Case: Motor & General Finance Limited Vs. Commissioner of Income Tax

S.H. Kapadia, C.J. 1. By consent, the matter is taken up for hearing. Despite repeated adjournments, counter-affidavit has not been filed. Leave granted. 2. In the present case, the assessee is a non-banking financial company registered with RBI. It is engaged in the business of hire-purchase and leasing. In the return of income under the Income Tax Act, 1961 it showed the following components of income:(A)Lease chargesRs 40,86,85,186(B)Hire-purchase chargesRs 32,64,89,358(C)Bill discounting chargesRs 1,91,48,614 3. The assessee did not, however, file any return of interest under the Interest Tax Act, 1974 (for short "the 1974 Act"). The AO served a letter on the assessee asking the assessee to explain the reasons for not filing the interest tax return for Assessment Year 1995-1996.4. A reply was filed by the assessee on 15-10-2003 requesting the AO to withdraw its letter as the assessee claimed that it was not liable to file returns under the 1974 Act. On 31-3-2005, a notice under Section 10 of the 1974 Act was served on the assessee calling upon him to file its return of interest. According to the AO, the interest chargeable to tax had escaped assessment. According to the AO, on perusal of the income tax return of the assessee for Assessment Year 1995-1996 it was found that the assessee was engaged in financial activities; that it had income from net hire-purchase charges, lease charges and bill discounting charges as indicated hereinabove. Accordingly, notice under Section 10 of the 1974 Act was sought to be substantiated.5. Since the assessee did not file the required return of chargeable interest the AO assessed the chargeable interest by way of best judgment assessment under Section 8(3) of the 1974 Act. The total interest chargeable, according to the AO, was Rs 75,43,23,158.00. One of the issues which arose for determination was whether the transactions undertaken by the assessee were in the nature of hire-purchase and not in the nature of financing transactions. According to the assessee, there is a dichotomy between financing transactions and hire-purchase transactions. According to the assessee, its principal business was of leasing. For the aforestated reasons, the assessee contended that it was not covered by the definition of "financial company" under Section 2(5-B) of the 1974 Act.6. On examination of the facts of the case and looking into all the parameters, including the parameter of principal business, such as turnover, capital employed, etc. it was held by CIT (Appeals) that the assessee carried on hire-purchase business activity and bill discounting activity as the principal business and, therefore, the assessee constituted a "credit institution" as defined under Section 2(5-A) of the 1974 Act and was, therefore, taxable under the 1974 Act. However, after coming to the conclusion that the reopening of the proceedings was valid and that the assessee constituted a credit institution, CIT (Appeals) went into the merits of the case and came to the conclusion that the transactions entered into by the assessee were not financing transactions as the ownership of the vehicle in each case remained with the assessee; that the hirer did not approach the assessee after purchasing the vehicle; that the vehicle stood purchased by the assessee and let out to the hirer for use on payment of charges. Consequently, CIT (Appeals) held that the hire-purchase transactions of the assessee were not financing transactions or loan transactions and, therefore, the AO was not justified in bringing to tax hire-purchase charges of Rs 32,64,89,358.00. CIT (Appeals), however, held that the AO was justified in treating receipts from bill discounting charges of Rs 1,91,48,614 as the "chargeable interest" under the 1974 Act.7. Lastly, CIT (Appeals) held that lease transactions undertaken by the assessee and the lease charges received by it did not fall within the ambit of Section 2(7) of the 1974 Act because the Department had accepted the case of the assessee that it remained the owner of the leased assets for all times to come and, therefore, it was not open for the Department to say that charges received for leasing the vehicles are financial charges exigible to the Interest Tax Act, 1974. Consequently, CIT (Appeals) came to the conclusion that the AO had erred in bringing to tax lease rental charges of Rs 40,86,85,186 as chargeable interest under the 1974 Act.8. Aggrieved by the decision of CIT (Appeals) the assessee as well as the Department went in appeal(s) to the Tribunal which held that the Department was justified in confirming the validity of action under Section 10 of the 1974 Act. On the question as to whether the assessee was a "financial company" as defined under Section 2(5-B) it was held that the assessee was not a finance company and therefore it did not fall within the definition of "credit institution" as