Holding

Hire‑purchase instalments are not interest on loans or advances within the meaning of s.2(7) of the Interest‑Tax Act, 1974, and therefore are not liable to interest tax.

Summary

Muthoot Leasing and Finance Ltd and another, classified as credit institutions, challenged the levy of interest tax on the interest component embedded in hire‑purchase instalments under the Interest‑Tax Act, 1974. The Income Tax Appellate Tribunal (ITAT) held that hire‑purchase agreements are composite transactions with elements of bailment and sale, and the instalments are not interest on loans or advances, relying on CBDT Circular No. 760 (1998). The Kerala High Court reversed this, treating the instalments as "finance charges" (interest) and imposing tax. The Supreme Court examined the meaning of "interest" under s.2(7) of the Act, relying on the precedents of Sahara India Savings Ltd. and State Bank of Patiala, and concluded that only interest directly arising on loans and advances is taxable. It affirmed that the High Court erred in interfering with the ITAT’s factual findings without framing a substantial question of law. Consequently, the Court set aside the High Court judgments, upheld the ITAT’s decision, and dismissed the additions made by the assessing officer. The appeals were allowed.

Issues considered

The applicability of interest tax under s.2(7) of the Interest‑Tax Act, 1974 to the interest component of hire‑purchase instalments.
Whether a hire‑purchase agreement constitutes a loan/advance transaction for tax purposes.
The correct interpretation of CBDT Circular No. 760 (1998) distinguishing hire‑purchase from financing transactions.
The extent to which a High Court may interfere with factual findings of the ITAT.

Legislation cited

Banking Regulation Act, 1949s. s.51
Companies Act, 1956s. s.4-A
Income Tax Act, 1961s. s.2(28-A)
Interest Tax Act, 1974s. s.2(5-A), s. s.2(5-B), s. s.2(7)
Motor Vehicles Act, 1988s. s.51
State Financial Corporations Act, 1951s. s.3, s. s.3-A, s. s.46

Subjects

Interest Tax ActHire‑purchaseCredit institutionTaxability of interestSection 2(7)CBDT Circular 760ITATHigh Court interferenceStatutory interpretationTax law

Judgment

[2023] 1 S.C.R. 317 317

M/S. MUTHOOT LEASING AND FINANCE LIMITED A
AND ANOTHER
v.
COMMISSIONER OF INCOME TAX
(Civil Appeal Nos. 10201-10202 of 2010)
B
JANUARY 03, 2023
[SANJIV KHANNA AND M. M. SUNDRESH, JJ.]
Interest Tax Act,1974 – s.2(5-A) and s.2(5-B) – Hire-purchase
agreements – Appellants-assessees are credit institutions within
C
meaning of s.2(5-A) – Whether appellants-assessees liable to pay
tax on interest component included in hire-purchase instalments paid
under hire-purchase agreements – ITAT referred to CBDT Circular
No. 760 dated 13th January 1998 and observed that hire-purchase
agreement is a composite transaction, and has elements of bailment
and sale and appellants-assessees are not liable to pay interest tax D
as hire instalments are not interest on loans and advances that is
chargeable to interest tax – High Court reversed the finding of ITAT,
observing that hire-purchase instalment includes “finance charges”,
which is nothing but interest, and therefore, interest tax is leviable
on the interest component – The transaction, though styled as a
E
hire-purchase agreement, the High Court held, is in fact a finance
agreement for purchase of a vehicle – Reliance placed by appellant-
assessee on Circular No. 760 dated 13th January 1998 issued by
CBDT was rejected by the High Court – On appeal, held: Given the
dictum and ratio in the cases of Sahara India Savings and Investment
Corporation Limited and State Bank of Patiala Through General F
Manager, the view taken by High Court is not correct – In Circular
No. 760 dated 13th January 1998, the CBDT observed that they
considered the issue and were advised that in case of transactions
which are, in substance, in the nature of hire-purchase, the receipts
of hire charges would not be in the nature of interest – In
transactions which are, in substance, in the nature of financing G
transactions, the hire charges should be treated as interest, subject
to interest tax – To determine the distinction between the two
transactions, the assessing officers were required to consider the
issue on merits taking, inter alia, into account – (i) the terms of the
agreement; (ii) the nature of the arrangement between the supplier H
317
318 SUPREME COURT REPORTS [2023] 1 S.C.R.

