You repossessed the vehicle. Now pay tax on it — even if you never drive it.

When the repo man gets the tax bill

Mahindra and Mahindra Financial Services Ltd. gave a loan for a transport vehicle. The borrower stopped paying. The company repossessed the vehicle. Then the U.P. government demanded motor vehicle tax. The company said: we don't use the vehicle, we just took it back because the loan defaulted. Why should we pay tax on something we don't operate?

The answer cost the company its appeal, and cost every financier in Uttar Pradesh a clear rule: if you possess the vehicle, you pay the tax — in advance. The only way out is a refund claim, and only if you have the papers to prove non-use.

On 22 February 2022, a two-judge Bench of the Supreme Court of India — Justice M.R. Shah (author) and Justice B.V. Nagarathna (concurring) — dismissed Civil Appeal No. 1217 of 2022. The Court upheld the Full Bench of the High Court of Judicature at Allahabad, Bench Lucknow, which had ruled against the financier on 16 December 2019. The judgment is reported as Mahindra and Mahindra Financial Services Ltd. v. State of U.P. and Ors., 2022 LiveLaw (SC) 198.

The repossession that triggered a tax fight

The facts are straightforward. Mahindra and Mahindra Financial Services Ltd. financed a transport vehicle under a hire-purchase agreement. The borrower defaulted. The company took possession of the vehicle under the agreement. At that point, the U.P. government demanded tax under the U.P. Motor Vehicles Taxation Act, 1997.

The company argued that it was not the "owner" in any real sense. It had not registered the vehicle in its name. It was not using the vehicle for any commercial purpose. It had merely repossessed the asset to recover its loan. Tax, the company said, should only be payable when the vehicle is actually operated on the road.

The State of U.P. took the opposite view. Under the Act, whoever possesses the vehicle is the "owner" for tax purposes. And the scheme of the Act is "pay the tax and use", not "use and pay the tax". If the vehicle is not used, the remedy is to claim a refund — not to avoid paying tax in the first place.

What the Full Bench decided

The Allahabad High Court's Full Bench agreed with the State. It held that a financier-in-possession is an "owner" under Section 2(h) of the U.P. Motor Vehicles Taxation Act, 1997, read with Section 2(30) of the Motor Vehicles Act, 1988. The financier is therefore liable to pay tax from the date it takes possession of the vehicle. The only remedy for non-use is to apply for a refund under Section 12 of the Act, 1997.

Mahindra and Mahindra Financial Services Ltd. appealed to the Supreme Court.

The financier's argument: no use, no tax

The appellant-financier relied heavily on State of Maharashtra and Ors. v. Sundaram Finance and Ors., (1999) 9 SCC 1. In that case, the Supreme Court had held that a financier-in-possession is not liable to tax unless the vehicle is actually put to use. The company argued that the same principle should apply here.

The company also pointed out that it had not registered the vehicle in its name. It had not obtained a permit or a fitness certificate. It had no intention of using the vehicle. How could it be liable for a tax that is meant to be paid by those who actually operate vehicles on public roads?

The learned Counsel for the appellant pressed this point hard. The vehicle was repossessed only because the borrower defaulted. The financier was not in the business of running transport vehicles. It was in the business of lending money. Taxing it for possessing a vehicle it never intended to use was, in the company's submission, fundamentally unfair and contrary to the scheme of the Act.

The State's counter: possession is ownership for tax purposes

The State of U.P. countered with a different precedent: Jagir Singh and Ors. v. State of Bihar and Ors., (1976) 2 SCC 942. That case, the State argued, supported the proposition that a financier-in-possession is an "owner" liable to pay tax.

More importantly, the State relied on the plain language of the Act. Section 2(h) of the U.P. Motor Vehicles Taxation Act, 1997 defines "owner" to include, in the case of a vehicle subject to a hire-purchase, lease, or hypothecation agreement, "the person in possession of the vehicle under that agreement." The definition is not limited to the registered owner. It extends to anyone who has possession under a financing arrangement.

