TMI Blog2009 (10) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant. O. S. Bajpai with B. K. Sing for the respondent. JUDGMENT The judgment of the court was delivered by 1. A. K. Sikri J.-These appeals relate to the assessment years 1995-96 to 1999-2000 in respect of the same assessee, i.e., Motor and General Finance Limited. The issues involved are identical. In fact, four appeals relating to these assessment years filed by the assessee as well as the Revenue against the orders of the Commissioner of Income-tax (Appeals) have been disposed of by the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal"), vide its common judgment dated July 27, 2007. It is for this reason all these appeals were heard together. The questions of law on which we heard the arguments are the following: "(a) Whether the Income-tax Appellate Tribunal was correct in law in holding that the assessee is neither a financial company nor a credit institution in terms of section 2(5B) of the Interest-tax Act, 1974 and as such was not a taxable entity for the purpose of the Interest- tax Act, 1974 ? (b) Whether the Income-tax Appellate Tribunal was correct in law in holding that for deciding the principal business of a taxable entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as engaged in financial activities and shown in the profit and loss for the year, income from net hire purchase charges Rs. 30,32,80,298, lease charges Rs. 40,09,89,489 and bill discounting charges Rs. 98,31,728 apart from other income. The assessee has not filed return of interest-tax for assessment year mentioned above. In view of the above facts, I have reason to believe that the assessee's income coming within the purview of the Interest-tax Act, 1974 has escaped assessment for the aforesaid assessment year. Therefore, notices under section 10 of the Interest-tax Act, 1974 is issued to the assessee for the assessment year 1999-2000. (Sd.) . . . . . . . . . . . . . S. P. Gupta, ACIT (OSD). Ward, 16(1), New Delhi." 3. These reasons were supplied to the assessee. The assessee did not file return even thereafter which led to issuance of reminder letter dated November 2, 2005. In response, the assessee furnished the reply dated November 4, 2005, reiterating request to drop the proceedings. The Assessing Officer refused to do so and also rejected the objections of the assessee, vide his letter dated March 2, 2006. Thereafter, he proceeded to complete the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 4A of the Companies Act, 1956 (1 of 1956) ; (iii) a State financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951) ; and (iv) any other financial company ;" 6. It is a common case of parties that the assessee is not a banking company or a finance institution or a State financial corporation. It is also an accepted position that the assessee can be treated as credit institution only if it fits into the description of "finance company"as mentioned in sub- clause (iv) above. "Finance company"is defined in section 2(5B) of the Act in the following manner : "(5B) 'financial company'means a company, other than a company referred to in sub-clause (i), (ii) or (iii) of clause (5A), being- (i) a hire-purchase finance company, that is to say, a company which carries on, as its principal business, hire-purchase transactions or the financing of such transactions ; (ii) an investment company, that is to say, a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal in Rajath Leasing and Finance Ltd. (supra). 8. The Special Bench did not accept the principle laid down in Rajath Leasing and Finance Ltd. (supra) that lease business is to be excluded altogether. According to it, a distinction had to be drawn between a finan- cial lease and an operating lease. If it is a case of financial lease, then in substance that would not be a loan transaction and would fall in sub-clause (iv) of section 2(5B), namely, "a loan company". It is because of the reason that such a transaction in reality and substance is a transaction of granting loan on the security of the assets stated to have been given a lease. For this proposition, apart from other judgments, the Special Bench referred to the majority view of the apex court's decision in the case of Sundaram Finance Ltd. v. State of Kerala [1966] 17 STC 489 ; AIR 1966 SC 1178 wherein the court held (page 504 of 17 STC) : "30. The appellants are carrying on the business of financiers : they are not dealing in motor vehicles. The motor vehicle purchased by the customer is registered in the name of the customer and remains at all material times so registered in his name. In the letter taken fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following (page 338) : "Dictionary of Accounting and Finance by R. Brockington (Pitman Publishing, Universal Book Traders, 1996 at page 136) : 'A finance lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan. SSAP 23 required that assets held under a finance lease be treated on the balance-sheet in the same way, as if they had been purchased and a loan had been taken out to enable this.' (emphasis supplied) In Lease Financing and Hire Purchase by Dr. J. C. Verma (4th edition, 1999 at page 33) . . . : 'Financial lease is a long-term lease on fixed assets, it may not be cancelled by either party. It is a source of long-term funds and serves as an alternative of long-term debt financing. In financial lease, the leasing company buys the equipment and leases it out to the use of a person known as the lessee. It is a full payout lease involving obligatory payment by the lessee to the lessor that exceeds the purchase price of the leased property and finance cost. Financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the report as under : "In our opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase of assets or equipment or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, bears the wear and tear, maintains and operates the machinery/equipment, undertakes indemnity and agrees to bear the risk of loss or damage, if any. He is the one who gets the property insured. He remains liable for payment of taxes and other charges and indemnity. He cannot recover from the lessor, any of the abovementioned expenses. The period of lease extends over and covers the entire life of the property for which it may remain useful divided either into one term or divided into two terms with clause for renewal. In either case, the lease is non-cancellable." 12. The Special Bench observed that it is necessary to establish that the company carries on a business of the interest specified in various sub- clauses ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 2(5B) of the Act. It found that none of the businesses of the assessee in that case was having a share more than 50 per cent. 15. The following aspects surface on the reading of the aforesaid judgment : (i) While considering what constitutes "principal business"as mentioned in sub-clauses (i) to (v) of section 2(5B) of the Act, will depend upon the facts and circumstances of each case. The income from a particular business is not the sole criteria. Other considerations like past history of the assessee, current business of the assessee, break-up of income, earning during the relevant year would also be relevant. (ii) The negative test applied in Rajath Leasing and Finance Ltd. (supra) is not the correct test whether the assessee is a finance company or not, is to be determined by applying the positive test, namely, whether it is carrying on its principal business in either of sub-clauses (i) to (v) or a business understood in sub-clause (5A) or exclusively or almost exclusively on any two or more businesses referred to in earlier sub-clauses as required by sub-clause (vi) of section 2(5B) of the Act. (iii) Lease business, is not per se excluded from consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iming higher rate of depreciation, the Assessing Officer also referred to two judgments of this court in CIT v. Suidu Trade Links Ltd. [2003] 131 Taxman 302 (Delhi) and CIT v. Madan and Co. [2002] 254 ITR 445 (Mad) ; 128 Taxman 116. But, apart from referring to these two cases, there is no discussion specifically on the two kinds of leases and it appears that that did not even occur to any of the authorities. It is, there- fore, necessary to undertake this exercise and to determine as to whether the lease business of the assessee falls in the category of operational lease or financial lease. The reason is simple. If it is financial lease and gets covered under sub-clause (iv), then the assessee can be termed as "credit institution". It is clear from the following table showing income of the assessee from different activities : 31-3-1995 31-3-1996 31-3-1998 31-3-1999 Income Amount % of total income Amount % of total income Amount % of total income Amount % of total income Lease charges 408685186 46.68 43846347 45.23 522922013 47.40 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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