A of the asset, the hire-purchase company and the end user of the
asset; and (iii) the intention of the parties which manifests itself in
the fixation of the initial payment, the method of determination of
hire-purchase price etc – However, when hire-purchase company
pays the price or a substantial part thereof on behalf of such hirer
who is real purchaser but does not pay the full price, then such
B
agreement is in nature of a security for re-payment of the loan and
is essentially a loan transaction – High Court reversed finding of
ITAT without framing a specific substantial question of law and
thus, interference with findings of fact was unwarranted – Orders
passed by ITAT deleting the additions made by assessing officer in
C case of appellant, set aside – Motor Vehicles Act 1988 – s.51.
Interest Tax Act,1974 – s.2(7) – Interpretation & scope of –
Interest recovered under hire-purchase agreement, if falls under
s.2(7) – Held: s.2(7) has been interpreted in two decisions, that is,
in the cases of Sahara India Savings and Investment Corporation
D Limited and State Bank of Patiala Through General Manager, which
have given a very limited and restricted meaning to s.2(7) of the Act
as interest directly arising “on” loans and advances, and not any
other interest, be it interest earned on investment or interest payable
on delayed payment of the discounted bill of exchange.
E Hire-Purchase – Elements – Held: A hire-purchase agreement
has two elements – an element of bailment and an element of sale –
Any transfer or sale made by the hirer or any violation of the hire-
purchase agreement can lead to civil as well as criminal
consequences.
F Taxation – Taxation matters – Interference by High Court with
findings of fact recorded by the ITAT – Scope – Held: Findings of
fact generally recorded by the ITAT are treated as conclusive – The
High Court can interfere with the findings of fact while deciding a
substantial question of law when the findings are not supported by
the material on record, so as to be treated as perverse – For this,
G
the High Court must frame a separate substantial question of law
and only then interfere with the findings of fact by the ITAT, while
applying the strict parameters.
Taxation matters – Precedents – Rule of caution when applying
the ratio of judgments relating to one tax enactment as a precedent
H
M/S. MUTHOOT LEASING AND FINANCE LIMITED v. 319
COMMISSIONER OF INCOME TAX

in a case relating to another tax enactment – This rule of caution is A
important and should not be overlooked, more so when the language
of the enactment and the object and purpose of the enactment are
different.
Constitution of India – Art.141 – SLP – Dismissal of – Held:
If the dismissal is in limine and at the admission stage, it would not B
constitute a binding precedent u/Art.141 of the Constitution.
Allowing the appeals, the Court
HELD : 1. A hire-purchase agreement has two elements –
an element of bailment and an element of sale. The element of C
sale fructifies when the option to purchase is exercised by the
intending purchaser after fulfilling the terms of the agreement.
Till then, the goods are given on hire. One can argue that in a
hire-purchase, an element of interest is inbuilt, but what is payable
is the hire amount and not interest per se. The hirer has an option
to return the vehicle or the goods taken on hire. It is not a simple D
transaction of giving a loan or advance on which interest is payable.
The transaction(s) in commercial and legal sense are far more
complex with corresponding rights of the parties. Even if the
hirer is recorded as the owner of the vehicle under Section 51 of
the MV Act, the name of the appellant – assessee is also recorded
E
in the registration book, which is in recognition of the hire-
purchase agreement. The registered owner under the MV Act
may be liable in case of accidents/traffic challans, etc. But this, in
no way, dilutes the right of the appellants – assessees in respect
of the title of the property, that is, the vehicle. Any transfer or
sale made by the hirer or any violation of the hire-purchase F
agreement can lead to civil as well as criminal consequences.
Given the dictum and ratio in Sahara India Savings and Investment
Corporation Limited and State Bank of Patiala Through General
Manager, the view taken by the High Court of Delhi in M/s G.E.
Capital Transportation, as followed by the High Court of Delhi in
G
Commissioner of Interest Tax v. M/S G.E. Capital Transportation is
correct and the view taken by the High Court of Kerala in the
impugned judgment is not in consonance with the above decisions
of this court. [Para 14][329-C-H]

H
320 SUPREME COURT REPORTS [2023] 1 S.C.R.

A 2. In Circular No. 760 dated 13th January 1998, the CBDT
observed that they considered the issue and were advised that
in case of transactions which are, in substance, in the nature of
hire-purchase, the receipts of hire charges would not be in the
nature of interest. In transactions which are, in substance, in the
nature of financing transactions, the hire charges should be
B
treated as interest, subject to interest tax. To determine the
distinction between the two transactions, the assessing officers
were required to consider the issue on merits taking, inter alia,
into account – (i) the terms of the agreement; (ii) the nature of
the arrangement between the supplier of the asset, the hire-
C purchase company and the end user of the asset; and (iii) the
intention of the parties which manifests itself in the fixation of
the initial payment, the method of determination of hire-purchase
price etc. However, when the hire-purchase company pays the
price or a substantial part thereof on behalf of such hirer who is
the real purchaser but does not pay the full price, then such
D
agreement is in the nature of a security for re-payment of the
loan and is essentially a loan transaction. [Para 16][331-F-H;
332-A-B]
3.1. The judgment in Sundaram Finance Limited relates to
the true nature of hire in hire-purchase agreements as in the
E
context of the sales tax enactment. In the present case, however,
one is dealing with and interpreting Section 2(7) of the Act, which
has been interpreted in two decisions, that is, in the case of Sahara
India Savings and Investment Corporation Limited and State Bank
of Patiala Through General Manager, which have given a very
F limited and restricted meaning to Section 2(7) of the Act as
interest directly arising “on” loans and advances, and not any
other interest, be it interest earned on investment or interest
payable on delayed payment of the discounted bill of exchange.
[Para 17][332-B-E]
G 3.2. Taxation depends upon the language of the charging
section and what is brought to tax within the four corners of the
charging section. Therefore, one should be careful and cautious
when applying the ratio of judgments relating to one tax enactment
as a precedent in a case relating to another tax enactment. This
rule of caution is important and should not be overlooked, more
H
M/S. MUTHOOT LEASING AND FINANCE LIMITED v. 321
COMMISSIONER OF INCOME TAX

