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Income Tax Appellate Tribunal, ALLAHABAD BENCH, ALLAHABAD
Before: SHRI VIJAY PAL RAO
IN THE INCOME TAX APPELLATE TRIBUNAL, ALLAHABAD BENCH, ALLAHABAD (THROUGH VIRTUAL COURT)
BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER
ITA No.309/ALLD/2017 Assessment Year: 2010-11 M.K. Agrawal & Co., v. ACIT, Range-II, Mirzapur Sonebhadra
Anpara, Sonebhadra – 231225. TAN/PAN:AAEFM3461D (Appellant) (Respondent)
Appellant by: Shri S. K. Jaiswal, CA Respondent by: Shri A. K. Singh,Sr. DR Date of hearing: 09. 11. 2020 Date of pronouncement: 03.12. 2020
O R D E R PER SHRI VIJAY PAL RAO, JUDICIAL MEMBER: This appeal by the assessee is directed against the order dated 20.09.2017 passed by Commissioner of Income Tax (Appeals), Allahabad for the assessment year 2010-11. The assessee has raised the following grounds:
“1. BECAUSE the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining addition of Rs. 773833/- on account of disallowance of interest and overdue charges paid to Tata Capital Ltd. by invoking provision of section 40a(ia) of the Income Tax, 1961. 2. BECAUSE the appellant had purchased plant & machinery under hire purchase agreement from Tata Capital Ltd. The learned Commissioner of Income Tax (Appeals) has failed to appreciate the fact that and difference between cash price and hire purchase price is not a interest within meaning of section 2(28A) therefore not liable to deduct tax at source as per the provision of section 194A, therefore the provision of section 40a(ia) is not applicable in appellant's case. 3. BECAUSE in any case the recipient, M/s Tata Capital Ltd. has paid taxes on interest and Overdue charges therefore the appellant is not a assessee in default and in view of proviso to
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section 40a(ia) inserted by Finance Act, 2012 no disallowance is called for by invoking the provisions of section 40a(ia).”
The only issue arises in this appeal of the assessee is regarding disallowances of finance charges on hire purchase u/s 40(a)(ia) of the Income Tax Act.
The ld. AR of the assessee has submitted that the financial charges paid by the assessee in respect of hire purchase agreement do not fall under the ambit of section 194A of the Act for the purpose of TDS. He has further contended that the assessee has paid financial charges to M/s Tata Capital Ltd. (an NBFC) and therefore the financial charges paid under hire purchase agreement cannot be treated as interest paid subjected to TDS u/s 194A of the Act. He has relied upon the CBDT Instruction No.OP 275/9/80- IT(B) dated 25.01.1981 and submitted that CBDT has clarified that section 194A is not attracted in case the payment of installment under hire purchase agreement and consequently the provision of section 40(a)(ia) cannot be invoked for disallowance of the claim of expenditure. The ld. AR has also relied upon the decision dated 24.09.2010 of Visakhapatnam Benches of Tribunal in the case of Kesineni Srinivas Vijayawada vs. ACIT in ITA No.353/Visag/2008. Alternately, the ld. AR has contended that the 2nd Proviso to section 40a(ia) is held as curative in nature and therefore shall have retrospective effect though the same was inserted by Finance Act 2012. The recipient of the financial charges, M/s Tata Capital Ltd., is assessed to tax and paid tax on finance charges. Therefore, in view of 2nd Proviso to section 40(a)(ia) of the Act, no disallowance is called for.
On the other hand, the ld. DR has submitted that the assessee has not submitted the relevant documents like hire purchase agreement, invoices, account statement etc. Therefore, the AO has to ascertain the true nature of the transaction and manner of accounting thereof as to whether it is a capital expenditure or revenue expenditure. He has further submitted that the interest paid to NBFC is liable to TDS u/s 194A even the
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financial charges paid under the hire purchase agreement is subjected to TDS u/s 194I of the Income Tax Act. In support of his contention, he has relied upon a decision of Hyderabad Benches of Tribunal dated 04.03.2014 in the case of ACIT vs. M/s R. Balarami Reddy & Co. in ITA No.2224 of 2011 and submitted that the Tribunal has considered the Explanation 1 to section 194A after the amendment by Finance Act 2006 w.e.f. 13.07.2006 and thereby the payment made by the assessee towards hire charges on hire purchase agreement is liable for TDS u/s 194I of the Income Tax Act. The ld. DR has also relied upon the decision dated 09.04.2018 of Mumbai Benches of Tribunal in the case of Mr. Shekhar Dadarkar vs. DCIT ITA No.7642 of 2012. He has relied upon the orders of the authorities below.
