The Supreme Court held that the appellants, being non-banking finance and hire-purchase companies, were not liable to pay interest tax under the Interest-Tax Act, 1974 on the interest component embedded in hire-purchase instalments, as such instalments do not constitute interest on loans or advances within the meaning of Section 2(7) of the Act. The Court observed that a hire-purchase agreement is a composite transaction involving elements of bailment and sale, where the hirer pays hire charges for use of the asset with an option to purchase upon fulfilment of contractual terms, and such payments cannot be equated with interest arising directly from a loan or advance. Relying on the principles laid down in CIT v. Sahara India Savings and Investment Corporation Ltd. and State Bank of Patiala v. CIT, the Court reaffirmed that the definition of “interest” under the Interest-Tax Act is narrow and exhaustive, and covers only interest directly arising from loans and advances. The Court distinguished the decision in Sundaram Finance Ltd. by holding that the nature of hire-purchase transactions must be examined in the context of the specific charging provision and statutory scheme, and cautioned against applying precedents from different tax enactments without regard to legislative intent. Accordingly, the Supreme Court set aside the judgments of the High Court, upheld the orders of the Income Tax Appellate Tribunal, and deleted the interest-tax additions made against the assessees.

SOURCE LINK

https://api.sci.gov.in/supremecourt/2008/27670/27670_2008_8_1501_40701_Judgement_03-Jan-2023.pdf

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