so when the language of the enactment and the object and A
purpose of the enactment are different. [Para 18][332-E-F]
4.1. Findings of fact generally recorded by the ITAT are
treated as conclusive. The High Court can interfere with the
findings of fact while deciding a substantial question of law when
the findings are not supported by the material on record, so as to B
be treated as perverse. For this, the High Court must frame a
separate substantial question of law and only then interfere with
the findings of fact by the ITAT, while applying the strict
parameters. In the present case, the High Court did not frame a
specific substantial question of law and thus, the interference with
C
the findings of fact is unwarranted. This is not to say that the tax
authorities are not entitled to examine the surrounding facts and
circumstances to ascertain the true character and nature of the
transaction, regardless of the nomenclature given by the parties.
[Para 19][333-C-E]
D
4.2. In the present case, at this distinct point of time, it
would not be appropriate to pass an order of remand. It is to be
also noted that the Act has ceased to operate with effect from
31st March 2000. 21. The impugned judgment is accordingly set
aside. The additions made by the assessing officer are set aside
and the orders passed by the ITAT deleting the additions in the E
case of appellant and other cases are upheld. [Paras 20, 21]
[333-G; 334-A]
Commissioner of Income Tax, Kanpur v. Sahara India
Savings and Investment Corporation Limited (2009) 17
SCC 43 and State Bank of Patiala Through General F
Manager v. Commissioner of Income Tax, Patiala (2015)
15 SCC 483 : [2015] 12 SCR 243 – relied on.
The Commissioner of Income Tax, Cochin v. M/s.
Muthoot Leasing & Finance Limited [Judgment dated
10th March, 2008 of High Court of Kerala in ITA No. G
269 of 2002] – overruled.
State Bank of Mysore v. Commissioner of I.T.,
Karnataka-I, Bangalore (1989) 175 ITR 607 – held
overruled.
H
322 SUPREME COURT REPORTS [2023] 1 S.C.R.

A Commissioner of Income Tax v. Cholamandalam
Investment and Finance Co. Ltd. (2008) 296 ITR 601
– held approved.
K.L. Johar and Co. (In Both Appeals) v. Deputy
Commercial Tax Officer, Coimbatore III (In Both
B Appeals) AIR 1965 SC 1082 : [1965] 2 SCR 112;
Sundaram Finance Limited v. State of Kerala and
Another AIR 1966 SC 1178 : [1966] 2 SCR 828;
Commissioner of Interest Tax, New Delhi v. M/s G.E.
Capital Services India [Decision of Supreme Court
C dated 16 th May, 2008 in SLP(C) No. 14202 of 2008]
and Association of Leasing and Financial Service
Companies v. Union of India and Others (2011) 2 SCC
352 : [2010] 13 SCR 381 – referred to.
Case Law Reference
D
[1966] 2 SCR 828 referred to Para 7
(2009) 17 SCC 43 relied on Para 10
[2015] 12 SCR 243 relied on Para 10
E [1965] 2 SCR 112 referred to Para 15
[2010] 13 SCR 381 referred to Para 18
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.10201-
10202 of 2010.
F
From the Judgment and Order dated 10/03/2008 of the High Court
of Kerala at Ernakulam in ITA Nos.230 and 269/2002.
With
Civil Appeal Nos.10203, 10204, 10205-10206, 10207 of 2010, 4903,
G 4904, 4905, 4906, 4907 Of 2014 And Slp (Civil) No.4441 of 2011.
Rupesh Kumar, Shashank Bajpai, Chinmayee Chandra, A.
Raghunath, Ms. Ritika Sinha, V. K. Monga, E. M. S. Anam, A. N. Arora,
Mrs. Anil Katiyar, Advs. for the appearing parties.
H
M/S. MUTHOOT LEASING AND FINANCE LIMITED v. 323
COMMISSIONER OF INCOME TAX

