HIRE-PURCHASE AGREEMENTS
(I). Preliminary.- Hire-purchase agreements
have acquired special importance
in the developing economy of the
country. What does hire-purchase agreement connote ? By a contract of hire-purchase is meant a contract which in addition
to terms of hire, provides that
on payment of the rent for a
certain period, or for a certain number of times, or on the
payment of a certain sum
after such payment of rent, or at some time during the hiring,
the property in the goods hired shall (or may) pass from the
owner to the hirer.
[Periar’s Law of Hire
and Hire-Purchase 2nd
Ed., p.2]. In effect hire-purchase
agreement is a contract of
bailment and is governed by
the provisions of Chapter IX of the
India Contract Act, 1872. This agreement
is with an option to purchase
though it is sometimes used in a wider sense to include agreements
where there is an irrevocable
agreement to buy in
instalments are paid. A
hire-purchase agreement thus creates
a bailment, but is a bailment
plus an option to purchase. The transaction
is composed of the element of both the law of hire and sale, it would be clearly wrong
to assimilate it to a hypothecation of moveable
property .[V. Dakshinamurthi Mudaliar v. General & Credit
Corporation (India) Ltd.,
AIR 1960 Mad. 328, 330].
The transaction partakes of a contract or bailment with an
element of sale added to it. In
such an agreement, the owner of the
goods lest them on hire for periodic
payments by the hirer upon an agreement
that when a certain number of payments
by the hirer upon an
agreement that when a certain number of payments have been
completed, the absolute property in the goods
will pass to the hirer, but
so that
the hirer may return the
goods at any time without any obligation
to pay any balance of rent
accruing after return; until the conditions have
been fulfilled, the property remains with the owner. In this agreement
the hirer is not bound to purchase the thing
hired, he has an option, he may
or may not purchase. But in either case, if there an obligation to buy, or an option to buy, the goods delivered
to the hirer by the owners
on the terms that the hirer on payment
of a premium as also of a number
of instalments shall enjoy the
use of the goods, which
ultimately may become his
property, the transaction amounts to one of hire-purchaser, even though
the title to the goods
has remained with the owner and shall
not pass to the hirer until certain
event has happened, namely that
all the stipulated instalments
have been paid, or that the hirer has exercised his option
to finalise the purchase on payment
of a sum nominal or otherwise. [Instalment Supply (P) Ltd. v. Union of India, AIR 1962 SC 53, 58: Sundaram
Finance Ltd. v. State of Kerala, AIR 1966 SC 1178].
(ii) Hire-Purchase agreement not sale.-It has to be remembered that a
hire-purchase agreement is not a sale
even if it contains a stipulation
in the form of option of the hirer to
purchase the article hired. Even where the
price for sale is to be pain in instalments later, the property
in the goods passes as soon as
the sale is made. This follows
from the definition of sale in section 4 of the Sale of Goods Act, 1930 (as distinguished from an
agreement to sell) which requires that the seller transfers the property in the
goods to the buyer for price. The essence
of sale is that the property is transferred from the
seller to the buyers
for a price whether paid
at once or paid later in instalments. On the other hand , a hire-purchase
agreement as its very name implies, has
two aspects. There is first an aspect
of bailment of the goods subjected to the hire-purchase agreement, and there
is next an element of sale which
fructifies when the option
to purchase, which is usually a
term of hire-purchase agreements, is
exercised by the intending purchaser. Thus the intending
purchaser is known as the hirer
so long as the option
to purchase is not exercised,
and the essence of the hire-purchase agreement
properly so called is that the property in the goods does not pass at the time
of the agreement but remains in
the intending seller, and only passes
later when the option is exercised by the intending purchaser. The distinguished
feature of a typical hire-purchase agreement is
made but only passes when the option is finally exercised after
complying with all the terms of
the agreement. [K.L. Johar & Co. vi
Dy CTO, AIR 1955 SC 1082,1088].
