TMI Blog2008 (2) TMI 441X X X X Extracts X X X X X X X X Extracts X X X X ..... use (5B). No other decision has been brought to our notice taking contrary view. Therefore, following the same, it has to be held that finance lease activity also cannot be brought within the ambit of sub-clause (iv) of definition clause (5B) of the Act . Scope of a Loan Company under sub-clause (iv) of clause (5B) of section 2 of the Act. With reference to the activity as that of an investment company - As compared to the two activities, it is seen from the financial statement of the year under consideration that income from leasing business was Rs. 456 lakhs which amounted to 45 per cent of the total income. Similarly, the employment of funds in the leased assets amounted to Rs. 1,610 lakhs which amounts to around 25 per cent of the total funds. This shows that the income as well as employment of funds in the activity of leasing of equipment is much more than the activity of granting loans and advances or the activity of investment in shares, debentures, securities etc. Therefore, we are of the opinion that learned CIT(A) was not justified in holding that the principal business of the assessee was either as that of an loan company or that of an investment company on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial Member And Abraham P. George Accountant Member For the Appellant : Arvind Sonde For the Respondent : Rajeev Nabar ORDER SINGHAL, JUDICIAL MEMBER. 1. The only issue arising in this appeal is whether the assessee is liable to pay interest tax under the provisions of Interest Tax Act, 1974 ('the Act'). 2. Briefly stated the facts are that assessee is an investment company and is considered as Non-Banking Finance Company as per the guidelines of Reserve Bank of India (RBI). No return was filed by the assessee under the provisions of the Act since in its view, the assessee could not be considered as a credit institution within the ambit of definition clause (5A) of section 2 of the Act. However, the Assessing Officer was of the view that assessee was liable to pay interest-tax under the provisions of the aforesaid Act and consequently, issued notice under section 10 of the Act directing the assessee to file the return of chargeable interest for the year under consideration. In response to the said notice, the assessee filed its return declaring chargeable interest at Nil. In the course of assessment proceedings, the assessee company was ask ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y at page Nos. 47 and 48 of the paperbook, it is seen that out of the total income of Rs. 1,007 lakhs, the appellant was having interest income of Rs. 408 lakhs and other income in the form of profit on dealing in investment of Rs. 39.3 lakhs, dividend from subsidiary of Rs. 10 lakhs, dividend from others of Rs. 3.73 lakhs, dividend on current investment of Rs. 34.03 lakhs and miscellaneous income of Rs. 29.65 lakhs which shows that substantial/principal portion of the appellant's income has been earned out of dividend income and interest income, as a result of which, the appellant company is automatically covered under the definition of an Investment Company under clause (i) as well as in the definition of a Loan Company under clause (iv) of sub-section (5B) of section 2 of Interest Tax Act respectively. 3.7 It is further seen from the analysis of Balance Sheet of the appellant that out of total funds of Rs. 6,845 lakhs available with the appellant company as on 31-3-1997, funds amounting to Rs. 488 lakhs were deployed in fixed assets like office premises, computers, furniture and fixtures, vehicle, etc. After excluding the said amount of funds locked up in fixed assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as defined in section 4A of the Companies Act, 1956, Clause (iii) refers to State Financial Corporation and Clause (iv) refers to any other financial company. It was submitted by him that the first three clauses are not applicable to the assessee and there is also no dispute on this aspect. Therefore, the question arises whether the assessee can be said to be a 'Financial Company'. He drew our attention to section 2(5B) which defines 'Financial Company'. Clause (i) refers to Hire Purchase Finance Company. According to him, the assessee is not engaged in the business of Hire Purchase Finance and the Assessing Officer had wrongly observed that assessee is engaged in the hire purchase finance. It was clarified by him that assessee is engaged only in the finance lease business which is entirely different from hire purchase finance. Clause (ii) refers to Investment Company and clause (iv) refers to loan company which have been invoked by the Assessing Officer as well as learned CIT(A) in order to assess the assessee