TMI Blog2015 (3) TMI 1206X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) to (v) or a business as understood in clause (va) or exclusively or almost exclusively any two or more business referred in earlier clauses as required by clause (vi) of Section 2(5B) of the Act. While considering the “principal business” number of factors are required to be considered. Breakup of the income earned during the relevant year only cannot be a sole criteria to consider the “principal business”. In a given case income from a particular business will be more compare to income from other business / activities in particular year, same may be less. What constitutes “principal business” will depend upon facts and circumstances of each case. In that situation past history of the assessee, current business of the assessee, breakup of the income earned during the relevant year may help in determining the principal business of the assessee company. For this, matter will have to be remand back to the AO as it is the AO who can on the basis of material produced before him can come to the conclusion as to whether the lease agreement entered into by the assessee with the lessee are “financial lease or operational lease” or both and in that case how much charges are to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestions of law arise. (A).Whether in law and in facts, the ITAT is right in holding that the assessee company is not a financial company as per the provisions of the Interest Tax Act, 1974 and particularly as per Section 2(5B) of the Interest Tax Act, 1974? (B). Whether in law and in facts, the ITAT is right in holding that the assessee company is not carrying exclusively, or almost exclusively, two or more classes of business referred to in subclauses (i) to (v) of Section 2(5B) of the Interest Tax Act ? 2.1. In Tax Appeal Nos.1036 of 2006 to 1038 of 2006 in the case of M/s. Rajath Finance Limited, Rajkot the following substantial questions of law arise. Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) deleting the hire purchase charges as not falling within the ambit of Interest Tax Act, 1974? 3.0. At the outset, it is required to be noted that in Tax Appeal Nos. 1036 of 2006 to 1038 of 2006 while deciding the Tax Appeals and holding that the assesee Company is not finance company as defined under Section 2(5B) of the Interest Tax Act, 1974 (hereinafter referred to as the Act ) and consequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income together with copy of draft lease agreement etc. The assessee furnished required details on 10.08.1999 and afterwards. 3.5. That from the details furnished, AO observed and found that principal business of the assessee is of making finances, giving loans etc. The AO found that the main income of the assessee from three heads as submitted by the assessee on 20.07.1999.... (a) Lease rental, (b) Finance charges on hire purchase (c) Interest on loan. The AO observed that business of earning interest on loan clearly makes the assessee a Finance Company; earning finance charges on hire purchaser also makes the assessee a finance company within the meaning of Act. As regards as the lease rentals, the AO observed that even if it is taken that leasing business is not a finance business, the assessee would still be liable to interest tax of the quantum of business the assessee does and the objective in pursuance of which the business is being carried out. Therefore, on facts it was found that the object is clearly of finance, hire purchase and lease business and therefore, the assessee is clearly a finance company within the meaning of Interest Tax Act. Therefore, the AO levi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest Tax Act, 1974. 3.8. Feeling aggrieved and dissatisfied with the impugned common judgment and order passed by the learned Income Tax Appellate Tribunal, the Revenue has preferred present Tax Appeals to consider the substantial question of law reproduced herein above. 4.0. Shri Pranav G Desai, learned advocate for the Revenue has vehemently submitted that the learned Tribunal has materially erred in law and on facts in not properly considering the true character and nature of the transactions entered into by the assessee. It is submitted that the learned Tribunal has materially erred in holding that the assessee company is not a financial company as per Section 2(5B) of the Interest Tax Act, 1974 and therefore, not liable to pay the interest tax on the interest amount received by the assessee, leviable under the provision of Interest Tax Act. 4.1. It is submitted that while holding that the assessee is not a financial institution / company as per the provision of Interest Tax Act, the learned Tribunal has misread and misinterpreted the transactions entered into by the assessee and has wrongly gave importance to the form over substance of the transactions. