Case Law (SC) -- The hire-purchase instalments are different from the interest on loans and advances hence not chargeable to interest tax.

"As noticed above, this judgment in Sundaram Finance Limited (supra) relates to the true nature of hire in hire-purchase agreements as 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 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 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 somewhat expressed by this Court in Association of Leasing and Financial Service Companies v. Union of India and Others (2011) 2 SCC 352, 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 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 thereto, be in the business of equipment leasing, hire-purchase finance 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 consideration for lease/hire, which is in the nature of remuneration (consideration) for hire."

MUTHOOT LEASING AND FINANCE LTD v. CIT, Civil Appeal Nos.10201-10202 of 2010 & Ors dated 03.01.2023

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