2014 (9) TMI 429 - HC - Income Tax

Interest Tax - Scope of definition u/s 2(5A) of 2(5B) According to AO assessee is a financial corporation advancing loans to other institutions for earning interest - Whether the Tribunal was right in holding that the assessee does not fall within the definition in either Section 2(5A) or 2(5B) of the Interest Tax Act Held that - Though principally the assessee company is embarked in the promotion of industries in the State of Tamil Nadu, it assists and finances any industrial undertaking, project or enterprise; and also grants or guarantees loans or advances to any company, association or concern engaged in any industry - CIT(A) rightly was of the view that the assessee company would come within the purview of financial company in terms of Section 2(5A)(iv) of the Interest Tax Act, which is more fully defined under Section 2(5B) of the Interest Tax Act, is justified. The Tribunal has misdirected itself to conclude that the primary intention of the assessee company is to promote development of industries and not financial company - the facts culled out by the CIT(A) and the claim made by the assessee u/s 36(1)(viii) of the Act make it clear that the character of the assessee company is also a financial company , as defined u/s 2(5B) of the Interest Tax Act - the nature of business conducted by the assessee and the transaction of finance, for which interest has been received for all the assessment years running to several crores of rupees, establishes that the assessee is also engaged in the business of financial company - the interest earned by the assessee company is liable to tax under the provisions of the Interest Tax Act - the assessee is a credit institution falling within the definition of financial company u/s 2(5B) of the Interest Tax Act Decided in favour of revenue.

Summary

Issues Involved:
1. Whether the assessee falls within the definition of "credit institution" under Section 2(5A) or "financial company" under Section 2(5B) of the Interest Tax Act.
2. Whether the assessee is liable to interest tax despite its main objective being the promotion of industry within the state, even though such promotion involves advancing loans.

Detailed Analysis:

Issue 1: Definition of "Credit Institution" and "Financial Company"
The primary issue revolves around whether the assessee qualifies as a "credit institution" or "financial company" under the Interest Tax Act. The Revenue argued that the assessee, by claiming benefits under Section 36(1)(viii) of the Income Tax Act, is engaged in providing long-term finance for industrial or agricultural development, thus falling within the purview of Section 2(5B)(iv) of the Interest Tax Act. The Tribunal, however, held that the assessee does not meet the definition of a "finance company" under Section 2(5B) and thus is not a "credit institution" under Section 2(5A).

The High Court examined the Memorandum and Articles of Association of the assessee company, which included clauses related to aiding, assisting, and financing industrial undertakings and granting loans or advances. The Court noted that the assessee's activities, including deriving substantial income from interest on loans and advances, align with the characteristics of a financial company. The Court concluded that the assessee falls within the definition of a financial company under Section 2(5B) and thus is a credit institution under Section 2(5A).

Issue 2: Liability to Interest Tax
The second issue concerns whether the assessee is liable to pay interest tax given its primary objective of promoting industry within the state. The Tribunal had accepted the assessee's argument that its main objective was industrial promotion, not financial activities. However, the High Court found that the assessee's substantial income from interest on loans and advances indicates that it is engaged in financial activities. The Court emphasized that the assessee's business transactions, including the receipt of interest income, qualify it as a financial company.

The Court also referenced the provisions of the Interest Tax Act, which levy tax on gross interest income of credit institutions, including financial companies engaged in providing finance by making loans or advances. The Court held that the assessee's activities fall within this scope, making it liable for interest tax.

Conclusion
The High Court concluded that the assessee qualifies as a financial company under Section 2(5B) and, consequently, as a credit institution under Section 2(5A) of the Interest Tax Act. Therefore, the assessee is liable to pay interest tax. The Tribunal's decision was overturned, and the appeals were allowed in favor of the Revenue. The Court answered the substantial questions of law against the assessee, emphasizing that the nature of the assessee's business and its substantial interest income establish its liability under the Interest Tax Act.