Ita/134/2007 Of Commissioner Of Income Tax,Tsr v. M/S.kerala State Financial Enterprieses

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN &THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY, THE 18TH DAY OF DECEMBER 2017/27TH AGRAHAYANA, 1939 ITA.No. 134 of 2007------------------- AGAINST THE ORDER/JUDGMENT IN ITA 30/COCH/2002 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 30-04-2007 APPELLANT(S)/APPELLANT/APPELLANT:-------------------------------- THE COMMISSIONER OF INCOME TAX, THRISSUR. BY ADV. SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT(S)/RESPONDENT: ------------------------- M/S.THE KERALA STATE FINANCIAL ENTERPRISES LTD., 'BHADRATHA',, MUSEUM ROAD, THRISSUR. R, BY ADV. SRI.ANIL D. NAIR R, BY ADV. SRI.P.BENNY THOMAS R, BY ADV. SRI.K.JOHN MATHAI R, BY ADV. SRI.E.K.NANDAKUMAR R, BY ADV. SMT.PREETHA S.NAIR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON18-12-2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.No. 134 of 2007 ------------------- APPENDIX APPELLANT(S) ANNEXURES: ---------------------- ANNEXURE ACOPY OF THE ORDER OF THE ASSESSING OFFICER U/2(2) OF THEINCOME TAX ACT DATED 8-3-2000. ANNEXURE BCOPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) IN ITA NO.6/INI/JC/TCR/CIT-II/2000-2001 DATED 13-06-2002. ANNEXURE CCOPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL ININTEREST TAX APPEAL NO.30/COCH/2002 DATED 30-04-2007. RESPONDENT(S) ANNEXURES: ----------------------- NIL //TRUE COPYT// dkr PA TO JUDGE K.VINOD CHANDRAN & ASHOK MENON, JJ. ------------------------------------------- ------------------------------------------- Dated this the 18[th] day of December, 2017J U D G M E N T Ashok Menon, J. The Revenue is on appeal aggrieved by the order of theIncome Tax Appellate Tribunal, Cochin Bench in ITA No.30/Coch/2002 for the assessment year 1997-98 pertaining to the assessee,Kerala State Financial Enterprises Ltd., Thrissur, a Kerala StateGovernment Undertaking, engaged in the business of conductingchitties, advancing loans, etc. The assessee had filed it's return ofchargeable interest at Rs.14,78,47,770/-. However, whilecompleting the assessment under Section 8(2) of the Income TaxAct, the assessing officer made various additions to the tune ofRs.18,43,38,284/- on account of interest received from hirepurchase transaction (Finance charges), F.D. loan interest, tradeloan interest, interest on housing loan/vehicle loans to employees,etc; and raised a demand of Rs.99,65,582/- on the premise thatthe assessee company is “credit institution”, a taxable entity underthe Interest Tax Act. ITA 134/2007 2 2.On appeal, the Commissioner of Income Tax (Appeals) atAnnexure B order confirmed the additions made by the assessingofficer and found that the assessee is a financial company in termsof clause (vi) of Section 2(5B) of the Interest Tax Act as there isvoluntary payment of interest tax on some interest like defaultchitty. On second appeal before the Income Tax Appellate Tribunalby the assessee, relying on an earlier Order of the Tribunalconcerning finance charges, the appeal was partly allowed videAnnexure C order. It is this order that stands challenged by theRevenue before us. 3.The only legal issue that arises for consideration in thisappeal is whether “finance charges” such as, interest received fromhire purchase transaction, and other interest would attract tax oninterest under the Interest Tax Act, 1974. The only legal issue that arises for consideration in this 4.The argument advanced for the Revenue is that, financecharges collected by the respondent for vehicle financing as well asother hire purchase is nothing, but “interest” attracting tax.Whereas, the respondent contended that hire purchase transactionsare outside the scope of interest tax and hence not taxable. ITA 134/2007 5.We heard the learned Counsel appearing for the Revenue and the assessee. 6.It would be apposite to extract the definition of 'interest' under Section 2(7) of the Interest Tax Act, which reads thus: The only legal issue that arises for consideration in this 4.The argument advanced for the Revenue is that, financecharges collected by the respondent for vehicle financing as well asother hire purchase is nothing, but “interest” attracting tax.Whereas, the respondent contended that hire purchase transactionsare outside the scope of interest tax and hence not taxable. ITA 134/2007 5.We heard the learned Counsel appearing for the Revenue and the assessee. 6.It would be apposite to extract the definition of 'interest' under Section 2(7) of the Interest Tax Act, which reads thus: “Sec.2(7): 'Interest' means interest on loans and advancesmade in India and includes.-made in India and includes.