2012 (11) TMI 888 - HC - Income Tax

Interest Tax Act, 1974 whether assessee is financial company or a credit institution in terms of Section 2(5B), 2(5A) of the Interest Tax Act, 1974 principal business of the assessee - whether the interest earned under the three heads namely, lease charges, hire purchase charges and bill discounting charges were chargeable to tax under Interest Tax Act, 1974. In the Present case, leasing transactions of the assessee constitutes only 29 per cent of the business activity of the assessee company. Therefore, the assessee company cannot passibly be brought within the scope of section 2(5B) clause(iv) of the Act and is not fulfilling the condition that it is carrying on two or more such financial activities to qualify under clauses (i) to (va) of Section 2(5B) of the Act being the exclusive activity of the assessee-company. This is obvious on perusal of the assessment order, which indicates that different activities from which, the assessee has earned income - In such circumstances Tribunal is not in error in concluding that the respondent - company is not liable to tax under the Act as it does not fit into the definition of a financial Company within the scope of any of the clauses of sub-section (5B) of Section 2 of the Act - against revenue. Validity of reopening of the assessment Held that - As the main matter itself has been decided against the revenue, the question relating to reopening of assessments becomes academic and does not survive for an independent answer appeal dismissed answering the substantial question of law in favour of the respondent assessee and against the appellants revenue.

Summary

Issues Involved:

1. Whether the assessee qualifies as a credit institution under Sections 2(5A) and 2(5B) of the Interest Tax Act, 1974.
2. Validity of reopening the assessment (specific to ITA No. 1002/2006).

Issue-Wise Detailed Analysis:

1. Qualification as a Credit Institution:

The primary issue was whether the assessee, a company providing financial services, qualifies as a "credit institution" under Sections 2(5A) and 2(5B) of the Interest Tax Act, 1974. The Tribunal had held that the assessee does not satisfy the requirements of these sections and thus is not liable for tax under the Act.

The revenue argued that the assessee's activities, including leasing transactions and hire charges, should be considered as interest received on loans. They contended that the assessee, being styled as a "financial services limited" and involved in activities like equipment leasing and merchant banking, should fall within the scope of the Act. The revenue also cited the Delhi High Court's decision in CIT v. Motor & General Finance Ltd., which held that a company dealing with equipment leasing is a loan company.

The assessee countered that it does not fit into the definitions of "credit institution" or "financial company" as per Sections 2(5A) and 2(5B) of the Act. They argued that their principal business activities do not align with the categories specified in these sections. The assessee also pointed out that their leasing activity constituted only 29% of their total business, which does not meet the criteria for being classified as a loan company.

The Court examined the definitions and concluded that the assessee does not fit into any of the categories under Section 2(5A) or 2(5B). They noted that the assessee is not a banking company, public financial institution, or state financial corporation. Furthermore, the Court found that the leasing activity, even if considered a loan transaction, was not the principal business activity of the assessee. Therefore, the Court upheld the Tribunal's decision, stating that the assessee is not liable for tax under the Act.

2. Validity of Reopening the Assessment:

This issue was specific to ITA No. 1002/2006, relating to the assessment year 1993-94. The revenue questioned the validity of reopening the assessment. However, since the main matter was decided against the revenue, the question of reopening the assessment became academic and did not require an independent answer.

Conclusion:

The Court dismissed the revenue's appeals, affirming that the assessee does not qualify as a credit institution under Sections 2(5A) and 2(5B) of the Interest Tax Act, 1974. Consequently, the assessee is not liable for tax under the Act. The issue of reopening the assessment in ITA No. 1002/2006 was rendered moot due to the main decision. Both appeals were dismissed, and the substantial question of law was answered in favor of the assessee.