2002 (2) TMI 314 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee-company qualifies as an "investment company" under section 2(5B) of the Interest-tax Act.
2. Whether the assessee-company can be considered a "credit institution" liable for interest tax under section 4(2) of the Interest-tax Act.
3. The relevance of the assessee-company's role as a holding company and agent of the State Government in determining its tax liability.
4. Applicability of the Kerala High Court's decision in the case of CIT v. South Indian Bank Ltd. to the assessee-company's situation.

Detailed Analysis:

1. Investment Company Classification:
The Assessing Officer categorized the assessee-company as an "investment company" based on its Memorandum of Association, which allowed it to carry on the business of acquiring shares, stocks, bonds, debentures, or securities. However, the Commissioner (Appeals) and the Tribunal found that the true nature of the assessee-company's activities could not be determined solely based on these enabling provisions. The Commissioner (Appeals) emphasized that the principal business of the company should be the acquisition of stocks and shares, which was not the case here. The assessee-company did not engage in the sale of shares during the relevant years, and its investments were aimed at promoting public sector concerns rather than generating profit. Therefore, it was concluded that the assessee-company did not qualify as an "investment company."

2. Credit Institution Status:
The Assessing Officer's view that the assessee-company fell under the category of a "credit institution" was challenged. The Commissioner (Appeals) and the Tribunal noted that the assessee-company's role was limited to acting as a channel for disbursing funds from the Kerala Government to its subsidiary companies, following the Government's directions. The interest received from these loans was not retained by the assessee-company but was credited to the State Government. Consequently, the assessee-company was not operating as a financial institution with the discretion to manage its funds, set interest rates, or determine loan terms. Thus, it was not liable for interest tax as a credit institution.

3. Role as Holding Company and Government Agent:
The Tribunal confirmed that the assessee-company was established by the Kerala Government to manage state-owned industrial enterprises and act as a holding company. The funds disbursed to subsidiary companies were provided by the Government, and the assessee-company merely executed the Government's directions. The interest collected was credited back to the Government, and the assessee-company did not benefit from these transactions. This role as a government agent was pivotal in determining that the assessee-company was not conducting the business of an investment company or credit institution.

4. Applicability of South Indian Bank Ltd. Case:
The Commissioner (Appeals) relied on the Kerala High Court's decision in CIT v. South Indian Bank Ltd., which held that amounts collected as interest by an agent could not be assessed in the agent's hands. The Tribunal upheld this view, noting that the assessee-company acted as a collecting agent for the State Government and did not retain the interest collected from subsidiary companies. This case supported the conclusion that the assessee-company was not liable for interest tax.

Conclusion:
The Tribunal dismissed the revenue's appeals, affirming that the assessee-company was neither an investment company nor a credit institution under the Interest-tax Act. The assessee-company's role as a holding company and agent of the Kerala Government, along with the findings from the South Indian Bank Ltd. case, were critical in reaching this decision.