‘Finance Charges’ from Hire Purchase of Vehicles are subject to Interest Tax Act: Kerala HC [Read Judgment]

Finance charges like interest received from hire purchase of vehicles are like other interest subject to tax under the Interest Tax Act, the Kerala High Court has said.

A bench of Acting Chief Justice K.Vinod Chandran and Justice Ashok Menon said so while allowing the appeal forwarded by revenue seeking finance charges would attract tax on interest under the Interest Tax Act, 1974.

The assessee is a Kerala State Government Undertaking, engaged in the business of conducting chitties, advancing loans, etc. During the assessment period, assessing office had made some additions on account of interest received from hire purchase transaction (Finance charges), F.D. loan interest, trade loan interest, interest on housing loan/vehicle loans to employees, etc; and raised a demand on the premise that the assessee company is “credit institution”, a taxable entity under the Interest Tax Act.

On first appeal, CIT (A) confirmed the additions made by AO by considering the fact that assessee is a financial company in terms of clause (vi) of Section 2(5B) of the Interest Tax Act as there is voluntary payment of interest tax on some interest like default chitty.

On second appeal before the Income Tax Appellate Tribunal by the assessee concerning finance charges, the appeal was partly allowed and the revenue challenged the same before the High court.

The only legal issue that arises for consideration in this appeal is whether “finance charges” such as, interest received from hire purchase transaction, and other interest would attract tax on interest under the Interest Tax Act, 1974.

The counsel for revenue argued that finance charges collected by the respondent for vehicle financing as well as other hire purchase is nothing, but “interest” attracting tax. On counterpart contended that hire purchase transactions are outside the scope of interest tax and hence not taxable.

The Kerala High Court relied on the decision of Supreme Court in Sundaram Finance Ltd.’s case (supra), wherein held that hire purchase companies are squarely covered by definition of “credit institutions” under the Act and are liable to pay tax on charge of interest on loans and advances.

Finally, the appeal is allowed in favour of the Revenue and the assessment as confirmed by the first appellate authority restored.