The Judgment of the Court was delivered by A
SANJIV KHANNA, J.
1. Leave granted in Special Leave Petition (Civil) No. 4441 of
2011.
B
2. The common question which arises for consideration in this
batch of Civil Appeals is: whether the appellants – assessees are liable
to pay tax under the Interest-Tax Act, 19741 on the interest component
included in the hire-purchase instalments paid under the hire- purchase
agreement?
C
3. The facts, in brief, are that the appellants – assessees are non-
banking finance and leasing companies registered with the Reserve Bank
of India. Some of the appellants – assessees have been reclassified as
hire-purchase finance companies. It is not disputed that the appellants –
assessees are credit institutions within the meaning of Section 2(5-A) of
the Act, which reads as follows: D

“(5-A) “credit institution” means,—
(i) a banking company to which the Banking Regulation Act, 1949
(10 of 1949), applies (including any bank or banking institution
referred to in Section 51 of that Act); E
(ii) a public financial institution as defined in Section 4- A of the
Companies Act, 1956 (1 of 1956);
(iii) a State financial corporation established under Section 3 or
Section 3-A or an institution notified under Section 46 of the State F
Financial Corporations Act, 1951 (63 of 1951), and
(iv) any other financial company;”
It is also imperative to mention Section 2(5-B) of the Act, which
defines a “financial company” and includes within its ambit hire-purchase
G
finance companies:
“(5-B) “financial company” means a company, other than a
company referred to in sub-clause (i), (ii) or (iii) of clause (5-A),
being—
1
For short, ‘the Act’. H
324 SUPREME COURT REPORTS [2023] 1 S.C.R.

A (i) a hire-purchase finance company, that is to say, a company
which carries on, as its principal business, hire-purchase
transactions or the financing of such transactions;
xx xx xx”

B 4. The contention of the appellants – assessees is that under a
hire- purchase agreement, they hire out a vehicle to the customer and
receive hire-purchase instalments, and not interest on loans and advances.
As per the findings of fact recorded by the Income Tax Appellate
Tribunal2, the hirer has acknowledged that the appellants– assessees
are the owners of the vehicle. As per the hire-purchase agreements, the
C
hirer must pay rent to the owner during the hiring as per the sums
mentioned in the agreement on the dates mentioned therein. Further, the
hirer has to take proper care of the vehicle and keep it in good condition.
He has to also pay all rents, rates, taxes and outgoings payable. The
hirer must keep the vehicle in his sole custody and possession at the
D address mentioned in the agreement, or such other place as the owner
has previously consented to in writing. The owner or any person
authorised by him in writing is entitled to inspect the vehicle at all
reasonable times during the period of hire. The hirer may, at any time,
determine the hire-purchase agreement by delivering the vehicle at his
E own cost to the owners. If the hirer fails to pay the hire instalments
within the stipulated time, becomes insolvent, pledges or sells, or attempts
to pledge or sell or otherwise alienate or transfer the vehicle, or does or
suffer any act or thing whereby, or in consequence of which, the vehicle
may be distrained, seized or taken into execution under legal process, or
breaks or fails to perform or observe any condition as mentioned in the
F hire-purchase agreement, the owner is entitled to forthwith determine
the agreement and, thereupon, entitled to enter the place where the
vehicle is kept and seize, remove and retake possession thereof. The
owner is also entitled to sue for all the instalments due, damages for
breach of the agreement, and the cost in retaking possession of the
G vehicle. The owners, if agreeable, may permit the hirer to have the
registration of the vehicle in his own name, provided that the hirer shall
transfer the registration in the name of the owner whenever required to
do so by the owner, especially when the hirer commits breach of any of
2
For short, ‘ITAT’.
H
M/S. MUTHOOT LEASING AND FINANCE LIMITED v. 325
COMMISSIONER OF INCOME TAX [SANJIV KHANNA, J.]

the conditions of the agreement, due to which the owners are obliged to A
seize the vehicle.
5. On these facts, the ITAT accepted the plea of the appellants –
assessees that they are not liable to pay interest tax on the interest
component imbedded in the hire-purchase instalment. The ITAT referred
to Circular No. 760 dated 13th January 1998 issued by the Central Board B
of Direct Taxes3 and observed that the hire-purchase agreement is a
composite transaction, and has elements of bailment and sale. Relying
on the terms and conditions of the hire- purchase agreement noted above,
the ITAT held that hire-purchase agreements are distinguishable from
loans and advances. The hire instalments are something different and C
more, and not the interest on loans and advances that is chargeable to
interest tax.
6. The ITAT had also relied on the provisions of The Hire-Purchase
Act, 1972, which, in our opinion, is palpably wrong as the said enactment
was never enforced and was subsequently repealed vide the Hire- D
Purchase (Repeal) Act, 2005.
7. The High Court of Kerala in the case of The Commissioner
of Income Tax, Cochin v. M/s. Muthoot Leasing & Finance Limited4
by the impugned judgment dated 10th March 2008 set aside and reversed
the finding of the ITAT, observing that the hire- purchase instalment E
includes “finance charges”, which is nothing but interest, and therefore,
interest tax is leviable on the interest component. The transaction, though
styled as a hire-purchase agreement, the High Court held, is in fact a
finance agreement for purchase of a vehicle. The hirer, as a borrower,
had been charged a flat rate of interest. The hirer, on payment of F
instalments, had the option to purchase the vehicle for one rupee, which
was an empty formality, because the vehicle was already registered in
his name. As per Section 51 of the Motor Vehicles Act, 19885, the
registering authority is required to enter the details of the hire-purchase
agreement in the certificate of registration. The respondent – assessee
G
therein had the license to repossess the vehicle on default, but to get
ownership they had to apply for change in name under the provisions of
3
For short, ‘CBDT’.
4
ITA No. 269 of 2002.
5
For short, the ‘MV Act’.
H
326 SUPREME COURT REPORTS [2023] 1 S.C.R.

