Supreme Court Upholds Tax Liability of Financiers in Possession of Vehicles: Mahindra and Mahindra Financial Services Ltd. vs. State of U.P. (22 February 2022)

Introduction

Date of the Judgment: 22 February 2022

Citation: [Not provided in the document]

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

When a vehicle owner defaults on their loan, and the financier takes possession of the vehicle, who is responsible for paying the motor vehicle tax? This question was at the heart of a recent case before the Supreme Court of India. The Court examined the provisions of the U.P. Motor Vehicles Taxation Act, 1997 to determine if the financier, now in possession of the vehicle, is liable for the tax. The Supreme Court, in this case, has upheld the decision of the High Court of Judicature at Allahabad, Lucknow Bench, ruling that the financier is indeed liable to pay the tax from the date of taking possession of the vehicle. This judgment clarifies the tax obligations of financiers in possession of vehicles due to loan defaults.

Case Background

Mahindra and Mahindra Financial Services Ltd. (the appellant) is a financial institution that provided a loan for the purchase of a transport vehicle. When the borrower defaulted on the loan payments, the appellant took possession of the vehicle. The dispute arose regarding the liability to pay tax under the U.P. Motor Vehicles Taxation Act, 1997, specifically whether the financier, now in possession of the vehicle, was liable for the tax. The original owner had paid all taxes prior to the appellant taking possession.

Timeline

Course of Proceedings

The High Court of Judicature at Allahabad, Lucknow Bench, referred the matter to a Full Bench. The main question was whether a financier of a motor vehicle, in respect of which a hire-purchase, lease, or hypothecation agreement has been entered, is liable to tax from the date of taking possession of the said vehicle. The Full Bench of the High Court ruled against the appellant, holding that the financier in possession is liable to pay tax under the U.P. Motor Vehicles Taxation Act, 1997. The appellant then appealed to the Supreme Court.

Legal Framework

The Supreme Court considered the following provisions of the U.P. Motor Vehicles Taxation Act, 1997:

• Section 2(h): Defines “owner” to include the person whose name is in the registration certificate, and also the person in possession of the vehicle under a hire-purchase, lease, or hypothecation agreement.
• Section 4: Imposes tax on motor vehicles used in public places in Uttar Pradesh. Specifically, Section 4(2-A) states that no public service vehicle shall be used unless a monthly tax is paid.
• Section 9: Deals with payment of tax and penalties. Section 9(1)(iv)(a) states that tax under Section 4(2-A) is payable in advance.
• Section 12: Provides for refunds of tax in cases of non-use of the vehicle.
• Section 20: Deals with recovery of tax arrears.

The Court also referred to the Motor Vehicles Act, 1988:

• Section 2(30): Defines “owner” similarly to Section 2(h) of the U.P. Act, including a person in possession under a hire-purchase agreement.
• Section 51: Provides special provisions for vehicles under hire-purchase agreements, including procedures for registration and transfer of ownership.

Arguments

Appellant’s Arguments (Mahindra and Mahindra Financial Services Ltd.):

• The appellant argued that as a financier, they took possession of the vehicle due to default in loan payment, and the registered owner had paid all taxes prior to this.
• They contended that taxes are levied on the ‘use’ of the vehicle and therefore, unless the vehicle is actually used, the financier should not be liable to pay tax.
• The appellant relied on Section 4(2-A), Section 6, and Section 9 of the U.P. Motor Vehicles Taxation Act, 1997, arguing that the Act emphasizes the operation of the vehicle as a precondition for imposing tax.
• They argued that as the financier does not possess the original registration certificate or permit, they cannot use the vehicle, and therefore, cannot be liable to pay tax.
• The appellant relied on the decision of the Supreme Court in State of Maharashtra and Ors. Vs. Sundaram Finance and Ors., (1999) 9 SCC 1, to support their argument that a financier in possession is not liable to pay tax unless the vehicle is put to use.

