TMI Blog2013 (11) TMI 467X X X X Extracts X X X X X X X X Extracts X X X X ..... vashi Shodhan. For the Respondent : Ravinder Kr. and Rahul Kumar. ORDER:- PER: SHRI A. K. GARODIA As per the order of the Hon ble President, ITAT, the following question was referred to the Special Bench for its decision: 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 there under and if yes, then which portion of the income/receipts of the assessee company can be considered chargeable interest under Interest Tax Act, 1974. 2. We feel it proper that we should note down the history of this case. From the records, it is seen that initially, reference was made by a Division Bench to Hon ble President, ITAT for constitution of Special Bench in only one appeal under Interest Tax Act being Interest Tax Appeal No.36/Ahd/2004 for the assessment year 1999-2000 dated 22.09.2006. Thereafter, Special Bench was constituted by Hon ble President, ITAT and the following question was referred to it: Whether in the facts and in the circumstances of the case, the assessee company, a non banking financial company (NBFC) u/s 45-I(f) of the Non Banking Finance Companies Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsequently, as per the order passed by Hon ble President, ITAT, Special Bench was constituted for all these 5 appeals which included two appeals under Interest Tax Act and 3 appeals under Income Tax Act. As per the subsequent development and as per subsequent order of Hon ble President, ITAT, 3 income tax appeals were de-linked from Special Bench and were referred to Division Bench and the question originally framed was also revised and as per such order, the present question before the Special bench of the Tribunal has come into picture. 5. At the time of hearing, it was submitted by the Ld. A.R. that on page 82 of the departmental paper book is the provisions of Section 2(5B) of Interest Tax Act, 1974. For the sake of ready reference, we reproduce the provisions of Section 2(5B) of Interest Tax Act, 1974, which read as under: (5B) "financial company" means a company, other than a company referred' to in sub-clause (/), (if) or (Hi) of clause (5A), being (i) a hire-purchase finance company, that is to say, 'accompany which carries on, as its principal business, hire-purchase transactions or the financing of such transactions; (if) an investment company, that is to say, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this aspect was never examined at any level as to whether the leasing activities undertaken by the assessee was operating leasing or financial leasing. His submission was this that the assessee is engaged in operating leasing. Ld. A.R. also relied on the following judicial pronouncements: i) 296 ITR 126 (Del.) CIT Vs Eicher Good Earth Ltd. ii) 74 ITR 01 (Cal.) Nirmala Bala Sarkar Vs CIT 7. As against this, it was submitted by the Ld. D.R. that on page 28 of the decision of Special bench of the Tribunal in assessee s own case, it was noted by the tribunal in para 39 that the assessee vide his letter dated 06.12.2006 has submitted that the assessee was engaged in only financial leasing and not operational leasing. He further submitted that the contents of this letter were reproduced by the Tribunal on the same page. He also submitted written submission of 10 pages, which are reproduced below: Government of India office of the Commissioner of Income-tax (DR), (ITAT) -I 2ND floor, neptune tower, Ashram road, ahmedabad. phone No. (079) 26581651 No. CIT(DR)/ITAT-I/Gujarat Gas/2012-13 Date: 08.03.2013 To The Hon'ble Members, Income Tax Appellate Tribunal, 'A' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Special Court (Trial of offences Relating to Transaction in securities Act, 1962 due to certain illegal transactions and the and the Industrial Finance Corp. of India(IFCI) became the custodian of the assets belonging to Fair Growth . The assessee company continued to make the payment to IFCI in place of Fair Growth as per the Lease Finance Agreement. An amount of Rs. 30,96,948/- was paid by the assessee to Fair Growth till December, 1992 while the amount of Rs. 44,612,273/-was paid to the custodian IFCI. The assessee made a communication to the custodian clarifying that the assessee would be entitled under the agreement to the amount on account of security deposit and interest accrued thereon at the time of buy-back of purchase of leased assets. Accordingly, it forwarded a cheque of Rs. 17,800/- in their favour and final settlement of the dues under the lease agreement. The Special Court u/s. 10 passed an order to handover the possession of all the 56 cars to the custodian within one week from date of the order since the assessee has failed to make the payment as per the lease agreement. The assessee has taken a plea before the Special Court that it was a case of lease finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly amortised during the not-cancellable period, if any, of the lease and where the lessor does not rely for his profit, on the rentals in the non-cancellable period". 5. After considering the aforesaid definitions of lease finance, the Supreme Court observed that following are the features of the financial lease 1. The asset is use specific and is selected for the lease specifically. Usually, the lessee is allowed to select it himself. 2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset. 3. Therefore, the lessee bears the risk of obsolence. 4. The lessor is interested in his rentals and not in the asset. He must get his principal back alongwith interest. Therefore the lease is non cancellable by either party. 5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period. 6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation. 7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset. 8. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4. Lease is not cancelable as lessor is interested in lease rentals and not in the asset. 5. It is noted that the lease period is conciding with the economic life of asset as given in paper book page no. 110 clause 18.3 which provides a fixed term. 6. (a) Repairs and maintenance are the sole responsibility of the lessee as given in clause (9) (paper book page no. 103). (b) Insurance policy is to be taken out by the lessor but the premium are to be paid by the lessee as given in clause (11) (page 104 of paper book). In view of the above it is clear that the appellant was only interested in the lease rentals and the whole agreement was designed as a finance agreement. This contention is further supported by the submission of the assessee itself made by its letter dated 06.12.2006. This letter quoted in the order of the special bench of the ITAT dated 19/09/2008 at page no. 28 in para 39 stated as under: "We refer to the hearing in our cases and are submitting herewith following papers. 