The
position of the owner of goods
under a hire-purchase agreement is that of a person who has made on irrevocable offer to sell but no obligation to buy. [Helby v. Mathews, (1895)
AC 471 ; Lee v. Butler, (1893) 2 Q.B. 318]. T
essence of the hire-purchase agreement
is that the hirer is not
bound to purchase . [Dalpat Rai v.
Manohar Lal & Sons, AIR
1974 Raj. 61]. A hire-purchase agreement
has two elements ; (I) element of
bailment, and (ii) element of sale, in
the sense that it contemplates an
eventual sale. The element of sale
fructifies when the option is exercised by the intending purchaser
after fulfilling the terms of the agreement. When all the terms of the agreement are satisfied
and the option to purchase is exercised, a sale takes place of the goods
which till then had been hired.
[K.L.Johar & Co. v. Dy. CTO, AIR 1965 SC 1082, 1090].
(iii) Duty of hirer.-According to section 151
of the Contract Act, 1872, the hirer is bound
to take as much care of the
goods hired to him as a man of ordinary
prudence would under similar
circumstances take of his own goods
of the same bulk, quality and value as the goods hired. Under Section 152 of
the Contract Act, the hirer in
the absence of any special contract is
not responsible for
the loss, destruction or deterioration
of the thing hired, if he has taken such care. Accordingly, the parties
may provide by stipulation in that
behalf that the hirer will be liable for any loss or damage to the goods
arising from any cause whatever.
(iv) Parties .-Normally , there are two
parties to the hire-purchase agreement,
viz., the owner and the hirer. However, sometimes a financier, for example in case of motor vehicles, is also brought in as a necessary party who purchase the vehicle from the owner and
lets the same on hire to the hirer on
instalments and in such case, a guarantor is also required to be supplied
by the hirer to secure fulfilment of the obligations imposed on the
hirer under the agreement.
(v).- Clauses.-In drafting a hire-purchase agreement, care should be
taken to draft the following important clause in the agreement properly ;
(a) No obligation to buy.-The agreement of hire-purchase should not amount
to an agreement to buy but it should
only give the hirer an option to purchase because where a person under an agreement to buy obtains the possession of the goods and the hirer under
the hire-purchase agreement so obtains
the possession, he would be able to
give little to any one who takes the goods
on sale or pledge from him without notice
of the hire purchase agreement [See section 30 (2) of the Sales of
Goods Act, 1930 and thereby the hirer would be able to defeat the
intention of the owner. Where, however, the agreement is not an agreement to buy but it
merely give an option to the
hirer to buy on the fulfillment of
certain conditions, the hirer cannot
gives a valid title to any one. [Roopchand
Jankidas v. National Bank, 46
Cal. 342].
(b) Property in goods not to pass.-A
hire-purchase agreement must contain an
express stipulation that the property in the goods shall not pass
of the hirer untill all instalments have been paid.
© Minimum
payment clause.-A hire-purchase agreement may be
terminated either by the owner or
hirer and the hirer
may return the article
to the owner after terminating
the agreement. But since the articles are
subject to usual wear and
tear on account of user, it is usual to
insert a “minimum payment”
clause in the agreement in order to provide for depreciation of the article
taken under the hire-purchase agreement. Such a clause provides that in the event of the agreement being determined by the
owner or the hirer, the hirer shall be liable to pay 50% of the total price after deduction of the instalments already paid by the hirer.
(d) Seizure clause.-It is also usual to
incorporate a clause in the hire-purchase agreement empowering the owner to seize the article hired in the event of the hirer committing a breach of any terms thereof, particularly the non-payment
of monthly hire.
