2003 (10) TMI 293 - AT - Income Tax

Summary

Issues Involved:
1. Re-opening of the assessment.
2. Levy of interest tax under the Interest-tax Act, 1974.
3. Classification of the assessee as a credit institution under section 2(5A) of the Interest-tax Act.
4. Determination of whether the assessee is a financial company under section 2(5B) of the Interest-tax Act.
5. Computation of total interest chargeable to tax.
6. Levy of interest under sections 12(1), 12A, and 12B of the Interest-tax Act.

Issue-wise Detailed Analysis:

1. Re-opening of the assessment:
The assessee raised a ground before the CIT(A) challenging the re-opening of the assessment. However, this ground was not adjudicated upon by the CIT(A) and no arguments were advanced before the CIT(A) or the Tribunal. Consequently, the Tribunal presumed that the assessee was not serious in pursuing this ground and did not deal with it.

2. Levy of interest tax under the Interest-tax Act, 1974:
The assessee challenged the levy of interest tax by claiming it was not a credit institution under section 2(5A) of the Act. The Assessing Officer (AO) issued a notice under section 10(a) due to the non-filing of returns of chargeable interest. The AO determined the assessee to be a finance company based on its registration as a Non-banking Finance Company (NBFC) with the Reserve Bank of India (RBI) and its activities involving loans and earning interest. The AO referred to Circulars No.738 and No.760 to support this view.

3. Classification of the assessee as a credit institution under section 2(5A) of the Interest-tax Act:
The AO observed that the assessee earned income mainly from lease rentals, finance charges on hire purchase, and interest on loans. The AO held that the latter two clearly made the assessee a finance company. The CIT(A) confirmed this view, referring to various accounting standards and concluding that the principal business of the assessee was that of a finance company, thus making it a credit institution under section 2(5A).

4. Determination of whether the assessee is a financial company under section 2(5B) of the Interest-tax Act:
The Tribunal examined whether the assessee was a financial company as defined in section 2(5B). The assessee argued that it was classified by the RBI as an "Equipment Leasing Company" and not a financial company. The Tribunal rejected this argument, stating that the specific definition in the Interest-tax Act takes precedence. The Tribunal concluded that leasing activity is not included in the definition of a financial company under section 2(5B), and therefore, the assessee was not a financial company.

5. Computation of total interest chargeable to tax:
The AO computed the total interest chargeable to tax by including interest on loans, finance charges on hire purchase, and a portion of lease rentals. The AO determined the interest element in lease rentals based on a 20% interest rate, taking 1/6th of the lease rental as interest income. The Tribunal, however, held that lease rentals are not subject to interest tax as leasing is not a financial activity under section 2(5B).

6. Levy of interest under sections 12(1), 12A, and 12B of the Interest-tax Act:
The Tribunal directed the AO to give consequential relief to the assessee regarding the levy of interest under sections 12(1), 12A, and 12B of the Act.

Conclusion:
The Tribunal allowed all six appeals of the assessee, holding that the assessee was not a financial company under section 2(5B) and thus not a credit institution under section 2(5A) of the Interest-tax Act. Consequently, the assessee was not liable to interest tax under the Interest-tax Act, 1974.