2011 (7) TMI 507 - HC - Income Tax

Interest tax - Whether in the facts and circumstances of the case, the Tribunal was right in holding that interest tax cannot be charged on interest received on advances to dealers and suppliers - the assessee s case does not fall for consideration under sub-clause (iv) of Section 2(5B) - The assessee is a credit institution - As a finance company engaged in hire purchase and leasing transaction, the assessee also does not deny that its activities in respect of financing, falls for consideration under sub clause (iv) - The Assessing Officer has assessed the transactions relating to hire purchase financing - the assessee s case does not fall for consideration under sub-clause (iv) of Section 2(5B) - The assessee is a credit institution - As a finance company engaged in hire purchase and leasing transaction, the assessee also does not deny that its activities in respect of financing, falls for consideration under sub clause (iv) - However, as rightly pointed out by the assessee, when the payment of money as advance was towards the purchase of machinery, there exists a distinct feature from all those transactions of financing on hire purchase and leasing that an exception has to be made in respect of the amount advanced by the assessee for the purpose of purchase of machinery - On the delay in delivery, the manufacturer had paid interest - As already pointed out, going by the fact - a fact which is not disputed by the Revenue, that the amount given by the assessee was towards the purchase of machinery as advance, held that the case of the assessee does not fall for consideration under sub-clause (iv) of Section 5(B) - Therefore no hesitation in holding that the Interest Tax Act does not stand attracted to the facts of the case. On the admitted facts, the assessee had financed for the purpose of purchase of machinery - Decided against the assessee.

Issues Involved:
1. Whether interest tax can be charged on interest received on advances to dealers and suppliers.
2. Whether interest tax can be levied on interest from bonds.

Issue 1: Interest on Advances to Dealers and Suppliers

The Revenue appealed against the Income Tax Appellate Tribunal's decision, which held that interest tax cannot be charged on interest received on advances to dealers and suppliers. The case pertains to the assessment year 1994-95, involving a finance company that received interest on an advance made to a manufacturer for purchasing goods under a hire purchase/lease agreement. The Assessing Officer considered these advances as loans, making the interest earned taxable under the Interest Tax Act, 1974. However, the assessee argued that the advances were trade advances for purchasing machinery, not loans, and thus should not attract interest tax. The Tribunal agreed with the assessee, noting that the advances were meant for purchasing goods and were adjusted against the purchase price, not intended as loans. Therefore, the interest on these trade advances did not fall within the purview of the Interest Tax Act.

The Revenue contended that as a credit institution, the interest charged on any advance should be taxable. However, the court distinguished between loans and trade advances, referencing previous judgments that elucidated the difference between loans and deposits. The court concluded that the trade advances made by the assessee for purchasing machinery did not constitute loans or advances as defined under the Interest Tax Act. Consequently, the interest on these advances was not subject to interest tax, and the Tribunal's decision was upheld.

Issue 2: Interest from Bonds

Both parties agreed that the issue of whether interest tax can be levied on interest from bonds required a remand for further factual examination. The court referenced decisions in Eastman Industries Ltd. vs. Deputy Commissioner of Income Tax and Commissioner of Income Tax vs. Corporation Bank, which were relevant to determining whether the interest was from Government Securities. The Tribunal's order on this issue was set aside, and the matter was remanded back to the Tribunal to ascertain the factual position regarding the nature of the securities held by the assessee.

Conclusion:

The court held that the Interest Tax Act did not apply to the interest received on trade advances for purchasing machinery, as these advances were not loans. Thus, the first question was answered in favor of the assessee. However, regarding the interest from bonds, the issue was remanded to the Tribunal for further examination. The Tax Case was allowed in part, with the first question resolved in favor of the Revenue and the second question requiring further investigation.

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