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2008 (2) TMI 441 - ITAT BOMBAY-EInterest Tax - Liability to Pay Chargeable Interest - Activity of equipment leasing - Financial Company or Not - loans or advances or otherwise within the ambit of sub-clause (iv) of definition clause (5B) - 'Credit Institution' as defined by the provisions of clause (5A) of section 2 read with clause (5B) - business of lease financing, trading in shares and securities - Finance lease activity - HELD THAT:- This issue arose before the Tribunal in the case of Union Bank of India v. Addl. CIT [2007 (4) TMI 283 - ITAT BOMBAY-E] held that Finance Lease, though a mode of financial accommodation, is a step short of loan or advance. It has also been held that a loan or advance has to be a direct monetary transaction while finance lease is an alternate to loan or advance and, therefore, finance lease business would not fall within the scope of sub-clause (iv) of definition clause (5B). No other decision has been brought to our notice taking contrary view. Therefore, following the same, it has to be held that finance lease activity also cannot be brought within the ambit of sub-clause (iv) of definition clause (5B) of the Act. Scope of a Loan Company under sub-clause (iv) of clause (5B) of section 2 of the Act. With reference to the activity as that of an investment company - As compared to the two activities, it is seen from the financial statement of the year under consideration that income from leasing business was Rs. 456 lakhs which amounted to 45 per cent of the total income. Similarly, the employment of funds in the leased assets amounted to Rs. 1,610 lakhs which amounts to around 25 per cent of the total funds. This shows that the income as well as employment of funds in the activity of leasing of equipment is much more than the activity of granting loans and advances or the activity of investment in shares, debentures, securities etc. Therefore, we are of the opinion that learned CIT(A) was not justified in holding that the principal business of the assessee was either as that of an loan company or that of an investment company on the basis of financial statement pertaining to the year under consideration. Principal business either as an investment company or as a loan company within the ambit of sub-clauses (ii) and (iv) of definition clause (5B) of section 2 of the Act - The perusal of the financial statement shows that none of the activities can be said to be the principal business activity carried on by the assessee. The details regarding investment in shares, debentures and securities shows that by no standard, the assessee can be said to be in the business of investment so as to fall within the ambit of sub-clause (ii) of section 2(5B) of the Act inasmuch as the income in each year is below 15 per cent while the investment is below 34 per cent. The other two activities are running parallel to each other income-wise as well as on the basis of employment of funds. In our opinion, the said observations of the Hon'ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. [1971 (9) TMI 20 - SUPREME COURT] would equally apply in determining the principal business activity carried on by the assessee. Therefore, following the said judgment, it is held that none of the business activity can be said to be the principal business activity of the assessee-company. In the present case, the activity of lease financing is a substantial activity carried on by the assessee since substantial earning is made from such activity after employing substantial funds. The income from leasing business was around 40 per cent to 45 per cent and employment of funds in the leasing business was around 20 per cent to 23 per cent. Thus, the activity of leasing was substantial activity carried on by the assessee and, therefore, it cannot be said that assessee was a miscellaneous finance company. Therefore, We are of the opinion that assessee-company cannot be said to be a 'Credit Institution' as defined by the provisions of clause (5A) of section 2 read with clause (5B). Consequently, the interest earned by the assessee would not form part of the chargeable interest. Thus, the assessee would be outside the scope of charging provisions contained in the Act. Consequently, the orders of learned CIT(A) as well as AO are, therefore, quashed. The tax paid by the assessee, if any, shall be refunded. In the result, the appeal of the assessee is allowed.
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