A the MV Act. Reliance placed by the appellant – assessee on Circular
No. 760 dated 13th January 1998 issued by the CBDT was rejected,
observing that the CBDT had earlier issued Circular No. 738 dated 25th
March 1996 clarifying that the interest recovered under the hire-purchase
agreement falls under Section 2(7) of the Act. For arriving at the
conclusion, reliance was placed on the decision of this Court in Sundaram
B
Finance Limited v. State of Kerala and Another6, a decision which
we will subsequently examine.
8. The High Court of Delhi in Commissioner of Interest Tax v.
M/s G.E. Capital Transportation7, decided on 1st September 2006, has
C taken a different view, observing that the assessees therein having not
earned any interest on loan or advance, no component of the hire-
purchase instalment paid by the customer/hirer towards the hire is
chargeable to interest tax under the Act. At this stage, it may be relevant
to state that the special leave petition preferred by the Commissioner of
Income Tax, New Delhi against the decision of the Delhi High Court in
D a connected matter, in the case of Commissioner of income Tax, New
Delhi v. M/s G.E. Capital Services India8, was dismissed by this Court
on 16th May 2008. The dismissal being in limine and at the admission
stage, would not constitute a binding precedent under Article 141 of the
Constitution of India.
E 9. Section 2(7) of the Act, post amendment with effect from 1st
October 1991, reads as under:
“(7) “interest” means interest on loans and advances made in
India and includes—

F (a) commitment charges on unutilised portion of any credit
sanctioned for being availed of in India; and
(b) discount on promissory notes and bills of exchange drawn or
made in India,

G but does not include—
(i) interest referred to in sub-section (1-B) of Section 42 of the
Reserve Bank of India Act, 1934 (2 of 1934);
6
AIR 1966 SC 1178.
7
ITA No. 1275 of 2006.
8
H SLP(C) No. 14202 of 2008.
M/S. MUTHOOT LEASING AND FINANCE LIMITED v. 327
COMMISSIONER OF INCOME TAX [SANJIV KHANNA, J.]

(ii) discount on treasury bills;” A
10. There are two direct decisions of this Court interpreting Section
2(7) of the Act vide Commissioner of Income Tax, Kanpur v. Sahara
India Savings and Investment Corporation Limited9; and State Bank
of Patiala Through General Manager v. Commissioner of Income
Tax, Patiala10, which are relevant, and thus, we would refer to them in B
some detail.
11. In Sahara India Savings and Investment Corporation
Limited (supra), this Court noticed that prior to 1st October 1991, the
word “interest” in Section 2(7) was defined so as to include any amount
chargeable to income tax under the head “Interest on Securities”. Post C
the amendment, the words “amount chargeable to income tax… under
the head ‘Interest on Securities’” stood deleted. The Act, this Court
held, had been enacted with twofold purposes, namely, as an anti-
inflationary measure and for revenue collection. With this objective in
mind, the court proceeded to examine and interpret Section 2(7) of the D
Act to hold that the expression “interest” must be given a restrictive
meaning as interest on “loans and advances, including commitment
charges, discount on promissory notes and bills of exchange, but not to
include interest referred to in Section 42(1-B) of the Reserve Bank of
India Act, 1934 as well as discount on treasury bills”. Section 2(7) defines
taxable interest in the first part and confines the interest only to loans E
and advances, and in the second part includes, by specific mandate,
commitment charges and discounts on promissory notes and bills of
exchange. Interpreting the provision in this manner, it was held that the
legislature, in its wisdom, had extended the meaning of the word “interest”
in the second part to two items, namely, commitment charges and F
discounts on promissory notes and bills of exchange. In the said case,
the respondent – assessee had made investments in bonds and debentures.
It was held that interest on these bonds and debentures bought by the
respondent – assessee therein, as and by way of “investment”, is not
taxable as interest under Section 2(7) of the Act as they do not qualify
and could not be treated as “interest on loans and advances”. G

12. In State Bank of Patiala Through General Manager (supra),
this Court had examined the cleavage of opinion between different High
9
(2009) 17 SCC 43.
10
(2015) 15 SCC 483. H
328 SUPREME COURT REPORTS [2023] 1 S.C.R.

