TMI Blog2008 (12) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... le to tax. An appeal was filed by the assessee before the CIT(A), who relying on his order in the case of assessee for asst. yr. 1997-98 has held that transaction terms of lease were in fact in the nature of loan recoverable in instalments and it was a purely financing arrangement and, thus, the interest component is chargeable to Interest-tax Act. Learned CIT(A) has further observed that according to certificate of chartered accountant of the assessee filed during the course of appellate proceedings for asst. yr. 1998-99 only a sum of Rs. 85,26,302 out of the lease rentals of Rs. 1,84,04,890 pertained to recoverable towards principal and, therefore, balance of Rs. 98,78,588 would be the interest component. He provided the show-cause notice to the assessee in terms of s. 15(4) of the Act to show as to why interest component should not be enhanced to Rs. 98,78,588 and, thus, the figure of Rs. 33,12,880 has been substituted by CIT(A) to a sum of Rs. 98,78,588. The assessee is aggrieved by such findings of CIT(A), hence, in appeal. 3. During the course of appellate proceedings learned Authorised Representative relied on the order of Tribunal, Mumbai Bench dt. 30th April, 2007 in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be seen whether it was intended to have real effect as governing their rights and liabilities inter se or it was executed by way of pretence to escape or postpone the liability to tax without any intention that its provision showed in truth have effect as defining the rights of the parties as between themselves. In these circumstances though a transaction of lease if in its form and fact were not a lease transaction, but in substance and reality a loan or a finance transaction it may be so held that the assessee company was engaged in providing finance and was in fact a loan company and considering the facts and circumstances of that case it was found that the assessee company was a financial company to which the provisions of Interest-tax Act would apply. In para 48, it is observed that definition of interest as given in s. 2(7) of Interest-tax Act is an exhaustive definition as it defined interest by using the word "means" and, thus, even though interest is the taxable event and basis for levy of interest-tax, it can be assessed only if it were an "interest on loans and advances" as stated in the definition and not otherwise. To examine a question that whether a receipt is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o escape or postpone the liability to tax without any intention that its provision showed in truth have effect as defining the rights of the parties as between themselves. In these circumstances though a transaction of lease if in its form and fact were not a lease transaction, but in substance and reality a loan or a finance transaction it may be so held that the assessee company was engaged in providing finance and was in fact a loan company. 42. In these circumstances there is no merit in assessee's claim that it is not a financial company to which the provisions of Interest-tax Act would apply. It would be a residuary financial company cumulatively engaged almost exclusively in one or more businesses enumerated in s. 2(5B) of the Act." 5. Elaborating his arguments, learned Authorised Representative stated that question referred to the Special Bench in the above-mentioned case was as follows: "Whether, on the facts and in the circumstances of the case, the assessee company is a financial company under the Interest-tax Act, 1974, liable to tax thereunder on the revenue income earned on its financial transactions?" 6. Referring to para 18 reproduced above, it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laneous finance company, that is to say, a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses;" 7. Learned Authorised Representative also referred to the definition of interest as given in s. 2(7) of the Act which reads as under: "(7) "Interest" means interest on loans and advances made in India and includes: (a) commitment charges on unutilized portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India, but does not include: (i) interest referred to in sub-s. (1B) of s. 42 of the RBI Act, 1934 (2 of 1934); (ii) discount on treasury bills;" 8. Referring to the above provisions it was pointed out by learned Authorised Representative that the words used in s. 2(7) are different with wording found in s. 2(5B), cl. (iv) in which the words 'loan or advances' are further extended by the word 'otherwise' whereas in s. 2(7) the word 'otherwise' is not used. It was contended that Ahmedabad Special Bench in the case before it has held that the assessee in that case was a finance company falling within the ambit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wned for use, as well as contract between the parties for the return of the thing owned and as against that a loan contract, no doubt, created a debt; but there may be a debt without contracting a loan. It was pleaded that unless it is interest earned on debt incurred that would not fall within the category of interest as defined in Interest-tax Act. Reference was also made to the decision of Hon'ble Gujarat High Court in the case of CIT vs. Saurashtra Cement Chemical Industries Ltd. (1975) 101 ITR 502 (Guj) to contend that an agreement to pay the balance of consideration due by the purchaser does not in truth give rise to, a loan as a loan of money undoubtedly results in a debt, but every debt does not involve a loan. Thus, it was pleaded that unless it is an interest on loan the same cannot be brought to tax as it will not fall within the definition of interest described in s. 2(7) of Interest-tax Act. 11. Referring to the decision of Hon'ble Madhya Pradesh High Court in the case of CIT vs. State Bank of Indore (1988) 69 CTR (MP) 147 : (1988) 172 ITR 24 (MP), it was pleaded by the learned Authorised Representative that according to the well established law, entries made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h has been answered by the aforementioned decision of Special Bench in the case of Gujarat Gas Financial Services Ltd. but in view of his arguments submitted and recorded in earlier part of this order, the matter may be referred to the Larger Bench and, thus, it was pleaded by learned Authorised Representative that interest earned by the assessee from lease transaction could not be held liable for tax under Interest-tax Act. 15. On the other hand, learned Departmental Representative has submitted before us the written submissions and referring to those submissions it was argued by him that the interest as defined under s. 2(7) of Interest-tax Act refers to interest