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C.I.T. Versus Rajat Leasing & Finance Ltd.

2015 (3) TMI 1206 - GUJARAT HIGH COURT

Applicability of provisions of the Interest Tax Act, 1974 and particularly as per Section 2(5B) of the Interest Tax Act, 1974 on the assessee company - principal business - Held that:- In the present case, the learned Tribunal has held that if the breakup of income under the various heads are examined, then in all the years under consideration, income from lease rentals constituted more than 50 percent of the total receipts and as the leasing is not an activity which falls under any of the subcl .....

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by applying the positive test whether it is carrying on as its principal business in either of clauses from (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 consid .....

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tter 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 apportioned as income from financial lease and how much to be assigned as income from the operational lease. On the basis of evidence, the AO is also required to consider the “principal b .....

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y quashed and set aside and the matters are remitted to the file of the AO to consider afresh whether the transaction / lease agreement executed by the assessee company are finance lease or operating lease and to consider “principal business” of the assessee company so as to bring the assessee company within the definition of financial company as per clause subclause (i) to subclause (vi) except (sub clause VA) of Section 2(5B) and consequently to consider whether assessee company can be said to .....

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URT OF INDIA ) as well as relevant circulars issued by the CBDT issued from time to time. - Tax Appeal No. 120 of 2004 With Tax Appeal No. 121 of 2004 To Tax Appeal No. 125 of 2004 With Tax Appeal No. 1036 of 2006 To Tax Appeal No. 1038 of 2006 - Dated:- 17-3-2015 - M. R. Shah And S. H. Vora, JJ. For the Appellant : Pranav G Desai (Advocate) For the Opponent : Swati Soparkar (Advocate) JUDGMENT M. R. Shah, J. 1.0. As common question of law and facts arise in this group of appeals, they are dispo .....

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ing 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 fallin .....

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ter of Tax Appeal Nos. 120 of 2004 to 125 of 2004. Therefore, Tax Appeal No.120 of 2004 be treated as a lead matter and the facts in Tax Appeal No. 120 of 2004 are narrated and considered for the sake of convenience, while deciding the present appeals. 3.1. That the assessee Rajat Leasing and Finance Limited has been registered as non Banking Finance Company with RBI and was entered into Higher Purchase Agreement and giving loan. 3.3. That as the assessee did not file any return of chargeable in .....

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return of chargeable interest. The Chartered Accountant appeared on behalf of the assessee before the AO and made written submissions. It was the case on behalf of the assessee that the assessee is not credit institution within the meaning of Section 2(5A) of the Act. It was also submitted that principal business of the assessee is not in finance and therefore, the assessee is not financial company , within the meaning of Section 2(5B) of the Act also. Therefore, it was the case on behalf of th .....

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ation, finance business was main business. Therefore, the assessee was requested to make submission on the aforesaid point as to what is his principal business and to give details of his lease income, hire purchase income and interest 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 .....

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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 levied the interest tax under the Interest Act for different years as un .....

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ax thereon 91,36,880/- 2,74,106/- 199293 Chargeable Interest 3% interest tax thereon 1,50,57,882/- 4,51,736/- Charge interest under Section 12(1), under Section 12A and 12B. Initiate penalty u/s 13. Issue demand notice, challan and penalty notices for all the years. 3.6. Feeling aggrieved and dissatisfied with the common order dated 13.12.1999 passed by the AOJoint Commissioner of Income Tax, Special Range1, Rajkot for AY 199293 to 199798, by which, levied the interest tax under the Interest Act .....

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tax under the Interest Act, assessee preferred appeals before the learned Income Tax Appellate Tribunal, Rajkot Bench being Interest Tax Appeal No. 1 to 6/RJT/2003 and by impugned common judgment and order, the learned Tribunal has allowed the said appeals by holding that assessee company is not a credit institution as defined under the Act and therefore, the assessee company will be out of the purview of interest tax under the Interest Tax Act, 1974. 3.8. Feeling aggrieved and dissatisfied with .....

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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 transacti .....

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learned Tribunal has materially erred in not considering the CBDT circular no. 738 and 760. It is submitted that in circular no.760 dated 13.1.1998, CBDT has clearly given parameters to decide whether the transaction is a true hire purchase transaction or a financing transaction in the form of a hire purchase transaction. It is submitted that in the aforesaid circular it is specifically opined that if the transactions are in substance in the nature of financial transaction, the hire charges sho .....

