1987 (6) TMI 96 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Commissioner under Section 263(1) of the Income-tax Act, 1961.
2. Classification of the assessee as a financial company under Section 40A(8) of the Income-tax Act, 1961.
3. Application of the principle of ejusdem generis in interpreting the term "otherwise".

Detailed Analysis:

1. Jurisdiction of the Commissioner under Section 263(1) of the Income-tax Act, 1961:
The assessee contended that the order of the Income-tax Officer (ITO) had merged with the order of the Tribunal dated 27-3-1985 in ITA No. 545/Hyd/1984, and therefore, the Commissioner was not empowered to invoke Section 263(1) in respect of this assessment. The Tribunal, however, upheld the jurisdiction of the Commissioner, stating that the question of disallowance of 15% of the interest under Section 40A(8) was not a subject matter of appeal before the appellate authorities. The Tribunal cited the decision of the Andhra Pradesh High Court in CIT v. Vegi Veerinaidu & Sons, which held that the Commissioner had jurisdiction to revise the order of the ITO on an issue not appealed before any appellate authority. Thus, the Tribunal concluded that the Commissioner had valid jurisdiction in this case.

2. Classification of the Assessee as a Financial Company under Section 40A(8) of the Income-tax Act, 1961:
The assessee argued that its business activities fell under the definition of a financial company as per sub-clause (iv) of clause (c) of Explanation to sub-section (8) of Section 40A, which includes companies providing finance by making loans or advances or otherwise. The Commissioner, however, held that the principal business of the assessee was conducting chits, and not providing finance. The Tribunal agreed with the Commissioner, noting that the major component of the assessee's income was from the chit fund business, and the income from loans and advances was minimal. The Tribunal emphasized that the principal business should be that of making loans or advances or providing finance otherwise, which was not the case with the assessee. Therefore, the Tribunal upheld the Commissioner's view that the assessee was not a financial company under Section 40A(8).

3. Application of the Principle of Ejusdem Generis in Interpreting the Term "Otherwise":
The assessee contended that the term "otherwise" in sub-clause (iv) of clause (c) of Explanation to sub-section (8) of Section 40A should include chit fund business. The Tribunal, however, upheld the departmental representative's contention that the principle of ejusdem generis should be applied. This principle requires that the term "otherwise" be interpreted in the context of loans and advances. The Tribunal noted that other methods of financing, such as making deposits for a fixed term, underwriting, or guaranteeing loans, could be included under "otherwise," but not chit fund transactions. The Tribunal concluded that the chit fund business is not a business of loaning funds and thus does not fall under the term "otherwise" in the context of Section 40A(8).

Conclusion:
The Tribunal dismissed the appeal, upholding the Commissioner's order to modify the assessment by disallowing 15% of the expenditure on interest in accordance with the provisions of Section 40A(8). The Tribunal affirmed that the assessee's principal business was conducting chits and not providing finance, and thus, the assessee could not be classified as a financial company for the purposes of Section 40A(8). The Tribunal also applied the principle of ejusdem generis to interpret the term "otherwise," excluding chit fund business from its ambit.