CIT vs. Commercial Motors Finance Ltd (Allahabad High Court)

Distinction between “hire purchase transactions” and “loan transactions” explained

The vehicles were registered in the name of the respective customers. However, in the registration certificate a remark in terms of agreement was to be recorded to the effect that vehicle is held by the registered owner under a hire purchase agreement with the assessee. A “Sale Letter” was executed, reciting that the customer had on the date of the application for loan sold to the financier the motor vehicles. The sale of vehicles have not been shown by the assessee in its profit and loss account and no sales tax return has been filed by it. In its audited account, filed with the income tax returns, the assessee has shown the finance charges as revenue receipts. The auditor has certified that the assessee is not a trading company. The auditor has also certified that the assessee has followed the norms issued by the Reserve Bank of India for non-banking financial companies (NBFC). This shows that the assessee is a finance company engaged in financing of vehicles. There is no evidence that assessee is a trader dealing in purchase and sale of vehicles. Thus the hirer is the real purchaser of vehicles from the dealer. He selects the vehicle for purchase and also the dealer from whom it was to be purchased. At this stage the assessee does not come into picture. After the hirer identified the vehicle and the dealer i.e. the seller then he approached the assessee for finance due to his inability to purchase out of his own funds. At this stage the assessee extended the facility of finance to hirer on willingness of the hirer to pay a price for this facility. The total amount of hire that hirer pays to the assessee exceeds the price at which the vehicle was purchased from the dealer. This is more than that part of the purchase consideration which was paid by the assessee to the dealer as finance to the hirer. The excess amount so paid by the hirer to the assessee is nothing but interest on loan. The amount so invested by the assessee in the purchase of vehicles is the amount of loan advanced by it to the hirer. When tested on the principles of law laid down by Supreme Court in Sundaram Finance Ltd the only conclusion that can be reached is that the transactions entered by the assessee with the customer/hirer is a loan transaction and the finance charges were nothing but interest.