I have considered the rival submissions and perused the relevant materials on record. There is no dispute that the payment in question was in respect of hire charges paid by the assessee to M/s Tata Capital Ltd. (a NBFC) under the hire purchase agreement. It is also not in dispute that the assessee has not acquired any title for ownership of the asset under the hire purchase agreement but the assessee is under no obligation to buy the asset. Thus, it is only an option with the assessee either to return the goods or to become its owner by payment in full of the hire charges. Therefore, this transaction of payment of hire charges and financial charges do not fall in the ambit of section 194A of the Act. Even, the Hyderabad Benches of Tribunal in the case of ACIT vs. M/s R. Balarami Reddy & Co. (supra) as relied upon by the ld. DR has held in para 5 & 5.1 as under:
“5. We have heard the arguments of both the parties, perused the record and have gone through the orders of the authorities below. We find that the issue in dispute whether it is interest or not on hire purchase contract has been decided by the Hon'ble AP High Court in the case of CIT Vs. M/s M.G. Brothers Finance Ltd., vide ITTA Nos. 43,44,45, 50 of 2007 and 761 of 2006, judgment dated 05/12/2013, wherein the Hon'ble Court held as follows: "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
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hirer to buy up to become owner or not. In the event, he exercises his option t 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. 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 ITA No. 2224/H/2011 M/s. R. Balarami Reddy & Co. time back in the case of Sundaram Finance Ltd. Vs. The State of Kerala. In paragraph-24 of the said judgment, their lordships have explained the position stating thus: 'But a hire purchase agreement.........................is 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. 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 re accordingly dismissed."
5.1 In view of the above judgment, the payment made by the assessee on account of hire purchase transaction and payment of finance charges/hire charges cannot be construed as interest so as to deduct TDS u/s 194A of the IT Act. Accordingly, to that extent, the CIT(A) justified in observing that section 40(a)(ia) is not applicable. However, we find that insertion of Explanation 1 to section after amendment of section 194A by Taxation Laws (Amendment) Act, 2006, with effect from 13/07/2006, payment by the assessee towards hire charges on hire purchase agreement to be liable for TDS u/s 194I of the Act. Accordingly, we direct the Assessing Officer to recompute the disallowance u/s 40(a)(ia) in the light of the amended provisions, which came into effect from 13/07/2006. Accordingly, this ground of appeal is partly allowed.”
The applicability of section 194I is only in respect of the payment of rent which is not the case of the AO in the case in hand as the payment made by the assessee and claimed as financial charges is in nature of rent.
ITA No.309/ALLD/2017 M.K. Agrawal & Co., Sonebhadra Assessment Year: 2010-11
The Visakhapatnam Benches of Tribunal in the case of Kesineni Srinivas Vijayawada vs. ACIT (supra), after considering the CBDT instruction on the point as well as decisions of the Hon’ble Supreme Court has held in para 5 to 7 as under:
“5. Having heard the rival submissions and from a careful perusal of the orders of the lower authorities and the judgement of the apex court in the case of Charanjit Singh Chadha and other Vs. Sudhir Mehra (supra) and the instructions of the CBDT bearing no.1425 dated 16.11.1981 and we find that undisputedly assessee had taken the buses on hire purchase agreement from different parties and assessee have been making the payment of financial charges to all these parties on which deduction of TDS u/s 194A was not done and the A.O. invoked the provisions of section 40a(ia) of the Act and made the disallowance of the payments after treating the payments of financial charges to be in interest. In the case of Charanjit Singh Chadha and others Vs. Sudhir Mehra (supra), the issue of nature of financial charges came up before the apex court and their Lordship of the apex court have categorically held that hire purchase agreements are executory contracts under which the goods are let on hire and the hirer has an option to purchase in accordance with the terms of the agreement. These types of agreements were originally entered into between the dealer and the customer and dealer used to extend credit to the customer. But as hire-purchase scheme gained in popularity and in size, the dealers who were not endowed with liberal amount of working capital found it difficult to extend the scheme to many customers. Then the financiers came into the picture. The finance company would buy the goods from the dealer and let them to the customer under hire-purchase agreement. The dealer would deliver the goods to the customer who would then drop out of the transaction leaving the finance company to collect instalments directly from the customer. Under hirepurchase agreement, the hirer is simply paying for the use of the goods and for the option to purchase them. The finance charge, representing the difference between the cash price and the hire-purchase price, is not interest but represents a sum which the hirer has to pay for the privilege of being allowed to discharge the purchase price of goods by instalments.
