Andhra Pradesh H.C : Unless there is involvement of loan transaction, question of payment of interest does not arise

High Court Of Andhra Pradesh

CIT VS. M.G. Brothers Finance Ltd.

Section : 4

Kalyan Jyoti Sengupta, Cj. And Sanjay Kumar, J.

I.T.T.A. Nos. 761 Of 2006 And 43 To 45 & 50 Of 2007

December 5, 2013


Kalyan Jyoti Sengupta, Cj. -All these matters were admitted by this court by orders dated February 22, 2007, and February 5, 2007. However, no substantial question of law was formulated at the time of admission. Since all these matters have come up for final hearing, the court in order to discharge the statutory obligation, ventures to formulate the following substantial question of law.

“Whether the learned Tribunal, on the facts and in the circumstances of this case, was justified in not applying the provisions of the Interest-tax Act, 1974 ?

2. We have heard Mr. B. Narasimha Sharma, learned counsel for the appellant and we have gone through the judgment and order of the learned Tribunal.

3. The moot question is whether the transaction entered into by the assessee with third party is in the nature of loan transaction, which requires payment of interest or otherwise.

4. The learned Tribunal has found on fact that it is a hire purchase agreement. Hire purchase agreement under the jurisprudence stands in a very peculiar situation.

5. The owner of the goods, which are usable movable goods let out to the hirer on payment of certain amount either on monthly or quarterly or yearly basis and after payment of the entire amount as claimed by the owner being the price of the goods, it is optional for the hirer to buy up to become owner or not. In the event, he exercises his option to buy them, then, the owner of the goods is bound to convey the same by transferring title in favour of the hirer. On the other hand, if the hirer does not exercise his option, then the goods in question must be returned and the payments so far made are treated to be rentals.

6. Therefore, the whole concept is with regard to payment of consideration money or rental not repayment of loan amount in financial transaction. Unless there is involvement of loan transaction, the question of payment of interest does not arise. The aforesaid peculiar situation with regard to the hire purchase agreement has been explained by the Supreme Court quite long time back in the case of Sundaram Finance Ltd.. v. State of Kerala [1966] 17 STC 489 (SC). In paragraph 24 of the said judgment, their Lordships have explained the position stating thus :

“But a hire purchase agreement is a more complex transaction. The owner under the hire purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exercisable by the customer on payment of all the instalments of hire arises when the instalments are paid and not before. In such a hire purchase agreement there is no agreement to buy goods ; the hirer being under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire purchase agreement must be distinguished from transaction in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire purchase agreement…”

7. In this case, the learned Tribunal had admittedly held that there is a hire purchase agreement factually. Therefore, we affirm the judgment and order of the learned Tribunal. The appeals fail and they are accordingly dismissed.

[Citation : 360 ITR 603]

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