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... positive test, namely whether it is carrying on its principal business in either of the sub clause (i) to (v) or a business understood in Section 2(5A) or exclusively or almost exclusively on any two or more businesses referred to in earlier sub clauses as required by subclause (vi) of Section 2(5B) of the Act. 4.6. It is submitted that in the present case the learned Tribunal has held the assessee company not a financial company solely on the basis of the income arising from the lease rental. It is submitted that the learned Tribunal has not looked at the issue from the aforesaid angle i.e. whether the principal business of the assessee can be said to be finance or lease . Shri Desai, learned advocate for the revenue has relied upon the decision of the Hon'ble Supreme Court in the case of Asea Brown Boveri Limited vs. Industrial Finance Corporation of India reported in (2005) 126 Com.Cases 332. 4.7. Making above submissions, it is requested to allow the present Tax Appeal and answer the questions of law raised in the affirmative and in favour revenue. 4.8. In the alternative it is requested to remand the matter to AO to consider the issue fresh whether the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particularly as per Section 2(5B) of the Interest Tax Act, 1974 ?. The another ancillary question while considering the aforesaid issue / question would be whether the agreements / transactions entered into by the assessee company can be said to be a finance lease or operating lease and thereby it is to be held that the transaction entered into by the assessee company is held to be a financial lease, in that case, the assessee would be liable to pay the interest tax ? 7.0. In all these cases, the learned ITAT had held that the assessee company is not a financial company as per Section 2(5B) of the Interest Tax Act and therefore, not liable to pay any tax under the Interest Tax on lease rental. Hence, present appeals are preferred by the revenue. 8.0. Before we delve into the moot question posed above, it would be apposite to scan through the relevant provisions of the Act. Section 4(2) of the Interest Tax Act is charging Section, which reads as under: Section 4(2): Notwithstanding anything contained subsection( 1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herwise; ( 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 (1 of 1956), to be a Nidhi or Mutual Benefit Society; ( va) a residuary nonbanking company [other than a financial company referred to in subclause ( i ), ( ii ), ( iii ), ( iv ) or ( v )], that is to say, a company which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments or in any other manner; or] ( vi ) a miscellaneous 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 subclauses;] 8.2. During the assessment year, the assessee company used to enter into different transactions / agreements titled as agreement of lease. According to clause III(a) of the Memorandum of Association of the assessee company, the main obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ullpayout, that is, the single lease repays the cost of the asset together with the interest. 9.1. Finally, in para 10, the Hon'ble Supureme Court observed as under: 10.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 equipments 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 above mentioned 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 noncancellable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement to buy goods; the hirer being under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hirepurchase agreements must be distinguished from transactions in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire purchase agreement with the financier, but in substance evidences a loan transaction, subject to a hiring agreement under which the lender is given the licence to seize the goods. 11. Even as per Section 2(5B)(i), Financial Company menas a hire purchase finance company, which carries on, as its principal business, hire purchase transactions or the financing of such transactions and in that case can be said to be a credit institution as per Section 2(5A) (v)of the Interest Tax Act and is subjected to the provision of the Interest Tax Act. Therefore, it is necessary to establish that company carries on business of that nature specified in various sub clauses as its principal business . Therefore, if the assessee had another business which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en a finance lease or a operational lease and whether the principal business of the assessee company would be in all the business as per section 5(B) subclause (i) to (vi) (except 5(A)). What we find from the judgment of the Tribunal is that the learned Tribunal had not examined whether the transactions entered into by the assessee company constitute financial transaction as to attract the provision of Interest Tax Act. Even the nature of the business / principal business carried on by the assessee had not been examined by the learned Tribunal. Whether the assessee was a credit institution as defined in Section 2(5A) of the Interest Tax Act and on the merits of the case whether AO was right in taxing the lease rentals, are all questions which are required to be considered in detail considering the nature of the transactions, clauses mentioned in the agreement and in light of the various decisions of the Hon'ble Supreme Court as well as this Court and other High Courts. As observed herein above, main issue which was required to be considered by the learned Tribunal was whether the transactions / agreements entered into by the assessee company can be said to be a financial l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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