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M.com Sem -3

No. of Sessions 20 ( of 100 mins each )

To make students understand about the Concept of

Hire Purchase

To help them to know about the different feature of hire

purchase

To make them understand about different aspects of

hire purchase

PowerPoint Presentations

Current Affairs Coverage

Information About Latest Employment

Opportunities

For the conceptual grasp of Financial

Services, the students must possess the
following qualities or pre-requisites :1. What is finance?
2. What are financial services?

A After reading the course material , the students should

be able to :

Explain the Concept of Hire Purchase

Explain the different aspects of hire purchase

Explain the features of hire purchase

Introduction:
Hire Purchase is the legal term for a contract,
in which persons usually agree to pay for
goods in parts or a percentage at a time.
When a sun equal to the original full price plus
interest has been paid, the buyer may then
exercise an option to buy the goods or return
the goods to the owner.
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The origin of hire purchase system can be

traced back to the advent of industrial
development in UK.
Cowper wait & sons, a furniture dealer
introduced the system of Hire purchase in
USA, in 1807.
Bishogate piano-maker introduced the system
of Hire purchase in 1846, in UK.

In India, Hire purchase finance started only

after WW I.
However, it was only after WW II that its
growth assumed visible dimensions.
With the increase in economic activity,
many Non-Banking financing companies
entered the scene in the fifties and sixties.

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Hire Purchase is the hiring of goods at a stated

rental with the option to buy the goods at the end of
the hire purchase term.

The individual availing HP financing is the hirer and

the financier is the owner.

The rental payment is inclusive of the repayment of

principal as well as interest.

The hire purchaser acquires the goods immediately

on signing the hire purchase agreement but the
ownership of the same is transferred only when the
last installment is paid.
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HP transactions are governed by the Hire Purchase

Act 1972.

The HP Act sets out the forms and contents of HP

agreements, the legal rights, duties, obligations of
hirers and financiers.

The HP Act is administered by the Ministry of

Domestic Trade and Consumer Affairs.

Hire purchase should be distinguished from

installment sale wherein property passes to the
purchaser with the payment of the first installment.

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HP agreements must be in writing and signed by

both the parties.
They must clearly lay out the following information:

A clear description of the goods

The cash price for the goods

The HP price

The deposit

The monthly installments

Rights to parties
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Possession of goods

Each installment is treated as hire charges.

Ownership

Default in the payment

Terminate the agreement

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Spread the cost of finance

Interest-free credit

Higher acceptance rates

Sales

Debt solutions
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Personal debt

Final payment

Bad credit

Creditor harassment

Repossession rights
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The Government of India has permitted

banks to engaged in hire purchase
business on Sep- 7- 1990.

U/S 6 (1) (0) of

the banking regulation act 1949.

By this notification the banks are unable to

carry on hire purchase business, & to set up
subsidiaries for undertaking such business.

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The subsidiary of commercial banks lends to the dealer

or to finance intermediary who has already financed
Articles sold by the dealers to the hire purchase contract.

The bank subsidiary has to take extra precaution, looking

to the nature of transaction under hire purchase
contract.

The bank subsidiary would make an assessment of the

standing and financial position of the dealer or of the
hire purchase of company.

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The following guidelines should be

made applicable to banks in hire
purchase business......

Banks shall not themselves undertake directly the

business of hire purchase.

Only that banks which have set up subsidiaries for

the business equipment leasing, merchant banking
etc. may undertake hire purchase business.

An existing bank subsidiary that may here after

transact hire purchase business or set up new
subsidiary to transact such business.
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For the Purchase/Sale of the Asset/goods

In the Books of Hire
Purchaser

In the Books of Hire Vendor

Asset a/c
Dr.
Example:
To Hire Vendors a/c

Hire Purchasers a/c

Dr.
To Hire Purchase Sales

Gopinath & Co. acquired a machinery on hire purchase from

French Ltd. of Rs. 1,00,000.
For Hire Purchaser
Particulars

L.F.

Debit

1,00,000
Machinery a/c
Dr.
To French
Ltd. of asset from French Ltd.)
(Being
purchase

Credit

1,00,000

For Hire Vendor

Particulars

L.F.

Debit

Gopinath & Co.

1,00,000
Dr.
(Being
Sale of machinery to Gopinath & Co.)
To Gopinath & Co.

Credit

1,00,000

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For making/receiving Cash Down Payment

In the Books of Hire
Purchaser

In the Books of Hire Vendor

Hire Vendors a/c

Dr.
Example:
To Cash/Bank a/c

Cash/Bank a/c
Dr.
To Hire Purchasers a/c

Gopinath & Co. made a down payment of Rs. 40,000 to

French Ltd.
For Hire Purchaser
Particulars

L.F.