1. Note on Finance and operational lease-Anmnexure-1 2 Memorandum of Articles Annexure-2 3. Three agreement of Hire Purchase transaction- Annexure-3 4. One agreement of Lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what more facts are required to entain the ground, 42. In these circumstances there is no merit in assessee's claim that it is not financial company to which the provisions of Interest Tax Act would apply. It would be residuary financial company cumulatively engaged almost exclusively in one or more businesses enumerated in section 2(5B) of the Act." 10. The above finding that all the lease agreements entered into by the appellant company were finance leases is a finding of fact by the Tribunal. It is a settled law that Tribunal is the highest fact finding authority and its decision on facts cannot be tampered with by the courts unless it is proved that the findings of the facts are perverse. In the instant case, the special bench of the IT AT has given a finding of fact that the lease agreements entered into are finance leases. This being a finding of fact and not being perverse is settled and thus it becomes clear that the lease agreements entered into by the appellant company are finance 11. The appellant company before the CIT(A) during income tax proceedings vide its letter dated 06.02.2006 (quoted above) had stated that it was a finance company and all the leases entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money secured by right of seizure of goods. 15. The Circular No. 760 issued by the CBDT shown on page no. 138 139 of paper book clearly distinguishes hire purchase agreement into two categories - hire purchase agreement which are, in substance, in the nature of hire purchase, the receipts of hire charges would not be in the nature of interest hence not subject to interest tax. On the other hand, if the transactions are in substance in the nature of financing transaction, the hire charges should be treated as interest subject to Interest Tax. For determining the nature of transaction the circular has given certain guidelines in line with the decision of the Supreme Court. It would be seen that the hire purchase agreement by the appellant company is clearly in the nature of financial agreement. The sample hire purchase agreement as given on page No. 128 to 137 of the paper book clearly brings out that the appellant is into a financial agreement. 16. In view of the above, it is clear that both the transactions that of leasing and that of hire purchase entered into by the appellant is in the nature of financial transactions. As per the decision of the ITAT 'F' Special Bench Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of income Schedule- 14 15 Income From Operations Other Income: Lease 139,490,345 54% Hire Purchase 67,523,023 26% Bill Discount 14,874,208 6% Interest on govt. securities 6,769,432 3% Intercorporate deposit 14,939,205 6% Interest on term deposit with Banks 3,249,418 1 % Profit on sale of investment 2,138,374 1 % Others 4,560,854 2% Dividend 195,829 0% Other Income 6,103,106 2% Total 259,843,794 100% 17. Thus it would be seen that the incoenis in the case of Maruti Countrywide Auto Financial Services Ltd. and the appellant are identical hence the decision of the Special Bench of the IT AT Delhi in that case would squarely be applicable on the linstant case. 18. Further it would be seen that the appellant is a finance company which is apparent from a plain reading of the section 45 of the RBI Act relating to Non Banking Finance Companies. The relevant provisions of the RBI Act relating to non banki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CLfor availing gas connection by way of lease / HP. Provides consumer finance for purchse of two wheelers and four wheelers. Earlier involved in bill discounting and ICD lending, which it has now been discountinued." 22. The appellant is clearly a financial company within the meaning of section 5B of the Interest Tax Act, 1974 because its principle business is providing finance by way of providing financial lease. As would be evident some the facts that the lease income of the appellant company are 54 % of its total income. Further, it would be seen that in the case of Maruti Country wide auto finance (supra) the composition of income of the appellant company is identical to that of Maruti Countrywide Auto Finance Services Ltd. In that case it has been decided that Interest Tax Act was applicable on the lease income earned by the assessee. In the case of CIT Vs. Motor General Finance Ltd. reported in 327 ITR 530 (Del.) which is enclosed at pages 31 to 41 of the paper book. It has been held by Delhi High Court that Interest Tax Act is clearly applicable on interest portion of the lease rental in case of finance leases. In view of the above Interest Tax Act would also app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticular our attention was drawn to page 114 of the paper book as per which the value of the machine leased is stated to be Rs.27.50 lacs and Rs.5,56,750/- totaling Rs.33,06,750/- and on page 115 of the paper book is the detail of lease rent to be received in the lease period of 7 years which is specified at Rs.29,36,424/-. He further drew our attention to page 119 of the paper book where the assessee has worked out internal rate of return i.e. IRR from lease and in respect of these two assets of Rs.33,06,750/-, IRR has been worked out @ 18.76%. He submitted that both these details are conflicting and confusing because if the total lease rent is only Rs.29,36,758 then it cannot be said that during the lease period, the assessee is able to recover the principal amount along with normal return of investment but if the IRR from lease finance is worked out @ 18.76% then it has to be accepted that assessee is able to do so. He further submitted that on page 119 of the paper book is the value of asset given but it is not clear as to whether the entire amount was financed by the assessee or only part thereof was financed and whether any security deposit was taken by the assessee from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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