Respondent’s Arguments (State of U.P.):

• The State argued that under Section 2(h) of the U.P. Motor Vehicles Taxation Act, 1997, and Section 2(30) of the Motor Vehicles Act, 1988, a financier in possession of the vehicle becomes the “owner” and is therefore liable to pay tax.
• The State submitted that Section 4 of the U.P. Motor Vehicles Taxation Act, 1997, is the charging section, and Section 4(2-A) mandates that a public service vehicle cannot be used unless monthly tax is paid. The State argued that tax must be paid in advance, and only then can the vehicle be used.
• The State argued that the financier, as the “owner,” is liable to pay tax in advance. If the vehicle is not used after payment of tax, the financier can claim a refund under Section 12 of the U.P. Motor Vehicles Taxation Act, 1997.
• The State contended that it is the responsibility of the financier to secure all necessary documents when taking possession of the vehicle. If they do not have the documents, they can apply for a fresh registration certificate as per the Motor Vehicles Act, 1988.
• The State relied on the decision of the Supreme Court in Jagir Singh and Ors. Vs. State of Bihar and Ors., (1976) 2 SCC 942 and the decision of the Gujarat High Court in Abdul Samad Abdul Hamid Shaikh Vs. State of Gujarat, Special Civil Application No.5788 of 2012, to support their argument that a financier in possession is liable to pay tax in advance.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether a financier of a motor vehicle/transport vehicle in respect of which a hire-purchase, lease, or hypothecation agreement has been entered, is liable to tax from the date of taking possession of the said vehicle under the said agreements.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Jagir Singh and Ors. Vs. State of Bihar and Ors., (1976) 2 SCC 942 – Supreme Court of India: The Court relied on this case to support the view that a person in possession of a vehicle can be considered the “owner” for the purpose of taxation.
• Abdul Samad Abdul Hamid Shaikh Vs. State of Gujarat, Special Civil Application No.5788 of 2012 – Gujarat High Court: The Court relied on this case to support the view that the financier in possession is liable to pay the tax in advance, and the remedy available to the financier is to claim refund in case the vehicle is not used.

Legal Provisions Considered by the Court:

• Section 2(h) of the U.P. Motor Vehicles Taxation Act, 1997: Defines “owner” to include the person in possession under a hire-purchase agreement.
• Section 4 of the U.P. Motor Vehicles Taxation Act, 1997: Imposes tax on motor vehicles, especially Section 4(2-A) which requires monthly tax for public service vehicles.
• Section 9 of the U.P. Motor Vehicles Taxation Act, 1997: Deals with payment of tax and penalties, specifically Section 9(1)(iv)(a) which requires advance payment of tax.
• Section 12 of the U.P. Motor Vehicles Taxation Act, 1997: Provides for refunds of tax in cases of non-use of the vehicle.
• Section 20 of the U.P. Motor Vehicles Taxation Act, 1997: Deals with recovery of tax arrears.
• Section 2(30) of the Motor Vehicles Act, 1988: Defines “owner” similarly to Section 2(h) of the U.P. Act.
• Section 51 of the Motor Vehicles Act, 1988: Provides special provisions for vehicles under hire-purchase agreements.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court followed Jagir Singh and Ors. Vs. State of Bihar and Ors., (1976) 2 SCC 942* to define “owner” as including a person in possession.
• The Court followed Abdul Samad Abdul Hamid Shaikh Vs. State of Gujarat, Special Civil Application No.5788 of 2012* to support the view that the financier in possession is liable to pay tax in advance.
• The Court interpreted Section 2(h) of the U.P. Motor Vehicles Taxation Act, 1997* to define “owner” as including the person in possession.
• The Court interpreted Section 4 of the U.P. Motor Vehicles Taxation Act, 1997* to impose tax on motor vehicles, especially Section 4(2-A) which requires monthly tax for public service vehicles.
• The Court interpreted Section 9 of the U.P. Motor Vehicles Taxation Act, 1997* to deal with payment of tax and penalties, specifically Section 9(1)(iv)(a) which requires advance payment of tax.
• The Court interpreted Section 12 of the U.P. Motor Vehicles Taxation Act, 1997* to provide for refunds of tax in cases of non-use of the vehicle.
• The Court interpreted Section 2(30) of the Motor Vehicles Act, 1988* to define “owner” similarly to Section 2(h) of the U.P. Act.
• The Court interpreted Section 51 of the Motor Vehicles Act, 1988* to provide special provisions for vehicles under hire-purchase agreements.

The Supreme Court held that a financier in possession of a transport vehicle is liable to pay tax from the date of taking possession. The Court emphasized that under the U.P. Motor Vehicles Taxation Act, 1997, the tax is to be paid in advance before the vehicle is used. The Court rejected the argument that tax is only payable when the vehicle is actually used. The Court noted that Section 4(2-A) of the U.P. Act clearly states that no public service vehicle shall be used unless the monthly tax is paid. The Court also pointed out that Section 9(1)(iv)(a) requires advance payment of tax.

