2015 (3) TMI 1206 - HC - Income Tax

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 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 sub-clauses (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 considered as to whether the assessee is a finance company 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 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 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 business of the assessee company so as to bring the assessee company as financial company as per subclause (i) to subclause (vi) except (sub clause V) of Section 2 (5B). Some of the findings are findings of fact, others have given rise to the substantial question of law. Therefore, we are of the view that the matters need reconsideration in accordance with law by the AO. Thus all these appeals are allowed. The impugned common judgment and order passed by the learned Tribunal is / are hereby 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 be financial company , as per the Section 2(5B) of the Interest Tax Act, 1974 and whether the assessee company is liable to pay tax under the Interest Tax Act on the component of lease rental ? All the contentions which may be available to the respective parties are kept open, to be considered by the AO in accordance with law and on merits, more particularly, considering the observations made by the Hon ble Supreme Court in the case of Asea Brown Boveri Limited (2004 (10) TMI 325 - SUPREME COURT OF INDIA ) as well as relevant circulars issued by the CBDT issued from time to time.

Summary

Issues Involved:
1. Whether the assessee company is a financial company as per the provisions of the Interest Tax Act, 1974, particularly Section 2(5B).
2. Whether the assessee company is 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.
3. Whether the hire purchase charges fall within the ambit of the Interest Tax Act, 1974.

Detailed Analysis:

Issue 1: Whether the assessee company is a financial company as per the provisions of the Interest Tax Act, 1974, particularly Section 2(5B).

The court examined whether the assessee company qualifies as a "financial company" under Section 2(5B) of the Interest Tax Act, 1974. The assessee argued that its principal business was not finance, but rather leasing and hire purchase, and hence it should not be classified as a financial company liable to pay interest tax. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, concluding that the company's primary business activities were financial in nature, thus subjecting it to the provisions of the Interest Tax Act.

The Income Tax Appellate Tribunal (ITAT) reversed the AO and CIT(A)'s decision, holding that the assessee company was not a financial company under Section 2(5B). The ITAT's decision was based on the income breakdown, where more than 50% of the income was from lease rentals, which do not fall under any subclauses of Section 2(5B).

The High Court, however, found that the ITAT had not adequately considered whether the transactions were financial leases or operating leases, nor had it fully examined the principal business of the assessee. The court emphasized that the nature of the transactions and the principal business must be analyzed in detail, considering past history, current business, and income breakdown.

Issue 2: Whether the assessee company is 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.

The court noted that the ITAT did not apply the positive test to determine whether the assessee was carrying on its principal business in any of the classes mentioned in subclauses (i) to (v) of Section 2(5B). The court highlighted that the principal business determination should consider various factors, including past history, current business activities, and income breakdown, rather than solely relying on the income from a particular year.

The court found that the ITAT failed to examine whether the transactions entered into by the assessee constituted financial transactions, which would bring the assessee within the definition of a financial company under Section 2(5B). The court remanded the matter to the AO to reconsider whether the transactions were financial leases or operating leases and to determine the principal business of the assessee.

Issue 3: Whether the hire purchase charges fall within the ambit of the Interest Tax Act, 1974.

The court referred to the Supreme Court's decision in Asea Brown Boveri Limited, which distinguished between financial leases and operating leases. The court observed that in a financial lease, the lessee is, for all practical purposes, the owner of the asset, and the lease is akin to a loan transaction where the lessor finances the asset and earns interest through lease rentals.

The court found that the ITAT had not adequately examined whether the hire purchase charges constituted interest income subject to the Interest Tax Act. The court remanded the matter to the AO to determine whether the hire purchase transactions were financial in nature and thus subject to interest tax.

Conclusion:

The High Court set aside the ITAT's judgment and remanded the matters to the AO for a fresh examination. The AO was directed to determine whether the transactions were financial leases or operating leases, the principal business of the assessee, and whether the assessee qualifies as a financial company under Section 2(5B) of the Interest Tax Act. The AO was instructed to complete this exercise within six months, considering the Supreme Court's observations and relevant CBDT circulars. All contentions available to the parties were kept open for consideration by the AO.