Debit
40,000

French Ltd. a/c

Dr.
To Bank a/c

(Being down payment made for machinery)

For Hire Vendor
Particulars

Credit

L.F.

Debit

40,000

Credit

Bank a/c
40,000
Dr.
(Being
down payment
received from Gopinath &40,000
Co.)
To Gopinath
& Co.

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For Interest Due

In the Books of Hire
Purchaser

In the Books of Hire Vendor

Interest a/c
Dr.
Example:
To Hire Vendors a/c

Cash/Bank a/c
Dr.
To Hire Purchasers a/c

Interest chargeable is 10% p.a.

For Hire Purchaser
Particulars

L.F.

Interest a/c
Dr.
(Being
interest
To French
Ltd. due at 6%)

Debit
3600

3600

For Hire Vendor

Particulars

L.F.

Bank a/c
(Being
interest due at 6%)
Dr.
To Gopinath & Co.

Credit

Debit

Credit

3600
3600

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For Payment/Receipt of Hire Purchase Installment

In the Books of Hire
Purchaser

In the Books of Hire Vendor

Hire Vendors a/c

Dr.
Example:
To Cash/Bank a/c

Hire Purchasers a/c

Dr.
To Interest a/c

Annual installment of Rs. 20,000 are to be paid.

For Hire Purchaser
Particulars

L.F.

Debit

French Ltd.
23,600
Dr.
(Being
payment
of installment and interest)
To Bank
a/c

For Hire Vendor

Particulars

L.F.

Debit

Credit

23,600

Credit

Gopinath & Co.

23,600
Dr.
(Being
payment of installment and interest received)
To Interest
23,600

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For charging depreciation(At the end of year)

In the Books of Hire
Purchaser

In the Books of Hire Vendor

Depreciation a/c
Dr.
Example:
To Asset a/c

No Entry

Depreciation is charged at 10% p.a.

For Hire Purchaser
Particulars

L.F.

Debit

Depreciation a/c
10,000
Dr.
(Being
depreciation
To Machinery
a/c charged at 10%)

Credit

10,000

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For closure of Depreciation a/c and Interest a/c

In the Books of Hire
Purchaser

In the Books of Hire Vendor

Profit & Loss a/c

Dr.
To Depreciation a/c
To Interest a/c
Example:

Interest a/c
Dr.
To Profit & Loss a/c

For Hire Purchaser

Particulars

L.F.

Profit & Loss a/c

Dr.
To Depreciation a/c
To Interest a/c

Debit

Credit

13,600
10,000
3600

(Being Depreciation and Interest charged to Profit and Loss

a/c)
For Hire Vendor
Particulars

L.F.

Debit

Credit

Interest a/c
3,600
Dr.
(Being
interest
amount
transferred to profit and3600
loss a/c)
To Profit
& Loss
a/c

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1)Down payment plan

The rate of interest on the hire purchase
contractis always a flat rate.
n
i =.2f
n+1
2) Deposit linked plan
if installments are paid in advance ,the
relationship between I & f changes.
n
I =2f
n-1

INCOME TAX ASPECT

it is governed by central board of direct taxes(CBDT) in 1943.
This circular specifies that the hirer is entitled to the tax shield
on depreciation ,which is calculated with reference to the cash
purchase price & tax shield on the consideration for hire.
SALES TAX ASPECT
A sale is deemed to take place only when the hirer exercises
an option to purchase.
Sales tax amount must be fixed with depreciated value of
goods.
Sales tax cant be loevied on hire purchase transactions
structured by finance companies.
There is no uniform rate of sales tax applicable to hire
purchase. it vary from state to state.
INTEREST RATE ASPECT
It is payable on the total amount of interest aggregating to a
hire purchase company in the previous year at the rate of 3%.
Payable amount of interest established during the previous
year can be deducted from chargeable interest.

There is no exclusive legislation dealing with hire

purchase transaction in India.
The Hire purchase Act was passed in 1972. An
Amendment bill was introduced in 1989 to amend
some of the provisions of the act.
However, the act has not been enforced so far.
The provisions of act are not inconsistent with the
general law and can be followed as a guideline
particularly where no provisions exist in the
general laws which, in the absence of any specific
law, govern the hire purchase transactions.
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The act contains provisions for regulating:

1. the format / contents of the hire-purchase
agreement
2. warrants and the conditions underlying the hirepurchase agreement,
3. ceiling on hire-purchase charges,
4. rights and obligations of the hirer and the owner.
In absence of any specific law, the hire purchase
transactions are governed by the provisions of the
Indian Contract Act and the Sale of Goods Act.

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