2018 (2) TMI 1966 - HC - Income Tax

Liability to pay interest tax on the interest earned - whether the company does not fall within the definition of term financial company as defined in section 2(5B) under the Interest Tax act, 1974 ? - whether the Tribunal was correct in coming to the conclusion that the assessee was the financial company and that the interest earned by the assessee company was chargeable to tax under the said Act? - HELD THAT - Definition of term 'financial company' includes several sub clauses. Sub clause (ii) thereof refers to an investment company i.e. a company which carries on its principal business of acquisition of shares, stocks, bonds, debentures etc. The term 'loan company' is included in sub clause (iv) which would include a company which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise. As noted, sub clause (vi) would bring within the fold of the term financial company, a miscellaneous finance company, viz. a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub clauses. Very clearly, the assessee company was incorporated for carrying on exclusively the business of an investment company and a loan company. All the three principal objects fitted within these two categories. Tribunal therefore correctly held the assessee company to be a financial company. The contention of the counsel for the assessee that not the objects of the company but its real activities during a financial year which should be used as a parameter to decide the status of the company, cannot be accepted. Awaiting other projects, the company has parked its available funds in shares and stocks and yet further surplus was invested in fixed deposits. Accepting the contention as presented before us would lead to a situation where for the purpose of ascertaining whether a company is a financial company or not, its category from year to year would have to be examined ignoring the objects for which the company is incorporated. In turn, would mean for a particular year the company would be a financial company whereas during the later year, it may not fit the description. Clearly something that cannot be easily envisaged. Whether the interest earned by the assessee company can still be taxed under the said Act? - In this context, the contention of the counsel for the Revenue, we may recall that the interest was not earned by the company on any loan or advance made but was generated out of its deposits. We are conscious of a clear distinction between a loan or an advance and a deposit. This has been elaborately discussed by Delhi High Court in case of Visisth Chay Vypapar Ltd. 2011 (8) TMI 783 - DELHI HIGH COURT . Had adequate facts being brought on record, in this respect, we would have analyzed such material. However, this appears to be an argument raised for the first time. In fact, the stand of the assessee before the lower authorities was evidently different. We have reproduced the portion of the contention of the assessee before the Commissioner of Income Tax (Appeals), recorded by the CIT (Appeals). As argued that the year under consideration was an initial year of the company. No good project was coming forth and therefore in order to avoid keeping the funds idle, the assessee had advanced money and earned interest income and also carried out activities in trading in shares and securities. Thus, clearly even according to the assessee, the interest was earned by advancing its funds. The case now put up before us that such investment was in the nature of a deposit and not by way of advance was never raised earlier. We do not dispute that the term interest defined under section 2(7) of the Act would mean interest on loans and advances and if therefore in a given case it is established that the interest earned by the assessee was not out of either loan or advance but through some other source, the interest tax would not apply to such interest. When no such factual dispute was raised, no material on record to hold contrary to what the assessee itself had contended before the Commissioner of Income Tax (Appeals), the contention of the counsel for the assessee must be rejected.

Summary

Issues Involved:
1. Liability to pay interest tax on interest earned by the assessee.
2. Definition and classification of the assessee as a financial company under the Interest Tax Act, 1974.
3. Nature of interest income and its taxability under the Interest Tax Act, 1974.

Issue-wise Detailed Analysis:

1. Liability to Pay Interest Tax:
The primary issue was whether the assessee was liable to pay interest tax on the interest earned. The Court framed the substantial question of law: "Whether in the facts and under the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the appellant is liable to pay interest tax on the interest earned by it?"

2. Definition and Classification as a Financial Company:
The assessee contended that it was not a financial company and thus not liable under the Interest Tax Act, 1974. The company's primary objects, as per its Memorandum of Association, included carrying on the business of an investment company, investing in securities, and advancing money. The Assessing Officer and subsequent authorities classified the assessee as a financial company under section 2(5B) of the Act, which includes investment companies and loan companies. The Tribunal upheld this classification, noting that the assessee's activities and primary objects aligned with the definition of a financial company.

3. Nature of Interest Income and its Taxability:
The assessee argued that the interest income was not from loans or advances but from deposits, which should not be taxable under the Act. However, this argument was raised for the first time before the High Court. Previously, the assessee had contended that the interest was earned by advancing money to avoid idle funds. The Court noted that the term "interest" under section 2(7) of the Act refers to interest on loans and advances. Since the assessee had not raised the deposit argument earlier and no factual evidence was provided to support this new claim, the Court rejected the contention.

Statutory Provisions and Judicial Precedents:
The Court examined relevant statutory provisions, including sections 2(5A), 2(5B), 2(7), and 4 of the Interest Tax Act, 1974. It also referred to various judicial precedents to interpret the definitions and applicability of the Act. The Court noted that the definition of a financial company includes entities primarily engaged in investment and loan activities, which matched the assessee's objects and activities.

Conclusion:
The High Court concluded that the Tribunal correctly classified the assessee as a financial company and that the interest earned was liable to tax under the Interest Tax Act, 1974. The argument that the interest was from deposits and not loans or advances was dismissed due to lack of prior contention and supporting evidence. The appeal was thus dismissed, and the question was answered against the assessee.