company. Clauses (iii), (v) and (va) are not relevant since neither the Assessing Officer nor the learned CIT(A) has relied on these clauses. Proceeding furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the above categories, then it would fall within the ambit of clause (vi) of section 2(5B) which defines a Miscellaneous Finance Com-pany. According to this clause, 'Miscellaneous Finance Company' means a Company which carries on exclusively or almost exclusively two or more classes of business referred to in the preceding sub-clauses. According to him, the Assessing Officer was justified in holding the assessee company as finance company since two or more activities of the assessee company taken together bring the case of assessee within the ambit of Miscellaneous Finance Company. In reply, the learned Counsel for the assessee has submitted that there is an anomaly in invoking such sub-clause since activity which is not the principal activity would be outside the sub-clauses of clause (5B) and therefore the same cannot be brought within the scope of Miscellaneous Finance Co. If principal activity falls under any of the preceding sub-clauses, then the question of applying sub-clause (vi) would not arise. Further, if any activity does not fall in the preceding sub-clauses and the same is considered for the purpose of sub-clause (vi) then every company would fall within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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; or (vi)a miscellaneous finance company, that is to say, a company which carries on exclusively or almost exclusively. Two or more classes or business referred to in the preceding sub-clauses; 8. The stand of the revenue is that assessee can be said to be financial company as it is 'Investment Company' as well as 'Loan Company' as specified in sub-clauses (ii) and (iv) respectively of clause (5B) of section 2 of the Act. Alternatively, it is the stand of revenue that both the activities mentioned in above two sub-clauses, considered together, would bring the assessee company in sub-clause (vi) i.e. Miscellaneous Finance Company. We are unable to accept the stand of the revenue for the reasons given hereafter. 9. The perusal of definition clause (5B) shows that sub-clauses (i) to (v) refer to the specified activities carried on as principal business. The expression 'Principal business' has not been defined in the Act. As per the Oxford Dictionary, the word 'principal' means - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principal business', the test laid down by the Special Bench would be relevant. 11. Before applying the test of principal business, we would first deal with the issue whether the activity of equipment leasing can be said to be business of providing finance, whether by making loans or advances or otherwise within the ambit of sub-clause (iv) of definition clause (5B).In the case of lease, the equipment is owned by the lessor, which is given on lease for a specific period against lease rent and after the expiry of lease period, the equipment is returned to the lessor. Therefore, such activity, by any stretch of imagination, cannot be treated as an activity of financing. Such lease is called 'Operational lease'. Scope of Finance lease is, however, different. Therefore, question may arise whether finance lease can be brought within the scope of 'Loan Company' as per sub- clause (iv) of clause (5B). This issue arose before the Tribunal in the case of Union Bank of India v. Addl. CIT [2007] 14 SOT 75 (Mum.) wherein it has been held that Finance Lease, though a mode of financial accommodation, is a step short of loan or advance. It has also been held that a loan or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and advances would be Rs. 2,182 lakhs. Further, the details of loans and advances has been given in Schedule 'H' which shows that 166 lakhs is on account of advance income-tax, Rs. 720 lakhs is on account of Sundry deposits and Rs. 234 lakhs is on account of loan to subsidiary. It has been clarified by the assessee that sundry deposits does not relate to the activity of loans and advances since such deposit was given as security deposit to the lessor of immovable property which was taken on lease by the assessee. Therefore, this amount cannot be considered as part of loans and advances. The nature of transaction of deposit is entirely different from the nature of transaction of loans and advances as held by the Tribunal in the case of Oriental Insurance Co. Ltd. v. Dy. CIT [2004] 89 ITD 520 (Delhi). According to this decision, interest tax under the Interest Tax Act, 1974 cannot be levied in respect of interest on deposits. Therefore, such amount of deposit cannot be included. Regarding loan to subsidiary, it is clarified that it is the interest-free loan which is also not part of the business activity and therefore the same also cannot be taken into consideration. Admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in shares, debentures, securities etc. In view of the above discussion, we are of the opinion that learned CIT(A) was not justified in holding that the principal business of the assessee was either as that of an loan company or that of an investment company on the basis of financial statement pertaining to the year under consideration. 