[Motor and General Finance Ltd. v. CIT, (2011) 334 ITR 33 (SC)] The assessee, a non-banking financial company registered with R.B.I., was engaged in the business of hirepurchase and leasing. In the return of income, 1961 it showed the following components of income:
Rs.
(A) Lease charges 40,86,85,186
(B) Hire-purchase charges 32,64,89,358
(C) Bill discounting charges 1,91,48,614
The assessee did not, however, file any return of interest under the Interest-tax Act, 1974 (for short ‘1974 Act’). The Assessing Officer served a letter on the assessee asking the assessee to explain the reasons for not filing the Interest-tax return for the A.Y. 1995-96. A reply was filed by the assessee requesting the Assessing Officer to withdraw his letter, as the assessee claimed that it was not liable to file returns under the 1974 Act. On 31st March, 2005, a notice u/s. 10 of the 1974 Act was served on the assessee calling upon it to file its return of interest. According to the Assessing Officer, the interest chargeable to tax had escaped assessment. According to the Assessing Officer, on a perusal of the income-tax return of the assessee for the A.Y. 1995-96, 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. Since the assessee did not file the required return of chargeable interest the Assessing Officer assessed the chargeable interest by way of best judgment assessment u/s. 8(3) of the 1974 Act. The total interest chargeable, according to the Assessing Officer, was Rs.75,43,23,158. 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’ u/s. 2(5B) of the 1974 Act. On examination of the facts of the case and looking into all the parameters, including the parameter of the principal business, such as turnover, capital employed, etc., it was held by the Commissioner of Income-tax (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 u/s. 2(5A) 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, the Commissioner of Income-tax (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 vehicles; that the vehicle stood purchased by the assessee and let out to the hirer for use on payment of charges. Consequently, the Commissioner of Income-tax (Appeals) held that the hire-purchase transactions of the assessee were not financing transactions or loan transactions and, therefore, the Assessing Officer, was not justified in bringing to tax hire-purchase charges of Rs.32,64,89,358. The Commissioner of Income-tax (Appeals), however, held that the Assessing Officer was justified in treating receipts from bill discounting charges of Rs.1,91,48,614 as ‘chargeable interest’ under the 1974 Act. Lastly the Commissioner of Income-tax (Appeals) held that the lease transaction 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, the Commissioner of Income-tax (Appeals) came to the conclusion that the Assessing Officer had erred in bringing to tax lease rental charges of Rs.40,86,85,186 as chargeable interest under the 1974 Act.
Aggrieved by the decision of the Commissioner of Income-tax (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 u/s. 10 of the 1974 Act. On the question as to whether the assessee was a ‘financial company’ as defined u/s. 2(5B), 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(5A) of the 1974 Act and, therefore, it fell outside the purview of the 1974 Act. That, bill discounting charges was 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 appeals filed by the assessee were partly allowed. In the Department’s counter-appeal the Tribunal held on examination of the transaction in question that the Commissioner of Income-tax (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 the Commissioner of Income-tax (Appeals) was fully justified in holding that the receipt on account of lease charges was not taxable as finance charges or interest under the 1974 Act.
Aggrieved by the decision of the Tribunal, the Department carried the matter in appeal to the Delhi High Court u/s. 260A 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 persons employed, etc. were not relevant. Accordingly, the Tribunal’s decision stood set aside. The High Court also remitted the case to the Assessing Officer 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 lease or operational leases or both.
Aggrieved by the decision of the High Court, the assessee went to the Supreme Court by way of civil appeals. The Supreme Court was of the view that the High Court had not examined whether the transaction entered into by the assessee constituted financial transactions so as to attract the provisions of the 1974 Act. The Supreme Court noted that the Commissioner of Income Tax had examined the nature of the transactions entered into by the assessee and the three components of the receipt of the assessee under 1974 Act. According to the Supreme Court 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 was apart from the question as to whether the assessee which was a non-banking financial company was a credit institution u/s. 2(5A) of the 1974 Act. The Supreme Court was of the view that the matter needed reconsideration and hence set aside the judgment of the High Court with a direction to decide the matter in accordance with law.