Section 4(2-A) imposes tax on public service vehicles. Section 9(1)(iv)(a) requires payment of tax in advance. The scheme, the State argued, is clear: you pay the tax first, and then you use the vehicle. If you don't use it, you can claim a refund — but you cannot avoid paying tax upfront.

The State also pointed to Section 12 of the Act, which provides the mechanism for refund when a vehicle is not used for a month or more. The existence of this provision, the State said, shows that the legislature contemplated situations where tax is paid but the vehicle is not used. The remedy is refund, not exemption.

What the Supreme Court actually held

The Supreme Court dismissed the appeal. It upheld the Full Bench's decision in its entirety.

The Court held that 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 vehicle. The financier qualifies as "owner" under Section 2(h) of the Act, 1997 read with Section 2(30) of the Motor Vehicles Act, 1988.

The Court then addressed the "pay and use" versus "use and pay" question. Under Section 4(2-A) read with Section 9(1)(iv)(a), the statutory scheme mandates payment of tax in advance before any use of the transport vehicle. The requirement is "pay the tax and use", not "use and pay the tax". Accepting the contrary interpretation, the Court said, would render Section 9(1)(iv)(a) redundant.

Finally, the Court clarified the remedy for non-use. If after payment of tax the vehicle is not used for a month or more, the owner may apply for refund under Section 12(1) subject to its conditions. The only situation where tax liability does not arise at all is under Section 12(2), where the owner surrenders the registration certificate, token, and permit before the tax becomes due. The inability to produce documents does not extinguish tax liability.

The witness rule the Supreme Court applied

The Court distinguished Sundaram Finance without overruling it. The Court noted that the facts in Sundaram Finance were different — the financier there had not taken possession of the vehicle. Here, Mahindra and Mahindra Financial Services Ltd. had taken possession. That made all the difference.

The Court also followed the reasoning of the Gujarat High Court in Abdul Samad Abdul Hamid Shaikh v. State of Gujarat (Special Civil Application No. 5788 of 2012, decided on 25.01.2017). In that case, the Gujarat High Court had held that if a vehicle is repossessed by a financier, the remedy is to apply for non-use; otherwise, tax liability continues. Tax is payable in advance by every registered owner or person having possession or control.

THE PLAY: When you repossess a vehicle under a hire-purchase, lease, or hypothecation agreement in Uttar Pradesh, you become the "owner" for tax purposes from that moment. Pay the tax in advance. Your only remedy for non-use is a refund claim under Section 12 — and you need the registration certificate, token, and permit to make that claim stick.

Why this matters in practice

For every financier operating in Uttar Pradesh, this judgment changes the math of repossession. When you take possession of a vehicle, you inherit the tax liability. You cannot argue that you are not using the vehicle. You cannot argue that you are not the registered owner. The statute defines "owner" to include you, and the statute requires advance payment.

The practical takeaway is this: when you repossess a vehicle, seize all documents — the registration certificate, the token, the permit. If you cannot get them from the defaulting borrower, follow the procedure under Section 51 of the Motor Vehicles Act, 1988 to obtain a fresh certificate of registration. Without those documents, you cannot claim a refund under Section 12 for non-use. And without the refund, you are stuck paying tax on a vehicle you never intended to operate.

The Court also clarified an important point about arrears. For tax due before the financier took possession, the primary liability is on the registered owner or operator. But if the tax cannot be recovered from them, it becomes recoverable from the financier because tax constitutes a first charge on the motor vehicle under Section 20(2) of the Act, 1997. This means that even pre-possession arrears can eventually land on the financier's desk.

The bottom line

If you repossess a transport vehicle in Uttar Pradesh, you are the owner for tax purposes from day one. Pay the tax in advance. Keep the documents. Claim refund only if you can prove non-use with the right papers. Anything less, and you are paying for a vehicle you do not use — and the law says that is exactly how it should be.