has been held as under  :_

"If there is a bonafide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction, may not be regarded as a loan transaction even though the reason for which it was entered into was to raise money . . ."

". . . the intention of the appellant in obtaining the hire-purchase and the allied agreements was to secure the return of loan advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions . . ."

5. Accordingly, instead of routinely treating all hire-purchase transactions as mere financing transactions, the Assessing Officers may be advised to examine each transaction in the above light and charge interest-tax in such of those transactions which are not in the nature of hire-purchase.

(Sd.) Malathi R. Sridharan,

Under Secretary,

Central Board of Direct Taxes.