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is submitted that as such considering the income of the assessee and the memorandum of Articles of Association the principal business of the assessee can be said to be finance and therefore, the credit institution / financial company and therefore, liable to interest tax. 4.5. It is further submitted that the learned Tribunal has materially erred in applying the negative test. It is submitted that while considering what the constitutes principal business as mentioned in sub clause (i) to (v) of .....

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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 sub .....

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uestions 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 transactions entered into by the assessee are financial transaction or lease / operating agreement and to consider whether the assessee can be said to be a financial company as per the provision of the Interest Tax Act, more particularly, as per Section 2(5B) of the Interest Tax Act or not on considering principal business of .....

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from the lease rental and thereby as rightly held the assessee company not a financial company / institution and thereby not liable to pay interest tax leviable under the Interest Tax Act. It is submitted that the learned Tribunal has rightly considered the transactions / agreements entered into by the assessee as lease / hire purchase agreements and not finance agreements. 5.2. However, Shri Soparkar, learned advocate for the assessee is not in a position to dispute that as such the learned Tr .....

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of its case that the assessee can not been said to be a finance company as per Section 2(5B) of the Act and thereby not liable to pay interest tax and / or whether the transactions entered into by the assessee are finance agreement or operational agreement be kept open. 6.0. Heard the learned advocates for the respective parties at length. In all these appeals the short but an interesting question of law and facts which arises is whether the assessee company can be said to be financial company a .....

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ay 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 r .....

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n is defined in Section 2(5A) in the following manner. Section 2(5A): credit institution means: (i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in Section 51 of that Act). (ii). A public financial institution as defined in Section 4 A of the Companies Act, 1956 (1 of 1956), (iii). a State financial corporation established under section 3 or section 3 A or an institution notified under Section 46 of the St .....

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company, other than a company referred to in subclause ( i), (ii) or (iii) of clause( 5A), being- (I) a hirepurchase 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 company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the Government or a local authority, .....

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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 (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 wh .....

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r 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 object of the company is to carry and undertake as its principal business, the business of finance and trading hire purchase, leasing and in finance lease operation of all kinds, purchasing, selling equipment that the Company may think fit...... AO found the income of the assessee arising under three heads (1) Lease rental (2) Fina .....

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of the Interest Tax Act. 9.0. The Hon'ble Supreme Court in the case of Asea Brown Boveri Limited (supra) had an occasion to consider the identical issue. In the aforesaid decision, the Hon'ble Supreme Court made a distinction between a operational lease and a financial lease and held that in case of financial lease, it is the lessee who, for all practical purposes, is the owner of the asset and not a lessor. It further observed that finance lease, more like a loan. After considering the .....

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not in the asset. He must get his principal back along with interest. Therefore, the lease is noncancellable 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. .....

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e 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 l .....

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the asset and earns interest by way of lease rentals. 10. Thus, the true effect of transaction may be determined from the terms of the agreement considered in light of the surrounding circumstances. In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents. An owner of goods who purports absolutely to convey or acknowledges to have conveyed goods and subsequently purports t .....

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he goods, the property ostensibly passes under the documents embodying, the transaction, but subject to the terms of the hiring agreement, which become part of the buyer's title, and confer a licence to seize. When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transa .....

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arises when the installments are paid and not before. In 'such a hire purchase agreement there is no agreement 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 ente .....

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ction 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 is its principal business the provision of the Interest Tax Act would not apply. To judge as to whether the assessee is a Finace Company or not what is required to be considered is whether it was car .....

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not an activity which falls under any of the subclauses from (i) to (v) of Section 2(5B) of the Act, it cannot be said that the company was carrying on exclusively, or almost exclusively, two or more classes of business referred to in subclauses (i) to (v) of Section 2(5B) of the Act and therefore, the company is not a financial company as defined in Section 2(5B) and consequently, it is not a credit institution as envisaged in Section 2(5A) of the Act. However, what is required to be considere .....

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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 .....

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red 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 .....

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examining the nature of the transaction of agreement could be liable to tax under the Interest Tax Act or not. 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 apportioned as income from financial lease and how much to be assi .....

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