(vi) Claim of
financier to prevail over the state.-Where under a hire-purchase
agreement, the financier, i.e., the
owner lets on hire a motor vehicle to the hirer, clause 4 of the agreement
states that, on default by the hirer, the owner
can seize, remove and retake possession of the vehicle and
sue for all the instalments due and for damage for breach of the
agreement and for all the costs of
retaking of possession of the said vehicle and all costs occasioned by the hirer’s default. Clause 6 would show that, only upon
the hirer paying the entire
amounts due under the agreement, the said vehicle
shall become the sole and
absolute property of the hirer. In
regard to the registration of the vehicle shall become the sole and absolute property of the
hirer. In regard to the
registration of the vehicle, thought it
is in hirer’s name, clause 8 of
the agreement states that the
owners-meaning the financing
company agree to permit the hirer to
have the registration of the vehicle in his name provided that the hirer shall transfer the
registration in the name of the owners
whenever required to do so by them and
especially when the hirer commits breach
of any of the conditions of the agreement. In the light of these clauses in the agreement and in the
event of the financier seizing the
vehicle on default on the hirer in payment of the instalments, the claims of the financier would
prevail over that of the State. Where a person has
got a prior secured right over
the property, the State’s claim will
not prevail. In the Income-tax Act, there is no substantive provision
for superseding or overriding the claims or rights of a secured
creditor. Schedule II mentioned in section 222 of the I.T. Act, 1961, which contains statutory rules in accordance with
which the modes of recovery
mentioned in that section have to be exercised, relates to procedure
only and does not deal with substantive
rights. [Sundaram Finance Ltd. v. RTO,
(1979) 117 ITR 334 (Ker)].
(vii) Allowability of depreciation of hired
article.-The Board has issued
the following circular containing
instructions regarding depreciation
allowance on plant and machinery acquired under
hire-purchase agreement.
“The
following instructions are issued
for dealing with case in which as asset is being
acquired under or on what is known as hire-purchase agreement:-
(i) In
every case of payment purporting to be
for hire-purchase, production of the
agreement under which the payment
is made should be insisted on.
(ii) Where
the effect of an agreement is that the
ownership of the subject is at once transferred
to the lessee( e.g. where the lessor
obtains a right to sue for
arrear of instalments but no right to recovery of the asset) the transaction should be
regarded as one of purchase by instalments and no deduction in respect of “hire” should be made. Depreciation should be
allowed to the lessee on the
entire purchase price as per the agreement.
(iii) Where the terms of the
agreement provide that the
equipment shall eventually become
the property of the hirer or confer on
the hirer an option to purchase the equipment, the transaction
should be regarded as one of hire-purchase. In such case the periodical payments made
by the hirer should not tax purposes be regarded as made up of-
(a) consideration for hire, to be allowed as a deduction in the
assessment ; and
(b) payment
on account of purchase, to be treated as capital outlay, depreciation being allowed to the lessee on
the initial value(i.e., the amount for
which the hired subject would
have been sold for cash at the date of
the agreement).”
The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payments under the agreement and the initial
value(as described above), the amount of this allowance being spread evenly over the term of agreement. If, however,
the agreement was terminated either
by outright purchase of the
equipment or its return to the owner, the deduction
should cease as from the date of the termination.
An
assessee claiming this deduction should
be asked to furnish a certificate from
the vendor or other satisfactory evidence of the initial value (as described above). Where
no certificate or
satisfactory evidence is forthcoming, the initial value should be
arrived at by computing the present value of the amount payable under the agreement at an appropriate rate per
centum. In doubtful case the
fact should be reported
to the Board”.
[Circular No.9 of 1943, R. Dis. No. 27(4) IT/43,
dated 23rd March, 1943].
(viii) Registration.-Registration
of a hire-purchase agreement is not compulsory.
(ix) Stamp
duty.-The hire-purchase agreement requires a stamp of only Re. 1 like an ordinary agreement.
(x) Model
Forms
DISCLAIMER: THE ARTICLE IS BASED
ON THE RELEVANT PROVISIONS AND AS PER THE INFORMATION EXISTING AT THE TIME OF
THE PREPARATION. IN NO EVENT I SHALL BE LIABLE FOR ANY DIRECT AND INDIRECT
RESULT FROM THIS ARTICLE. THIS IS ONLY A KNOWLEDGE SHARING INITIATIVE.
THE AUTHOR – CS
DEEPAK SETH (ASSOCIATE PARTNER HELPINGHANDS PROFESSIONALS LLP) AND CAN
BE REACHED AT CONTACTHHPRO@GMAIL.COM OR 9910248911.
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