2001 (6) TMI 169 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of the Interest-tax Act, 1974 to non-financial companies.
2. Definition and scope of "credit institution" and "financial company" under the Interest-tax Act.
3. Interpretation of "deposit" and whether debentures qualify as deposits.
4. Whether the activities of issuing debentures and receiving deposits from employees constitute a business activity for tax purposes.

Issue-wise Detailed Analysis:

1. Applicability of the Interest-tax Act, 1974 to Non-Financial Companies:
The Interest-tax Act, 1974, reintroduced by the Finance (No. 2) Act, 1991, levies tax on the gross interest income of credit institutions, including banks, cooperative societies, public financial institutions, state financial corporations, and financial companies. The main question in these appeals is the applicability of the Interest-tax Act to companies engaged in manufacturing and other non-financial activities, which have issued debentures and received deposits from employees and the public.

2. Definition and Scope of "Credit Institution" and "Financial Company":
Section 2(5A) of the Interest-tax Act defines "credit institution" to include banking companies, public financial institutions, state financial corporations, and other financial companies. Section 2(5B) further defines "financial company" to include seven categories of companies, 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 term "financial company" is crucial, as it determines whether a company falls under the purview of the Interest-tax Act.

3. Interpretation of "Deposit" and Whether Debentures Qualify as Deposits:
The Act does not define "deposit," so its meaning must be derived from commercial understanding. The Revenue authorities argue that debentures are not excluded from the definition of deposits under RBI guidelines and should be treated as deposits. However, the Companies Act treats deposits and debentures separately. Therefore, the tribunal opines that debentures are not deposits in ordinary parlance or for the purposes of the Interest-tax Act.

4. Whether the Activities of Issuing Debentures and Receiving Deposits from Employees Constitute a Business Activity for Tax Purposes:
The tribunal notes that the companies in question are engaged in manufacturing and agricultural activities, not in the business of issuing debentures or receiving deposits. These activities were undertaken to finance their primary business operations, not as a business activity in itself. Clause (va) of section 2(5B) should be read in the context of other clauses, indicating that receiving deposits must be a business activity to qualify a company as a financial company. The tribunal concludes that the companies do not meet this criterion and, therefore, are not financial companies under the Interest-tax Act.

Separate Judgments:
In the Revenue's appeals concerning Nilgiri Plantations Ltd., the CIT(A) granted relief on the grounds that the company's principal business was agricultural, not financial. The tribunal agrees with this assessment, further supporting the conclusion that the company is not a financial company under section 2(5B) and, thus, not subject to the Interest-tax Act.

Conclusion:
The tribunal dismisses the departmental appeals and allows the assessee's appeals, holding that the companies in question are not financial companies under the Interest-tax Act and, therefore, not liable for interest tax.