The Court clarified that if the vehicle is not used after the tax is paid, the owner can claim a refund under Section 12 of the U.P. Act, subject to fulfilling the necessary conditions. The Court also addressed the appellant’s argument that they cannot claim a refund without the original registration certificate and permit. The Court stated that it is the financier’s responsibility to obtain these documents, and they can also apply for a fresh registration certificate under Section 51 of the Motor Vehicles Act, 1988.

The Court stated, “Therefore, the requirement under law is to first pay the tax in advance as provided under Section 9 and thereafter to use the vehicle. In other words, it is ‘pay the tax and use’ and not ‘use and pay the tax’.”

The Court further stated, “The sum and substance of the aforesaid discussion would be that the owner or operator has to first pay the tax in advance and thereafter if the transport vehicle is not used for a continuous period of one month or more since the tax was last paid, he may have to apply for the refund.”

The Court also noted, “It is for the financier to acquire the documents such as original registration certificate, permit, token etc. from the registered owner at the time of seizure of the vehicle.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the U.P. Motor Vehicles Taxation Act, 1997, and the Motor Vehicles Act, 1988. The Court emphasized the following points:

• Definition of “Owner”: The Court gave significant weight to the definition of “owner” under both the U.P. Act and the Central Act, which includes a person in possession of the vehicle under a hire-purchase agreement.
• Advance Payment of Tax: The Court highlighted the requirement of advance tax payment under Section 4(2-A) and Section 9(1)(iv)(a) of the U.P. Act, which mandates that the tax must be paid before the vehicle is used.
• Refund Mechanism: The Court acknowledged the refund mechanism under Section 12 of the U.P. Act, which allows for refunds in cases of non-use of the vehicle, provided the necessary conditions are met.
• Responsibility of the Financier: The Court emphasized that it is the financier’s responsibility to obtain the necessary documents for the vehicle, including the registration certificate and permit.

The Court’s reasoning was based on the principle that the law requires tax to be paid in advance, and it is not contingent upon the actual use of the vehicle. The Court also considered the practical implications of its decision, stating that the financier is responsible for securing the necessary documents and can apply for a fresh certificate of registration if needed.

Fact:Law Ratio

The court’s decision was heavily influenced by legal interpretations (80%) of the relevant statutes, with a lesser emphasis on the factual aspects (20%) of the case.

Key Takeaways

• Financiers’ Tax Liability: Financiers who take possession of vehicles due to loan defaults are liable to pay motor vehicle tax from the date of taking possession.
• Advance Payment: The tax must be paid in advance, as per the U.P. Motor Vehicles Taxation Act, 1997.
• Refund Mechanism: Financiers can claim a refund if the vehicle is not used after paying the tax, subject to compliance with Section 12 of the U.P. Act.
• Document Responsibility: Financiers are responsible for obtaining the necessary vehicle documents, including the registration certificate and permit.
• Fresh Registration: If the financier does not have the documents, they can apply for a fresh registration certificate under Section 51 of the Motor Vehicles Act, 1988.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

There is no specific amendment analysis in this judgment.

Development of Law

The ratio decidendi of this case is that a financier who takes possession of a vehicle due to loan default is considered the “owner” for the purpose of taxation under the U.P. Motor Vehicles Taxation Act, 1997, and is liable to pay tax from the date of taking possession. The judgment clarifies that the tax must be paid in advance, and the financier can seek a refund if the vehicle is not used, subject to compliance with Section 12 of the U.P. Act. This decision reinforces the principle that tax liability is not contingent upon the actual use of the vehicle but on the possession of the vehicle as an owner.

Conclusion

The Supreme Court upheld the decision of the High Court, ruling that a financier in possession of a transport vehicle is liable to pay motor vehicle tax from the date of taking possession. The Court emphasized that the tax must be paid in advance as per the U.P. Motor Vehicles Taxation Act, 1997, and a refund can be claimed if the vehicle is not used, subject to fulfilling the requirements of Section 12 of the Act. This judgment clarifies the tax obligations of financiers in possession of vehicles due to loan defaults, ensuring that they are treated as owners for tax purposes.