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2008 (2) TMI 441 - AT - Income TaxInterest Tax - Liability to Pay Chargeable Interest - Activity of equipment leasing - Financial Company or Not - loans or advances or otherwise within the ambit of sub-clause (iv) of definition clause (5B) - Credit Institution as defined by the provisions of clause (5A) of section 2 read with clause (5B) - business of lease financing trading in shares and securities - Finance lease activity - HELD THAT - This issue arose before the Tribunal in the case of Union Bank of India v. Addl. CIT 2007 (4) TMI 283 - ITAT BOMBAY-E held that Finance Lease though a mode of financial accommodation is a step short of loan or advance. It has also been held that a loan or advance has to be a direct monetary transaction while finance lease is an alternate to loan or advance and therefore finance lease business would not fall within the scope of sub-clause (iv) of definition clause (5B). No other decision has been brought to our notice taking contrary view. Therefore following the same it has to be held that finance lease activity also cannot be brought within the ambit of sub-clause (iv) of definition clause (5B) of the Act . Scope of a Loan Company under sub-clause (iv) of clause (5B) of section 2 of the Act. With reference to the activity as that of an investment company - As compared to the two activities it is seen from the financial statement of the year under consideration that income from leasing business was Rs. 456 lakhs which amounted to 45 per cent of the total income. Similarly the employment of funds in the leased assets amounted to Rs. 1, 610 lakhs which amounts to around 25 per cent of the total funds. This shows that the income as well as employment of funds in the activity of leasing of equipment is much more than the activity of granting loans and advances or the activity of investment in shares debentures securities etc. Therefore we are of the opinion that learned CIT(A) was not justified in holding that the principal business of the assessee was either as that of an loan company or that of an investment company on the basis of financial statement pertaining to the year under consideration. Principal business either as an investment company or as a loan company within the ambit of sub-clauses (ii) and (iv) of definition clause (5B) of section 2 of the Act - The perusal of the financial statement shows that none of the activities can be said to be the principal business activity carried on by the assessee. The details regarding investment in shares debentures and securities shows that by no standard the assessee can be said to be in the business of investment so as to fall within the ambit of sub-clause (ii) of section 2(5B) of the Act inasmuch as the income in each year is below 15 per cent while the investment is below 34 per cent. The other two activities are running parallel to each other income-wise as well as on the basis of employment of funds. In our opinion the said observations of the Hon ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. 1971 (9) TMI 20 - SUPREME COURT would equally apply in determining the principal business activity carried on by the assessee. Therefore following the said judgment it is held that none of the business activity can be said to be the principal business activity of the assessee-company. In the present case the activity of lease financing is a substantial activity carried on by the assessee since substantial earning is made from such activity after employing substantial funds. The income from leasing business was around 40 per cent to 45 per cent and employment of funds in the leasing business was around 20 per cent to 23 per cent. Thus the activity of leasing was substantial activity carried on by the assessee and therefore it cannot be said that assessee was a miscellaneous finance company. Therefore We are of the opinion that assessee-company cannot be said to be a Credit Institution as defined by the provisions of clause (5A) of section 2 read with clause (5B). Consequently the interest earned by the assessee would not form part of the chargeable interest. Thus the assessee would be outside the scope of charging provisions contained in the Act. Consequently the orders of learned CIT(A) as well as AO are therefore quashed. The tax paid by the assessee if any shall be refunded. In the result the appeal of the assessee is allowed.
Issues Involved:
1. Liability of the assessee to pay interest tax under the Interest Tax Act, 1974. 2. Classification of the assessee as a "credit institution" under Section 2(5A) of the Interest Tax Act. 3. Determination of the principal business activity of the assessee under Section 2(5B) of the Interest Tax Act. 4. Consideration of the assessee as a "Miscellaneous Finance Company" under Section 2(5B)(vi) of the Interest Tax Act. Issue-wise Detailed Analysis: 1. Liability of the Assessee to Pay Interest Tax: The primary issue is whether the assessee, an investment company considered as a Non-Banking Finance Company (NBFC) under RBI guidelines, is liable to pay interest tax under the Interest Tax Act, 1974. The Assessing Officer (AO) issued a notice under Section 10 of the Act, directing the assessee to file a return of chargeable interest. The assessee declared chargeable interest as Nil, contending it was not a "credit institution" under Section 2(5A) of the Act. The AO, however, assessed the interest income of Rs. 4,08,26,000 as chargeable under the Act, a decision upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. 2. Classification as a "Credit Institution": The definition of "credit institution" under Section 2(5A) includes banking companies, public financial institutions, State Financial Corporations, and any other financial company. It was undisputed that the assessee did not fall under the first three categories. The contention revolved around whether the assessee could be classified as a "financial company" under Section 2(5B). The AO and CIT(A) categorized the assessee as an "investment company" and a "loan company" under Section 2(5B)(ii) and (iv) respectively. The assessee argued that its principal business was equipment leasing, which does not fall under the specified categories of financial companies. 3. Principal Business Activity: The term "principal business" is pivotal in determining the classification under Section 2(5B). The assessee argued that its main activity was leasing of equipment, which does not qualify as providing finance or acquiring shares, stocks, bonds, etc. The Tribunal noted that "principal business" refers to the predominant activity, and two activities cannot jointly constitute a principal business. The financial statements indicated that income from leasing was the highest, both in terms of income and employment of funds, compared to loans and advances or investments in shares and securities. 4. Miscellaneous Finance Company: The revenue's alternative argument was that the assessee could be classified as a "Miscellaneous Finance Company" under Section 2(5B)(vi), which includes companies carrying on two or more classes of business referred to in the preceding sub-clauses. The Tribunal rejected this argument, stating that "exclusively or almost exclusively" implies that the company's business must consist predominantly of activities specified in the preceding sub-clauses. Since the assessee's substantial activity was equipment leasing, it could not be classified as a Miscellaneous Finance Company. Conclusion: The Tribunal concluded that the assessee could not be classified as a "credit institution" under Section 2(5A) read with Section 2(5B) of the Interest Tax Act. Consequently, the interest earned by the assessee was not chargeable interest under the Act. The orders of the CIT(A) and the AO were quashed, and it was directed that any tax paid by the assessee be refunded. The appeal of the assessee was allowed.
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