A Courts on whether the fixed percentage charge leviable on default in
payment of discounted bills of exchange should be treated as interest
within the meaning of Section 2(7) of the Act. The amount credited on
this account had been booked by the appellant Bank therein in its interest
account. Agreeing with the assessee therein, this Court observed that
B the definition of ‘interest’ in the Act is a narrow one, and is exhaustive
as it is a “means and includes” definition. The reasoning of the Karnataka
High Court in State Bank of Mysore v. Commissioner of I.T.,
Karnataka-I, Bangalore11 that discounting of a bill is a form of advance
or loan and hence, compensation paid on delayed payment of money
due thereon is interest on loans and advances, was overruled as
C overlooking the limited coverage in Section 2(7) of the Act. There is a
distinction between loans and advances, and discounted bills of exchange
drawn or made in India. If discounted bills of exchange were also to be
treated as loans and advances made in India, there would be no need to
extend the definition of “interest” to include discount on bills of exchange.
D This Court, accordingly, agreed with the views expressed by some other
High Courts, including Madras High Court in Commissioner of Income
Tax v. Cholamandalam Investment and Finance Co. Ltd.12, that the
character of an overdue bill is not synonymous with the loans and
advances and, therefore, it will not fall within the ambit and scope of
interest under part one of Section 2(7) of the Act. It was observed that
E
the right to charge for overdue interest by the assessee Banks therein
did not arise on account of any delay in repayment of any loan or advance,
but arose on account of default in the payment of amounts due under a
discounted bill of exchange. A subject can be brought to tax only by a
clear statutory provision in that behalf. Interest is chargeable to tax under
F the Act only if it arises “directly” from a loan or advance and not otherwise.
Accordingly, interest payable “on” a discounted bill of exchange cannot
be equated with interest payable “on” a loan or advance.
13. The decision in State Bank of Patiala Through General
Manager (supra) also draws distinction between the broad definition of
G the expression “interest” in the Income Tax Act, 1961 vide Section 2(28-
A), to observe that the expression used under the Act, that is the Interest-
Tax Act, 1974, is much narrower and restricted. Under the Income Tax
11
(1989) 175 ITR 607.
12
(2008) 296 ITR 601.
H
M/S. MUTHOOT LEASING AND FINANCE LIMITED v. 329
COMMISSIONER OF INCOME TAX [SANJIV KHANNA, J.]

Act, 1961, interest can be payable in any manner whatsoever. Secondly, A
the expression “in respect of” includes interest arising even indirectly
out of a money transaction, unlike the word “on” contained in Section
2(7) of the Act, which connotes a direct arising of payment of interest
out of a loan or advance. Thirdly, “any moneys borrowed” must be
contrasted with “loan or advances”. The former expression would include B
moneys borrowed by means other than by way of loans or advances.
Thus, the Act, unlike the Income Tax Act, 1961, is focused on a very
narrow taxable event which does not include within its ken interest payable
on default in payment of amounts due under a discounted bill of exchange.

14. A hire-purchase agreement has two elements – an element of C
bailment and an element of sale. The element of sale fructifies when the
option to purchase is exercised by the intending purchaser after fulfilling
the terms of the agreement. Till then, the goods are given on hire. One
can argue that in a hire-purchase, an element of interest is inbuilt, but
what is payable is the hire amount and not interest per se. The hirer has
D
an option to return the vehicle or the goods taken on hire. It is not a
simple transaction of giving a loan or advance on which interest is payable.
The transaction(s) in commercial and legal sense are far more complex
with corresponding rights of the parties. Even if the hirer is recorded as
the owner of the vehicle under Section 51 of the MV Act, the name of
the appellant – assessee is also recorded in the registration book, which E
is in recognition of the hire-purchase agreement. The registered owner
under the MV Act may be liable in case of accidents/traffic challans,
etc. But this, in no way, dilutes the right of the appellants – assessees in
respect of the title of the property, that is, the vehicle. Any transfer or
sale made by the hirer or any violation of the hire-purchase agreement F
can lead to civil as well as criminal consequences. Given the dictum and
ratio in Sahara India Savings and Investment Corporation Limited
(supra) and State Bank of Patiala Through General Manager (supra),
the view taken by the High Court of Delhi in M/s G.E. Capital
Transportation13 (supra), as followed by the High Court of Delhi in
Commissioner of Interest Tax v. M/S G.E. Capital Transportation14, G
is correct and the view taken by the High court of Kerala in the impugned
judgment is not in consonance with the above decisions of this court.

