2022 (1) TMI 1165 - HC - Income Tax

Income earned on account of the interest as liable to tax under the Interest Tax Act, 1974 - Reopening of assessment beyond the period of four years as per section 10 of the Interest Tax Act, 1974 - Whether the Appellate Tribunal was right in law in concluding that the interest income as chargeable interest under section 2(7) read with section 2(5B) V-A of the Interest Tax Act, 1974 without considering the Memorandum of the Appellant Company, which does not contain the finance business? - HELD THAT - We find that the expression financial company as defined under section 2(5B) of the Interest Tax Act, 1974, means a company carrying on activities as enumerated in sub-clauses (iv) to (v) thereon. Both the appellate authorities have not set out the sub-clause to the definition of financial company which covers the appellant company. The said aspect relating to identifying the taxable person is an essential criterion for the charge to get attracted. However, the appellate authorities failed to mention the sub-clause to Section 2(5B) of the Interest Tax Act, 1974, under which the appellant would fall. On this score alone, we are inclined to set aside the order of the Tribunal and remand the matter to the Tribunal for fresh consideration. It is apt to refer to the decision of the supreme court in CWT v. Ellis Bridge Gymkhana 1997 (10) TMI 2 - SUPREME COURT in which, it was held that the rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section and no one can be taxed by implication . Thus we set aside the order impugned herein and remand the matter to the Tribunal for fresh consideration. The Tribunal shall examine the facts as regards the activity of the appellant, and set out under which sub clause to the definition of financial company under section 2(5B), the appellant company would fall, so as to attract charge under the Interest Tax Act, 1974 and thereafter, pass appropriate orders. Such an exercise shall be completed within a period of twelve (12) weeks from the date of receipt of a copy of this judgment.

Summary

Issues Involved:
1. Validity of reopening of assessment beyond four years under Section 10 of the Interest Tax Act, 1974.
2. Classification of interest income as chargeable interest under Section 2(7) read with Section 2(5B) V-A of the Interest Tax Act, 1974.
3. Nature of advances given and their classification under the Interest Tax Act, 1974.

Detailed Analysis:

1. Validity of Reopening of Assessment Beyond Four Years:
The appellant contested the legality of the reopening of assessment beyond the period of four years as per Section 10 of the Interest Tax Act, 1974. The court examined whether the reopening was justified and concluded that the reopening was valid. The court noted that the reopening was based on the premise that chargeable interest had escaped assessment, which warranted the issuance of notices under Section 148 read with Section 10 of the Interest Tax Act, 1974.

2. Classification of Interest Income as Chargeable Interest:
The appellant argued that their principal business was not lending and financing, and thus, they did not fall within the purview of the Interest Tax Act, 1974. However, the assessing authority, first appellate authority, and the Tribunal concluded that the interest income earned by the appellant was liable to tax under the Interest Tax Act, 1974. The authorities based their decision on the object of the company as set out in the Memorandum of Association, the nature of business declared in the audit report, and the fact that interest was offered as business income in the returns filed by the appellant. The court found that the appellate authorities treated the appellant as "any other financial company" under Section 2(5A)(iv) of the Interest Tax Act, 1974, qualifying as a "taxable person."

3. Nature of Advances Given:
The appellant contended that the advances given were not in the nature of finance to attract the provisions of clause (ii) or (va) to Section 2(5B) of the Interest Tax Act. The assessing authority, however, treated the appellant as a residuary non-banking finance company under Section 2(5B)(va) of the Interest Tax Act, 1974. The court noted that the authorities failed to specify the sub-clause under which the appellant would fall, which is essential for determining the chargeability under the Act. The court emphasized that the identification of the "taxable person" is crucial for the charge to get attracted and that the appellate authorities did not correctly address this aspect.

Conclusion and Remand:
The court concluded that the appellate authorities erred in not specifying the sub-clause of Section 2(5B) under which the appellant would fall. Citing the Supreme Court decision in CWT v. Ellis Bridge Gymkhana, the court reiterated that clear words must be used in the charging section to tax any person. Consequently, the court set aside the order of the Tribunal and remanded the matter for fresh consideration. The Tribunal was directed to examine the facts regarding the appellant's activities and determine the appropriate sub-clause under Section 2(5B) of the Interest Tax Act, 1974, within twelve weeks. The tax case appeals were disposed of accordingly, with no costs imposed.