THE COMMISSIONER OF INCOME-TAX, vs. M/S.MULAMOOTTIL CONSUMER CREDITS LTD.

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ITA/122/2008HC KeralaKLHC01027027200801 November 2018Bench: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON4 pages
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What did the High Court hold?

The High Court held that the finance charges collected by the assessee constitute interest assessable under Section 2(7) of the Interest Tax Act, 1974. The Court relied on the Division Bench decision in CIT v. Kerala State Financial Corporation Ltd. The reasoning was that although termed as hire purchase agreements, the purchase was made in the purchaser's name, with possession granted and an option to repurchase for Re.1/- after full payment. This structure was considered an attempt to disguise a loan agreement. The flat rate of interest calculated over the agreement period, loaded onto the financed amount and recovered in installments, was deemed chargeable interest. The High Court allowed the appeal, restoring the order of the Assessing Officer, and ruled in favour of the Revenue against the assessee. No issue was expressly left undecided.

What were the facts?

The assessee, M/s. Mulamoottil Consumer Credits Ltd., is a firm engaged in financing vehicle purchases through hire purchase agreements. The vehicles are purchased in the names of the intending purchasers, with finance amounts recovered in installments along with finance charges, which the assessee claimed were not interest income taxable under the Interest Tax Act, 1974. The Revenue contested this classification. The appeal is against an order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench, dated December 23, 2005, which had previously ruled in favour of the assessee. The Commissioner of Income-tax, Thiruvananthapuram, is the appellant. The assessment years are not explicitly stated in the provided text.

What were the issues?

1. Whether the finance charges collected by the assessee under hire purchase agreements constitute 'interest' assessable under Section 2(7) of the Interest Tax Act, 1974, despite being termed as 'finance charges' by the assessee? (Question of law) Assessee's contention: The amounts collected as finance charges are not interest income and therefore not taxable under the Interest Tax Act, 1974. Revenue's contention: The finance charges are in the nature of interest and are taxable under the Interest Tax Act, 1974. The Revenue relies on the decision in CIT v. Kerala State Financial Corporation Ltd. [(2008) 220 CTR Reports 286].

Which sections of the Income-tax Act were involved?

Section 2(7)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON THURSDAY ,THE 01ST DAY OF NOVEMBER 2018 / 10TH KARTHIKA, 1940 ITA.No. 122 of 2008 AGAINST THE ORDER/JUDGMENT IN TA 3/2005 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 23-12-2005 APPELLANT/S: THE COMMISSIONER OF INCOME-TAX, THIRUVANANTHAPURAM. BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) RESPONDENT/S: M/S.MULAMOOTTIL CONSUMER CREDITS LTD. THIRUVANANTHAPURAM. BY ADVS. SRI.E.K.NANDAKUMAR (SR.) SRI.ANIL D. NAIR SRI.P.BENNY THOMAS OTHER PRESENT: SRI RAJA KANNAN FOR RESPONDENT THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 01.11.2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA No.122/2008 2 J U D G M E N T Vinod Chandran, J The assessee respondent is a firm involved in financing, purchase of vehicles. Hire purchase agreements are entered into with the intending purchasers and the vehicles are purchased in the name of the purchasers. The finance amounts are recovered in installments along with finance charges which actually is the interest due on the amount financed. This was termed as finance charge and hence the contention of the assessee that the same would not form part of interest income assessable under the Interest Tax Act, 1974. The issue has already been considered by a Division Bench in CIT v. Kerala State Financial Corporation Ltd. [(2008) 220 CTR Reports 286]. Therein the Division Bench found that though the agreements are termed as hire purchase agreements the purchase is made in the name of the intending purchaser with only an

ITA No.122/2008 3 option to possess the vehicle on default committed. There is also an option given to the purchasers to re- purchase the vehicle after the entire finance amounts are paid along with the finance charges for Re.1/-. This was found to be an eye wash insofar as attempting to term the agreement as a hire purchase plan. The Division Bench found that it is actually a loan agreement and the amount calculated at flat rate of interest over the period of agreement, loaded to the amount financed and recovered in installments over the period of agreement is chargeable interest under Section 2(7) of the Interest Tax Act, 1974. We hence answer the question of law in favour of the Revenue and against the assessee and allow the appeal restoring the order of the Assessing Officer. No order as to costs. Sd/- K. Vinod Chandran, Judge Sd/- Ashok Menon, jma

Judge

ITA No.122/2008 4 APPENDIX PETITIONER'S/S EXHIBITS: ANNEXURE-A TRUE COPY OF THE ORDER OF THE ASSESSING OFFICER DATED 4/2/2004. ANNEXURE-B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) DATED 3/11/2004. ANNEXURE-C CERTIFIED COPY OF THE ORDER OF APPELLATE TRIBUNAL DATED 22/12/2005. ANNEXURE-D TRUE COPY OF THE CBDT'S CIRCULAR NO. 760 DATED 13/1/1998.

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