2007 (2) TMI 91 - HC - Income Tax

Rate of Tax Alleged that assessee-bank assessed at the rate of 60% not at 55% on the ground that the major income of assessee-bank is from securities Held that the allegation was not correct and assessee-bank assessed at the rate of 55%

Summary

Issues:
1. Whether the Tribunal was correct in assessing the income of the banking company at a rate of 55% instead of 60%?

Analysis:
1. The main issue in this case is whether the income of the banking company should be assessed at a rate of 55% or 60%. The Commissioner initially assessed the bank at 60% under Section 263 of the Income Tax Act, considering it as an investment company mainly earning interest from securities. However, the Tribunal allowed the appeal, citing a Supreme Court decision that income from securities in a banking business should be considered business income. The Tribunal found a close nexus between the banking business and placing funds in government securities, concluding that the interest earned should be treated as income from business. The Tribunal's decision was based on the compulsion of the bank's business activities and compliance with the Banking Regulation Act.

2. The Revenue argued that the Tribunal erred in treating the bank as an investment company. They referred to a decision defining an investment company based on the type of income, mainly from sources like interest on securities. The Revenue contended that since the bank's income from securities exceeded that from banking, the higher tax rate for investment companies should apply. However, the respondent's counsel relied on a different decision, emphasizing that the bank's activities were primarily related to banking, not investment. They also cited a Bombay High Court decision clarifying that a company cannot be labeled an investment company solely based on income percentages in a particular year.

3. The Tribunal's reasoning was supported by a Supreme Court decision stating that income from investments made by a banking company as part of its banking business should be considered business income. Considering the nature of the bank's activities and the legal framework governing banking operations, the Court rejected the Revenue's argument. The Court emphasized that the bank's status should be determined by its predominant business activity, which, in this case, was banking. Therefore, the Court upheld the Tribunal's decision, confirming the lower tax rate of 55% for the bank's income and rejecting the Revenue's appeal.