13
ITA 1275 of 2006.
14
ITA 1280 of 2006. H
330 SUPREME COURT REPORTS [2023] 1 S.C.R.

A 15. However, the learned counsel for the Revenue has relied on
Sundaram Finance Limited (supra), which decision had also been
relied upon by the High Court of Kerala in the impugned judgment. The
submission is that there is a conflict in the ratios. Before we consider the
ratio of the judgment in Sundaram Finance Limited (supra), we would
B refer to the decision of the Constitution Bench of this Court in K.L.
Johar and Co. (In Both Appeals) v. Deputy Commercial Tax Officer,
Coimbatore III (In Both Appeals)15. In the decision, this Court had
referred to the concept of hire-purchase in the context of sales tax liability
under the Madras General Sales Tax Act, 1939, to observe that the hirer
can exercise the option of purchase only when he fulfils the terms of the
C agreement, and till then there is no sale at all. The argument, which was
accepted by the High Court of Madras, that because in most cases such
option is exercised by the hirer, the tax was leviable immediately, was
flawed, as the taxable event had not taken place. In the said case also,
one of the contentions raised was that only one rupee had to be paid as
D the price for the transfer of the vehicle since the entire amount was paid
as hire. This contention was not accepted, for it overlooked the essence
of the hire-purchase agreement, which was that the hire includes not
only what would be payable really as hire but also that a part of it was
towards the price. These observations are relevant in the context of the
present case as they refer to and explain the true nature of hire in hire-
E
purchase agreements, albeit in the context of the sales tax enactment.
However, this court also observed that even in the absence of legislative
guidance, the sales tax authorities may split the hire into two parts. This
decision was followed in the case of Sundaram Finance Limited (supra)
with the majority judgment authored by J.C. Shah, J. observing that the
F decision of the Constitution Bench in K.L. Johar and Co. (supra) dealt
with the agreements where the financier has paid the balance amount to
the erstwhile owner of the goods and thereupon obtained the hire-
purchase agreement from the customer, under which the customer
becomes the owner of the goods on payment of all the instalments of the
G stipulated hire and exercising his option to purchase the goods on payment
of a nominal price. In another form of hire-purchase transactions, goods
are purchased by the customer who, in consideration of executing a
hire-purchase agreement and allied documents, remains in possession
of the goods, subject to the liability to pay the amount paid by the financier
15
H AIR 1965 SC 1082.
M/S. MUTHOOT LEASING AND FINANCE LIMITED v. 331
COMMISSIONER OF INCOME TAX [SANJIV KHANNA, J.]

on behalf of the customer to the owner or the dealer. The financier A
obtains the hire-purchase agreement which gives him a license to seize
the goods in the event of failure by the customer to abide by the conditions
of the hire-purchase agreement. The true effect of a transaction may be
determined from the terms of the agreement considered in light of the
surrounding circumstances. In some cases, the real bargain would be a B
loan on the security of the goods. If there is a bona fide and completed
sale of goods, evidenced by documents, anterior to and independent of a
subsequent and distinct hiring to the vendor, the transaction may not be
regarded as a loan transaction, even though the reason why it was entered
into was to raise money. Recording the aforesaid, the appeal of the
assessee in Sundaram Finance Limited (supra) was allowed by the C
majority observing that they were carrying on business of financiers and
not dealing with motor vehicles. The motor vehicle purchased by the
customer was registered in his name and remained, at all material times,
so registered in his name. The sale letter was a formal document which
was not made effective by registering the vehicle in the name of the D
assessee and even the insurance of the motor vehicle had to be effected
as if the customer was the owner.
16. Before we examine the reasoning and context in which the
elucidation was made, we would like to refer to two circulars issued by
the CBDT. The CBDT had, vide Circular No. 738 dated 25th March E
1996, opined that hire-purchase transactions are generally in the nature
of finance transactions entered into by the companies engaged in the
business of financing, and finance charges accruing or arising to hire-
purchase finance companies are in the nature of interest as defined in
Section 2(7) of the Act and hence, chargeable to interest tax. However, F
in the subsequent Circular No. 760 dated 13th January 1998, the CBDT
observed that they considered the issue and were advised that in case of
transactions which are, in substance, in the nature of hire-purchase, the
receipts of hire charges would not be in the nature of interest. In
transactions which are, in substance, in the nature of financing
transactions, the hire charges should be treated as interest, subject to G
interest tax. To determine the distinction between the two transactions,
the assessing officers were required to consider the issue on merits
taking, inter alia, into account – (i) the terms of the agreement; (ii) the
nature of the arrangement between the supplier of the asset, the hire-
purchase company and the end user of the asset; and (iii) the intention H
332 SUPREME COURT REPORTS [2023] 1 S.C.R.

