2003 (9) TMI 74 - HC - Income Tax

Interest Tax Act, 1974 - objects for which the company was established - Whether the Tribunal was right in holding that the assessee was not a miscellaneous finance company but a residuary non-banking company? - The principal business of the respondent-company as is evident from the record is to accept deposits under various schemes, and it cannot be said that it carries on exclusively, or almost exclusively, two or more classes of business referred to in clauses (i) to (va) of section 2(5B) - The Tribunal has recorded a finding of fact that the respondent-company was not carrying on any other business except as mentioned in object No.1 of the memorandum of association. Hence, it is not a miscellaneous finance company as defined in the Act. This finding being a finding of fact, cannot be interfered with in this second appeal under section 260A of the Income-tax Act, which is analogous to a second appeal under section 100 of the Civil Procedure Code. There is no force in these appeals and they are therefore dismissed.

Issues Involved:
1. Taxability of the assessee-company under the Interest-tax Act, 1974.
2. Interpretation of the term "interest" under section 2(7) of the Interest-tax Act.
3. Determination of whether the respondent is a financial company under section 2(5B) of the Interest-tax Act.

Detailed Analysis:

1. Taxability of the Assessee-Company under the Interest-tax Act, 1974
The appeals pertain to the taxability of the assessee-company under the Interest-tax Act, 1974. The Act was originally intended to impose a special tax on the total amount of interest received by scheduled banks on loans and advances made in India. However, significant amendments were introduced by the Finance (No.2) Act of 1991, which expanded the scope to include credit institutions. Section 4(2) of the Act, as amended, imposes interest-tax on credit institutions in respect of their chargeable interest.

2. Interpretation of the Term "Interest" under Section 2(7) of the Interest-tax Act
The definition of "interest" in section 2(7) was a point of contention. The earlier definition specifically excluded interest on securities, while the new definition post-1991 does not. The appellant argued that the legislative intent was to include interest on securities within the definition of "interest." However, the court emphasized the principle of strict interpretation of taxing statutes, stating that the literal rule of interpretation applies. The court cited several precedents, including Partington v. Attorney-General and A. V. Fernandez v. State of Kerala, to support the view that only the words used in the statute should be considered, not the legislative intent or spirit. The court concluded that "interest" under the new section 2(7) means interest on loans and advances, and includes two additional categories specified in clauses (a) and (b) of section 2(7).

3. Determination of Whether the Respondent is a Financial Company under Section 2(5B) of the Interest-tax Act
Section 2(5B) defines a financial company and includes various categories such as hire-purchase finance companies, investment companies, housing finance companies, loan companies, mutual benefit finance companies, residuary non-banking companies, and miscellaneous finance companies. The respondent argued that it became a financial company only from the assessment year 1993-94 due to the insertion of clause (va) in section 2(5B). The appellant contended that the respondent was always a financial company under clause (vi) of section 2(5B). The Tribunal observed that the respondent was a residuary non-banking company as per the RBI's directions and was not carrying on any other business except as listed in object No.1 of its memorandum of association. Therefore, it did not satisfy the conditions to be a miscellaneous finance company under section 2(5B)(vi). The court agreed with the Tribunal's view, stating that the respondent's principal business was to accept deposits under various schemes and it did not carry on exclusively, or almost exclusively, two or more classes of business referred to in clauses (i) to (va) of section 2(5B). The finding that the respondent was not a miscellaneous finance company was upheld as a finding of fact, which cannot be interfered with in a second appeal under section 260A of the Income-tax Act.

Conclusion:
The appeals were dismissed, with the court affirming the Tribunal's findings that the respondent-company was not liable to interest-tax prior to the insertion of section 2(5B)(va) and that it was not a financial company under the definitions provided in the Interest-tax Act.

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