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2016 (6) TMI 1026 - GUJARAT HIGH COURT

2016 (6) TMI 1026 - GUJARAT HIGH COURT - TMI - Liability of interest - principle business of the assessee - whether the Appellant is a credit institution under the provisions of Interest Tax Act and further liable to pay tax on chargeable interest earned by it ? - Held that:- Interest income in the three years is ₹ 14,97,441/-, Rs, 11,15,533 and ₹ 4,46,972/- whereas the service charges are only ₹ 5,40,132/-, ₹ 3,95,405/- and ₹ 2,95,098/-. From the balance sheet it i .....

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AND MR. G.R.UDHWANI, JJ. FOR THE APPELLANT : MR SOPARKAR FOR MRS SWATI SOPARKAR, ADVOCATE FOR THE OPPONENT : MR KM PARIKH, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. By filing these appeals, the assessee has challenged order dated 21.4.2006 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench 'A' in Int.TA Nos.66 to 70/Ahd/2003 for the Assessment Years 1994-95 to 1998-99, whereby the Tribunal has dismissed the appeals of the assessee and confirmed the orde .....

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ances of the case, the Income Tax Appellate Tribunal was right in law in holding that gross interest receipt should be compared with the service charges earned and not the net interest income which is much lower than the other income so as to qualify the Appellant as a financial company ? (iii) Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in holding that the interest earned from the associate and sister concerns on money advanced to them n .....

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n 2 (5B) of the Interest Act, 1974 which provides for the definition of a ' financial company . Said Section reads as under:- 2.(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, hirepurchase transactions or the financing of such transactions; (ii) an investment company, that is to say, a compan .....

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say, a company[ not being a company referred to in subclauses (i) to (iii)] which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise; (v) a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 , to be a Nidhi or Mutual Benefit S .....

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almost exclusively, two or more classes of business referred to in the preceding sub- clauses;] 4. He submitted that the assessee is not a financial company as per Clause (v) of Section 2 (5B) of the Act, and it cannot be said that the principal activity of the assessee was disbursement of loan. He further submitted that income of the assessee from the interest was only ₹ 4,86,162/- for the A.Y. 1994-95, it was ₹ 3,25,237/- for the A.Y. 1995-96 while service charge received for the .....

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-purchase business, it is not covered by sub-clause (i) of the definition clause because admittedly, the finding of the lower authorities including the Tribunal is that its principal business is chitty and not hire-purchase business or the financing of such transaction. The respondent will come under the tax net as a hirepurchase finance company only if it's principal business is hire-purchasing or financing of such transactions. The Department admittedly does not have a case that the respon .....

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, that is also not its principal business and so much so, it does not fall under clause (iv) above. The respondent is admittedly not a mutual benefit finance company and therefore, falls outside sub-clause (v). Senior counsel appearing for the appellant prays for acceptance of the position that the respondent would fall under sub-clauses (v-a) or (vi). 4. Even though the appellants have relied on notes and clauses explaining the scope of financial company reported in 194 ITR (Statutes) 206, on g .....

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nsidered with reference to the object of the statute which is to levy tax on chargeable interest. Fundamentally, liability is on interest income, which as defined under Section 2(7) of the Act, means interest on loans and advances made in India and also includes the nature of receipts covered by sub-clauses(a) and (b) of Section 2(7). It is common knowledge that the chitty business is not one which involves advancing of loans. In fact, interest happens to be levied only when subscriber fails to .....

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n 2(5-B) of the Act. 5. In view of above, he prayed to allow these appeals by reversing the impugned order. 6. Mr.Parikh, learned counsel for the respondent has contended that the actual income from interest received by the assessee is ₹ 20,37,534/- for the A.Y. 1994-95 including Service charge of ₹ 5,40,132/-. He submitted that, therefore, more than 70% income of the assessee is from interest. He submitted that same is the position in other Assessment Years also. He further submitte .....

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fore, prayed that these appeals may be dismissed. 7. We have heard learned counsel for both sides. We have also gone through the provisions of law and the material on record. While passing the impugned order, the Tribunal has observed as under:- 7. On the basis of above chart, the assessee claims that interest income is less than service charges in first three years and, therefore, assessee's principal business is not that of granting loans and consequently, not a finance company in view of .....

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service charges. That cannot be accepted. Like should be compared with like. 8. The next contention of the assessee is that interest is received and paid to sister concern, group companies as loans and not as a business venture and, therefore, in view of the decision of the Calcutta Tribunal in case of Tara Finvest Ltd. 81 TTJ 631, the assessee would not be a financial company within a meaning of section 2(5B) (iv) of the Act. Here also, we do not find substance in the contention of the assesse .....

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