2013 (11) TMI 467 - AT - Income Tax

Operating lease or finance lease Whether the assessee company is a financial company under the Interest Tax Act, 1974? Held that - sufficient material is not available on record to give the finding as to whether the assessee is engaged in granting operating lease or finance lease - The assessee has taken contradictory stands in interest tax proceedings and income tax proceedings. In the interest tax proceedings, the assessee is claiming that it is engaged in operating lease but in income tax proceedings, the stand of the assessee is this that the assessee is engaged in granting financial lease - There is no clear cut finding of the lower authorities also in this regard Matter to go back to the file of A.O. for a clear cut decision on this aspect of matter as to whether the assessee is engaged in granting operating lease or finance lease.

Issues Involved:
1. Whether the assessee company is a financial company under the Interest Tax Act, 1974.
2. Which portion of the income/receipts of the assessee company can be considered 'chargeable interest' under the Interest Tax Act, 1974.
3. Whether the leasing activities of the assessee are financial leasing or operating leasing.

Issue-wise Detailed Analysis:

1. Whether the assessee company is a financial company under the Interest Tax Act, 1974:

The Tribunal examined if the assessee company qualifies as a financial company under Section 2(5B) of the Interest Tax Act, 1974. The definition 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 assessee argued that its principal activity is leasing, which is not covered under Section 2(5B). However, the Tribunal noted that clause (iv) of Section 2(5B) includes companies engaged in financial leasing as financial companies. The Tribunal questioned whether the assessee's leasing activities were financial leasing or operating leasing, as this distinction is crucial for determining the applicability of the Interest Tax Act.

2. Which portion of the income/receipts of the assessee company can be considered 'chargeable interest' under the Interest Tax Act, 1974:

The Tribunal considered whether the income from leasing activities should be treated as 'chargeable interest.' The assessee contended that it was engaged in operating leasing, which would not be subject to interest tax. The Revenue, however, argued that the assessee was involved in financial leasing, which is akin to loan transactions and hence chargeable under the Interest Tax Act. The Tribunal reviewed various judicial pronouncements and the definitions provided by the Institute of Chartered Accountants of India (ICAI) to determine the nature of the leasing transactions. The Tribunal noted that if the lease payments cover the full cost of the asset along with interest, it should be classified as financial leasing, making the income chargeable under the Interest Tax Act.

3. Whether the leasing activities of the assessee are financial leasing or operating leasing:

The Tribunal found conflicting evidence regarding the nature of the assessee's leasing activities. The assessee had taken contradictory positions in different proceedings. In income tax proceedings, the assessee claimed to be engaged in financial leasing, while in interest tax proceedings, it claimed to be engaged in operating leasing. The Tribunal emphasized the need for a clear determination of whether the leasing activities were financial or operating leasing. The Tribunal directed the Assessing Officer (A.O.) to examine the nature of the leasing activities thoroughly. The A.O. was instructed to consider the total lease rent, the recovery of the principal amount, and the return on investment to decide whether the leasing activities were financial or operating leasing. The Tribunal also highlighted the importance of grouping other activities such as loan advances and hire purchase into financial or operating categories to determine the principal activity of the assessee.

Conclusion:

The Tribunal set aside the order of the Commissioner of Income Tax (Appeals) and remanded the matter back to the A.O. for a fresh decision. The A.O. was directed to gather complete details and evidence to determine whether the assessee is engaged in financial leasing or operating leasing. The Tribunal emphasized that the principal activity of the assessee must be ascertained before deciding its liability under the Interest Tax Act. The judgments cited by both parties were to be considered during this fresh evaluation. Consequently, the Tribunal left the question referred to it unanswered due to the lack of necessary and relevant facts. The cross appeals of the assessee and the revenue were allowed for statistical purposes.

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