The nature of financial charges were also clarified by the board through its instruction no.1425 dated 16.11.1981 and it has been stated there in that the agreed amount payable by the hirer in periodical instalments cannot, therefore, be characterized as interest payable in any manner with the meaning of section 2(28A) of the I.T. Act, as it is not in the respect of any money borrowed or debt incurred. In this view of the matter, it is clarified that provisions of section 194A of the income tax act are not attracted in these transactions. We however, for the sake of reference extract the instructions of the CBDT as under: 1. On the representation of the Federation of Indian Hire Purchase instalment paid by a hirer to the owner under a hire-purchase contract can be deemed to constitute payment of interest within the meaning of sec.2(28A) of the I.T. Act thereby attracting the provisions of section 194A of the said Act, this has been examined by the board in consultation with the Ministry of Law. 2. In a hire-purchase contract the owner delivers goods to another person upon terms on which the hirer is to hire them on a fixed periodical rental. The hirer has also the option of purchasing the goods by paying the total amount of agreed hire at any time or of returning the same before the total amount is paid. It may be pointed out that
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part of the amount of the hire-purchase price is towards the hire and part towards the payment of price. The agreed amount payable by the hirer in periodical instalments cannot, therefore, be characterized as interest payable in any manner with the meaning of section 2(28A) of the Income-tax Act, as it is not in respect of any money borrowed or debt incurred. In this view of the matter, it is clarified that that provisions of section 194A of the Income-tax Act are not attracted in these transactions.
A copy each of the referral note to the Ministry of Law and its opinion is attached for information. 4. These instructions may please be brought to the notice of all the officers under your control. Instruction No.1425 in F.No.275/9/80-IT(B) dated 16.11.1981.
Now through this judgement of the apex court and the instructions of the CBDT, it has been made clear that the payment of financial charges cannot be termed to be the payment of interest on the borrowed loan. Therefore, the provisions of section 194A cannot be invoked in these transactions. In the instant case, though the assessee has made the payment of financial charges but the A.O. has treated it to be the payment of interest charges and invoked the provisions of section 194A of the I.T. Act. In the light of aforesaid proposition of law, we are of the view that revenue has wrongly treated the payment of financial charges as a payment of interest and disallowed the entire payment. We therefore set aside the order of the CIT(A) and held that for payment of financial charges, no TDS is required to be deducted. Therefore, the assessee is entitled for the deduction of the entire payment of financial charges. We accordingly direct the A.O. to allow the deduction of the financial charges paid by the assessee after setting aside the order of the CIT(A).”
Therefore, there is no quarrel on the point that the provision to section 194A are not applicable in respect of the payment in question and consequently the claim of deduction cannot be disallowed by invoking the provision to section 40(a)(ia) of the Income Tax Act. The AO has invoked the provision to section 194A r.w.s. 40(a)(ia) as specified in the impugned order and hence there is no question of applying the section 194I of the Income Tax Act.
As regards, alternative plea of the ld. AR of the assessee, it is noted that the amendment by which the 2nd Proviso to section 40(a)(ia) is brought into Statute and the same is remedial in nature as held by the Hon’ble Supreme Court in the case of CIT vs. Calcutta Export in [2018] 93 taxmann.com 51(SC). Thus it is settled proposition that the
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2nd Proviso to section 40(a)(ia) shall have retrospective effect. Once the recipient of the charges has considered this amount as part of its income and filed the return of income then the question of invoking of section 40(a)(ia) does not arise. Accordingly, in the facts and circumstances of the case, as discussed above, the disallowance made by the AO u/s 40(a)(ia) of the Income Tax Act is not justified and the same is deleted.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 03/12/2020.
Sd/- [VIJAY PAL RAO] JUDICIAL MEMBER
DATED: 03/12/2020 RS