A of the parties which manifests itself in the fixation of the initial payment,
the method of determination of hire-purchase price etc. However, when
the hire-purchase company pays the price or a substantial part thereof
on behalf of such hirer who is the real purchaser but does not pay the
full price, then such agreement is in the nature of a security for re-
B payment of the loan and is essentially a loan transaction. Reference was
made to the judgment in the case of Sundaram Finance Limited
(supra).
17. As noticed above, this judgment in Sundaram Finance Limited
(supra) relates to the true nature of hire in hire-purchase agreements as
C in the context of the sales tax enactment. In the present case, however,
we are dealing with and interpreting Section 2(7) of the Act, which has
been interpreted in two decisions, that is, in the case of Sahara India
Savings and Investment Corporation Limited (supra) and State Bank
of Patiala Through General Manager (supra), which have given a
very limited and restricted meaning to Section 2(7) of the Act as interest
D
directly arising “on” loans and advances, and not any other interest, be it
interest earned on investment or interest payable on delayed payment of
the discounted bill of exchange.
18. Taxation depends upon the language of the charging section
E and what is brought to tax within the four corners of the charging section.
Therefore, one should be careful and cautious when applying the ratio
of judgments relating to one tax enactment as a precedent in a case
relating to another tax enactment. This rule of caution is important and
should not be overlooked, more so when the language of the enactment
and the object and purpose of the enactment are different. This ratio is
F somewhat expressed by this Court in Association of Leasing and
Financial Service Companies v. Union of India and Others16, wherein
in the context of levy of service tax by Section 65(105)(zm) read with
section 65(12) of the Finance Act, 1994, as amended, banking and
financial services were brought to tax. In the context of the said
G enactment, this Court deemed it appropriate to distinguish between
financial lease and operating lease and held that the services rendered in
the former case would be taxable, whereas the latter would fall out of
the tax net. In this context, it was observed that non-banking financial
companies are essentially loan companies, but they could, in addition
16
H (2011) 2 SCC 352.
M/S. MUTHOOT LEASING AND FINANCE LIMITED v. 333
COMMISSIONER OF INCOME TAX [SANJIV KHANNA, J.]

thereto, be in the business of equipment leasing, hire- purchase finance A
and investment. In case of bailment termed as “hire”, the bailee receives
both possession of the chattel and the right to use it in return for
remuneration. On the other hand, equipment leasing is long-term financing
which helps the borrower to raise funds without outright payment in the
first instance. Here, the “interest” element cannot be compared to B
consideration for lease/hire, which is in the nature of remuneration
(consideration) for hire.

19. Findings of fact generally recorded by the ITAT are treated
as conclusive. The High Court can interfere with the findings of fact
while deciding a substantial question of law when the findings are not C
supported by the material on record, so as to be treated as perverse.17
For this, however, the High Court must frame a separate substantial
question of law and only then interfere with the findings of fact by the
ITAT, while applying the strict parameters. In the present case, the High
Court did not frame a specific substantial question of law and thus, the
D
interference with the findings of fact is unwarranted. This is not to say
that the tax authorities are not entitled to examine the surrounding facts
and circumstances to ascertain the true character and nature of the
transaction, regardless of the nomenclature given by the parties.
20. Given the aforesaid legal position, we may have even remanded E
the matter to the assessing officer for fresh adjudication and to re-
examine all the transactions in light of the aforesaid ratio and reasoning,
keeping in mind the dictum laid in Sahara India Savings and
Investment Corporation Limited (supra) and State Bank of Patiala
Through General Manager (supra) to rule out cases where camouflage
or subterfuge has been adopted to avoid payment of interest tax. This F
would have entailed not only looking at the documents but also several
other factors, which would have meant getting information and
ascertainment of facts in detail from the assessee and the hirer. However,
at this distinct point of time, we do not think that it would be appropriate
to pass an order of remand. It is to be also noted that the Act has ceased G
to operate with effect from 31st March 2000.
17
See Karnataka Board of Wakf v. Anjuman-E-Ismail Madris-Un-Niswan, (1999) 6
SCC 343; and C. Doddanarayana Reddy (Dead) By Legal Representatives and Others
v. C. Jayarama Reddy (Dead) By Legal Representatives and Others, (2020) 4 SCC 659.
H
334 SUPREME COURT REPORTS [2023] 1 S.C.R.

A 21. Recording the aforesaid, we allow the present appeals and
set aside the impugned judgments. The additions made by the assessing
officer are set aside and the orders passed by the ITAT deleting the
additions in the case of the appellant – M/s. Muthoot Leasing and Finance
Limited and other cases are upheld. In the facts of the present case,
B there would be no order as to costs.

Bibhuti Bhushan Bose Appeals allowed.
(Assisted by : Neha Sharma, LCRA)

C

D

E

F

G

H