envisaged in Section 2(5-A) of the 1974 Act and, therefore, it fell outside the purview of the 1974 Act. That, the bill discounting charges were taxable under the 1974 Act. That the plea of the assessee that such charges were not covered by the definition of the word "interest" was not acceptable. Consequently, the four appeals filed by the assessee were partly allowed.9. In the Departments counter-appeal the Tribunal held on examination of the transaction in question that CIT (Appeals) was right in holding that the hire-purchase agreement in the present case was not a financing transaction. Similarly, on examining the lease transaction undertaken by the assessee, the Tribunal held that the asset owned by the lessor was given to the lessee for use only and therefore CIT (Appeals) was fully justified in holding that the receipt on account of lease charges were not taxable as finance charges or interest under the 1974 Act.10. Aggrieved by the decision of the Tribunal, the Department carried the matter in appeal to the Delhi High Court under Section 260-A of the Income Tax Act, 1961. The appeal was allowed by the High Court. It was held by the High Court that the Tribunal had erred in holding that for deciding the principal business of a taxable entity under the 1974 Act only the receipt from business is the criteria and the other parameters such as turnover, capital employed, the head count of person employed, etc. were not relevant. Accordingly, the Tribunals decision stood set aside. The High Court also remitted the case to the AO saying that it was not clear from the material produced before the Court as to whether the lease agreements entered into by the assessee were financial leases or operational leases or both. Aggrieved by the decision of the High Court, the assessee has come to this Court by way of these civil appeals. 11. What we find from the judgment of the High Court is that the High Court has not examined whether the transactions entered into by the assessee constituted financial transactions so as to attract the provisions of the 1974 Act. As stated above, the issues which arose before the authorities below covered a wide spectrum, namely, reopening of the proceedings, the nature of the business carried on by the assessee, whether the assessee was a credit institution as defined in Section 2(5-A) of the 1974 Act and on the merits of the case whether the AO was right in taxing the hire-purchase charges, the lease and bill discounting charges. One more point may be mentioned. The dichotomy between the operating lease and financial lease was never raised by the Department. As stated above, CIT had examined the nature of the transactions entered into by the assessee and the three components of the receipt of the assessee under the 1974 Act. (See p. 98 of the SLP paper book.) 12. As stated, several questions stood raised in the appeal(s) filed by the assessee as well as by the Department. Some of the findings are findings of fact, others are giving rise to substantial questions of law. The main question which arose for determination in this case was whether the receipt from lease charges, from net hire-purchase charges and bill discounting charges could be taxed under the 1974 Act. This is apart from the question as to whether the assessee which is a non-banking financial company is a credit institution under Section 2(5-A) of the 1974 Act.

Decision:
1[ds]11. What we find from the judgment of the High Court is that the High Court has not examined whether the transactions entered into by the assessee constituted financial transactions so as to attract the provisions of the 1974 Act. As stated above, the issues which arose before the authorities below covered a wide spectrum, namely, reopening of the proceedings, the nature of the business carried on by the assessee, whether the assessee was a credit institution as defined in Section 2(5-A) of the 1974 Act and on the merits of the case whether the AO was right in taxing the hire-purchase charges, the lease and bill discounting charges. One more point may be mentioned. The dichotomy between the operating lease and financial lease was never raised by the Department. As stated above, CIT had examined the nature of the transactions entered into by the assessee and the three components of the receipt of the assessee under the 1974 Act. (See p. 98 of the SLP paper book.As stated, several questions stood raised in the appeal(s) filed by the assessee as well as by the Department. Some of the findings are findings of fact, others are giving rise to substantial questions of law. The main question which arose for determination in this case was whether the receipt from lease charges, from net hire-purchase charges and bill discounting charges could be taxed under the 1974 Act. This is apart from the question as to whether the assessee which is a non-banking financial company is a credit institution under Section 2(5-A) of the 1974