- (a)commitment charges on unutilised portion of any creditsanctioned for being availed of in India; and sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchangedrawn or made in India, but does not include -drawn or made in India, but does not include - (i) interest referred to in sub-section (1B) of S.42 of theReserve Bank of India Act, 1934(2) of 1934;Reserve Bank of India Act, 1934(2) of 1934; (ii) discount on treasury bills.” The Tribunal had relied on another decision of the Tribunal dated19-04-2004 to conclude that financial charges may not besubjected to tax and following the decision, the appeal was partlyallowed in favour of the assessee. Admittedly, the finance chargesinvolved in the instant case are from hire purchase of vehicles. Theposition has now been settled by a precedent of this Court involvingthe same assessee, Commissioner of Income Tax v. K.S.F.E. Ltd. ITA 134/2007 (2008) 220 CTR (Ker) 286, the Division bench held thus: “Applying the principle laid down by the Supreme Court inSundaram Finance Ltd.'s case (supra), we already foundthat the transaction is a genuine loan transaction, thoughit is styled as a hire-purchase agreement. Anotherinstruction relied on by the respondents is InstructionNo.1425 in F.No.275/90/80 IT(B) dt. 18[th] Nov. 1981issued by the CBDT with reference to s.194A of the IT Actwhich provides for deduction of tax at source on interestincome. What is stated in this is that no deduction shouldbe made at the time of payment of hire-purchaseinstallment. We do not know how this circular prohibitingdeduction of tax at source on hire-purchase installment ofwhich interest is only an element can apply to the facts ofthis case. Moreover, it is to be noted that hire purchasecompanies are squarely covered by definition of “creditinstitutions” under the Act and are liable to pay tax oncharge of interest on loans and advances. It is immaterialwhether a loan or advance is called hire-purchaseagreement or not. On the other hand, what is to beconsidered is whether the transaction involved is really aloan or advance and if the transaction is found so, thenthe interest earned on the same is taxable under theInterest-tax Act. Besides the decision of the SupremeCourt in Sundaram Finance Ltd.'s case (supra), the other decision relied on by the assessees is that of the Punjab &Haryana High Court in Deep Hire Purchase (P) Ltd. v. CIT(2005) 195 CTR (P&H) 174: (2005) 274 ITR 69 (P&H). Wenotice that this is a case where Punjab & Haryana HighCourt had only confirmed the order of the Tribunalremanding the matter to the AO with an observation thatinterest on financing only attracts tax under s.2(7) of theAct. However, the question whether motor vehiclefinancing of the kind carried on by the respondent which isthe issue in this case attracts tax under the Act or not wasnot raised or decided by that Court. Similarly, anotherdecision relied on by the respondent is that of the MadrasHigh Court in CIT v. Harita Finance Ltd. (2006) 283 ITR370 (Mad) also does not deal with the nature oftransaction involved in this case. On the other hand, theCourt has only held that Tribunal's findings on facts arebinding and conclusive and there is no scope forinterference in reference case. However, in this caseRevenue had specifically canvassed against the findings ofthe Tribunal contrary to the concurrent findings entered bythe assessing authority and the first appellate authoritybased on documents and with reference to specific hire-purchase agreements entered into between therespondents and their parties. After going through thefacts pertaining to transactions extracted above, we find no justification for the Tribunal to come to the findings differentfrom that of the two lower authorities. Besides this, we havealready noticed that the exercise of option provided in theagreement relied on by the Tribunal is contrary to the real dealand against the provisions of the Motor Vehicles Act because ofregistration of vehicles by the borrowers in their own names.The Tribunal's findings are based on wrong assumption of factsand they have decided the matter without even referring to theprovisions of the Motor Vehicles Act which comprehensively dealwith all transactions in motor vehicles. We, therefore, allow theappeals by reversing the order of the Tribunal and restoring theassessments confirmed in first appeals.” In view of the above cited decision of the Division Bench concerningthe same assessee, on identical facts, we find no reason to be atvariance, and therefore, we answer the questions raised in favour ofthe Revenue and against the assessee. The appeal is allowed infavour of the Revenue and the assessment as confirmed by the firstappellate authority stands restored. No costs. Sd/-K.VINOD CHANDRANJudge Sd/-ASHOK MENONJudge dkr