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2018 (2) TMI 1966 - HC - Income TaxLiability to pay interest tax on the interest earned - whether the company does not fall within the definition of term “financial company” as defined in section 2(5B) under the Interest Tax act, 1974? - whether the Tribunal was correct in coming to the conclusion that the assessee was the financial company and that the interest earned by the assessee company was chargeable to tax under the said Act? - HELD THAT:- Definition of term 'financial company' includes several subclauses. Subclause (ii) thereof refers to an investment company i.e. a company which carries on its principal business of acquisition of shares, stocks, bonds, debentures etc. The term 'loan company' is included in subclause (iv) which would include a company which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise. As noted, subclause (vi) would bring within the fold of the term financial company, a miscellaneous finance company, viz. a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding subclauses. Very clearly, the assessee company was incorporated for carrying on exclusively the business of an investment company and a loan company. All the three principal objects fitted within these two categories. Tribunal therefore correctly held the assessee company to be a financial company. The contention of the counsel for the assessee that not the objects of the company but its real activities during a financial year which should be used as a parameter to decide the status of the company, cannot be accepted. Awaiting other projects, the company has parked its available funds in shares and stocks and yet further surplus was invested in fixed deposits. Accepting the contention as presented before us would lead to a situation where for the purpose of ascertaining whether a company is a financial company or not, its category from year to year would have to be examined ignoring the objects for which the company is incorporated. In turn, would mean for a particular year the company would be a financial company whereas during the later year, it may not fit the description. Clearly something that cannot be easily envisaged. Whether the interest earned by the assessee company can still be taxed under the said Act? - In this context, the contention of the counsel for the Revenue, we may recall that the interest was not earned by the company on any loan or advance made but was generated out of its deposits. We are conscious of a clear distinction between a loan or an advance and a deposit. This has been elaborately discussed by Delhi High Court in case of Visisth Chay Vypapar Ltd. [2011 (8) TMI 783 - DELHI HIGH COURT]. Had adequate facts being brought on record, in this respect, we would have analyzed such material. However, this appears to be an argument raised for the first time. In fact, the stand of the assessee before the lower authorities was evidently different. We have reproduced the portion of the contention of the assessee before the Commissioner of Income Tax (Appeals), recorded by the CIT (Appeals). As argued that the year under consideration was an initial year of the company. No good project was comingforth and therefore in order to avoid keeping the funds idle, the assessee had advanced money and earned interest income and also carried out activities in trading in shares and securities. Thus, clearly even according to the assessee, the interest was earned by advancing its funds. The case now put up before us that such investment was in the nature of a deposit and not by way of advance was never raised earlier. We do not dispute that the term “interest” defined under section 2(7) of the Act would mean interest on loans and advances and if therefore in a given case it is established that the interest earned by the assessee was not out of either loan or advance but through some other source, the interest tax would not apply to such interest. When no such factual dispute was raised, no material on record to hold contrary to what the assessee itself had contended before the Commissioner of Income Tax (Appeals), the contention of the counsel for the assessee must be rejected.
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