13. Let us now examine whether the assessee can be said to carry on the principal business either as an Investment Company or as a Loan Company within the ambit of sub-clauses (ii) and (iv) of definition clause (5B) of section 2 of the Act on the basis of the test laid down by the Special Bench of the Tribunal in the case of Venkateswar Investment Finance (P.) Ltd. (supra). We have gone through the Memorandum of Association appearing at page 5 of the paper book wherein the main object of the company is stated which is to carry on the trading business in various items mentioned in the object clause as well as the business of financing of industrial or other companies and enterprises as well as to lend or advance money to builders and their persons on securities or to grant loans on mortgage of immovable properties and to lend money in all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 577.32 STATEMENT OF APPLICATION OF FUNDS A.Y. 1996-97 A.Y. 1997-98 A.Y. 1998-99 Particulars Amount (Rs. in lakhs) Amount (Rs. in lakhs) Amount (Rs. in lakhs) Fixed Assets (Annexure A) Leased Assets 1,660.64 1,610.57 1,169.92 Other fixed assets 930.57 940.30 1,108.35 Investments (Annexure B) 583.67 1,242.06 1,901.79 Loans Advances On which interest recd. (Annexure C) 1,653.91 1,061.16 641.41 Other (Annexure D) 1,852.29 1,121.03 780.40 Net Current Assets 328.69 789.59 -90.22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income (in lakhs) Percentage (%) Employment of Funds (in lakhs) Percentage (%) As Investment Company A.Y. 1996-97 186.34 15% 583.67 8.21% A.Y. 1997-98 87.12 9% (approx.) 1242.06 18.14% A.Y. 1998-99 68.64 12% (approx.) 1901.79 34.13% As Loan Company A.Y. 1996-97 477.71 38.97% 1653.91 23.26% A.Y. 1997-98 408.26 40.54% 1061.16 15.50% A.Y. 1998-99 220.39 38.17% 641.41 11.51% Income (in lakhs) Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession 'loans and advances' as held by the Tribunal in the case of Oriental Insurance Co. Ltd. (supra). Advance income-tax also cannot be treated in the nature of loans. Loans to subsidiary company are given as interest-free loan to meet the financial crises. Though, it is in the nature of loan but the same cannot be said to be part of the business activity within the ambit of sub-clause (iv) of section 2(5B) of the Act since it is a interest-free loan. 16. Let us now consider the contention of the revenue that the case of the assessee would fall within the ambit of Miscellaneous Finance Company defined in sub-clause (vi) of section 2(5B) which reads as under : 2(5B) (i) to (v) * * * * * * (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 sub-clauses . According to the learned D.R., if two or more activities referred to in the preceding sub-clauses which are carried on by the assessee are considered together then such activities taken together would constitute principal/pre-dominant business of the assessee which would bring the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces which are specified activities in the preceding sub-clauses. Independently, each activity may not be treated as principal business of the assessee company but considered together would amount to carrying on the business exclusively in two or more activities referred to in the preceding sub-clauses. In such cases, the company would be considered as Miscellaneous Finance Company. Further, there may be a case where in addition to above three business activities, the assessee may be carrying on an insignificant activity which is not referred in the preceding sub-clauses. In such cases, it would be a case of a company which carries on almost exclusively two or more classes of the business referred to in the preceding sub-clauses. However, if the fourth activity is not insignificant but is a substantial activity then such company would not fall within the ambit of Miscellaneous Finance Company. In the present case, the activity of lease financing is a substantial activity carried on by the assessee since substantial earning is made from such activity after employing substantial funds. The income from leasing business was around 40 per cent to 45 per cent and employment of funds in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