means interest on loans and advances made in India. Learned Departmental Representative referred to the definition of interest as given under s. 2(7) of Interest-tax Act and it was pleaded that interest defined in s. 2(7) is an inclusive definition. It was pleaded that only two exclusions are made which are firstly; interest referred to in sub-s. (1B) of s. 42 of RBI Act (2 of 1934) and secondly; discount on treasury bills. Learned Departmental Representative referred to the decision of Madras High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and advances" by the word 'otherwise' and in s. 2(7) the word 'otherwise' is not used after 'loans and advances'. The scope of chargeability of interest as defined, in s. 2(7) becomes limited and, thus, assessee cannot be held liable for taxability of interest earned by it on financial lease transactions. In our opinion, such difference pointed out by learned Authorised Representative is of no help to the case of assessee firstly, for the reason that the liability of the assessee to be assessed under Interest-tax Act has never been in a dispute in the case of the assessee. The question of considering whether an assessee will fall under the definition of s. 2(5B) or not was considered by the Special Bench in that case as it has been the argument of the assessee in that case that it being not a finance company within the meaning of s. 2(5B), interest-tax could not be charged. We have gone through the assessment order in the present case and found that the assessee basically is a finance company, the interest income of which is chargeable to Interest-tax Act. Total interest chargeable to tax has been computed by the AO at a sum of Rs. 11,04,75,458 out of which the dispute was raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est-tax Act. A loan or advance has to be a direct monetary transaction, which 'financial leasing' is not. Considering all these arguments it was held by the Special Bench that the definition of "interest" as given in s. 2(7) of the Interest-tax Act is exhaustive definition as it is defined by using the word 'means'. Thus, it was held that even though interest is taxable event and basis for levy of interest-tax, it can be assessed only if it were an interest on loans and advances as stated in the definition and not otherwise. It was held that to consider a question whether a receipt is interest or not is required to be judged on the facts and circumstances of each case and if in substance the receipt is interest on loans and advances, it has to have that character irrespective of the name or a form given to it, otherwise in the documents evidencing the transaction. For the sake of convenience the relevant portion of Special Bench decision is reproduced as under: "43. On merits of the case the submission of the assessee is that most of the receipts are not interest on loans and advances. It is submitted that s. 2(7) of the Interest-tax Act, defines "interest" to mean interest on lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rental. As aforesaid he submitted that in the case of the assessee it was a financial lease where except title everything else passed on to the customer with an option to purchase it on expiry of the period thereof. The assessee itself has admitted this fact vide its letter dt. 7th March, 2006 aforesaid that it was a case of financial lease and not an operational lease. He submitted that it is the substance, which has to be the deciding factor and not the form in view of the Supreme Court decision in CIT vs. Durga Prasad More 1973 CTR (SC) 500 : (1971) 82 ITR 540 (SC). He submitted that CIT(A) has not examined the matter in right perspective and erred in deleting the addition by looking only to the form of transaction without going into the substance of the transaction. He also referred to CIT vs. Nirbheram Daluram (1997) 139 CTR (SC) 484 : (1997) 224 ITR 610 (SC) 46. The assessee submits that lease does not find its place in the gamut of Interest-tax Act and hence even in the definition of credit institution, leasing company nowhere appears. In other words, it means leasing is outside the purview of chargeability of interest-tax. Reliance is placed on the decision of Union Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notes and bills of exchange drawn or made in India, but does not include; (i) interest referred to in sub-s. (1B) of s. 42 of the RBI Act, 1934 (2 of 1934); and (ii) discount on treasury bills. 48. The definition of 'interest', as is evident from above s. 2(7) of the Interest-tax Act, 1974, is an exhaustive definition as it is defined by using the word 'means'. Therefore even though interest is the taxable event and basis for levy of interest-tax, it can be assessed only if it were an 'interest on loans and advances' as stated in the definition and not otherwise. Whether a receipt is interest or not has to be judged on the facts and circumstances of each case and if in substance the receipt is interest on loan or advance, it has to have that character irrespective of the name or a form given to it otherwise in the documents evidencing the transaction. We have already taken note of the fact while discussing the charge ability of the assessee to tax that, it being a financial company under s. 2(5B), the lease granted by the assessee is a financial lease in contradiction to an operation lease. A financial lease is a transaction providing finance where lease rent includes a recou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions as mere financing transactions, the AO may be advised to examine each transaction in the above light and charge interest-tax in such of those transactions which are not in the nature of hire purchase. A careful reading of the extracts of the above circular divulges that all the hire purchase transactions cannot be construed as financing transactions and it is not open to the Department to levy tax on the hire charges resulting from genuine hire purchase transactions. It is the duty of the AO to separate the grain from the chaff by examining all the transactions separately with a view to draw a line between genuine hire purchase transactions and other transactions which are merely in the nature of financing. We find that in the instant case, no such exercise was carried out by the Revenue official for separating the genuine hire purchase transactions on the anvil of the legal position and the statutory provisions discussed in the foregoing paras.' The High Court upheld Tribunal view by observing that 'the effective findings of the Tribunal, as reproduced earlier, clearly show that the scope of remand is merely to separate genuine hire purchase transactions from transactions whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
