2008 (9) TMI 447 - AT - Income Tax

Liability of the assessee company to tax under the Interest-tax Act, 1974 - financial company under the Interest Tax Act, 1974 or not - principal business is claimed to be of leasing, reckoning the same both from the percentage of turnover, or that of the funds employed (asset) wise - Assessee company claims that the leasing business is not among the prescribed businesses u/s 2(5B) of the Act which defines a financial company which could be treated as a Credit Institution u/s 2(5A) chargeable to tax u/s 4 of the Act - Special Bench order. HELD THAT - In the case of Rajath Leasing Finance Ltd. 2003 (10) TMI 293 - ITAT RAJKOT it is held that if the break-up of income under various heads was examined, then, in all the years under consideration, income from lease rentals constituted more than 50 per cent of the total receipts and as the leasing is not an activity which falls under any of the sub-clauses from (i) to (v) of section 2(5B), it cannot be said that the company was carrying on exclusively, or almost exclusively, two or more classes of business referred to in sub-clauses (i) to (v) of section 2(5B) of the Act. Therefore, it was held that the company is not a financial company as defined in section 2(5B) and consequently, it is not a credit institution as envisaged in section 2(5A) of the Act. Since it is not a credit institution as defined in the Act, the assessee-company will be out of the purview of interest-tax under the interest-tax Act, 1974. In the present case, its income and assets being less than 50 per cent, its principal business may not be lease and the provision of Interest-tax Act may not be excluded on this ground of negative test. Further the mere fact that assessee is a public limited company and the Reserve Bank of India has classified it as a Leasing Company may not help the assessee. In our opinion, it cannot be said that the principal business of the assessee was in either of the two activities i.e., hire purchase loan business or investment business, the individual activity being less than 50 per cent. In this view of the matter the assessee cannot be a carrying on leasing as its principal business so as to exclude it from the term 'financial company' unless the theory of largest business is applied to hold it as a 'principal business'. In the present case, if the entire income of the assessee excluding lease is taken into consideration it is 53 per cent (or 46 per cent if we consider the equalization reserve) on income as a base or 58 per cent if assets are taken as a base. These percentages cannot in our opinion be said to be almost exclusively not to speak of exclusively. The assessee-company in such circumstances may not fall into the definition of credit institution as envisaged by either clauses (i) to (va) or clause (vi) of section 2(5B) of the Act. The income in respect of which the same are covered for the purpose of credit institution, also collectively do not form exclusively or almost exclusively the business activities in both the cases, i.e., income/asset wise. There is no reason to restrict the power of the Tribunal u/s 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have right to file an appeal/cross-objections before the Tribunal. Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider the question in order to correctly assess the tax liability of an assessee. When the assessee itself has stated and claimed that it was a finance lease and not operating lease what more facts are required to entertained the ground. In these circumstances there is no merit in assessee's claim that it not a financial company to which the provisions of Interest. Tax Act would apply. It would be a residuary financial company cumulatively engaged almost exclusively in one or more businesses enumerated in section 2(5B) of the Act. On merits of the case the submission of the assessee is that most of the receipts are not interest on loans and advances. It is submitted that section 2(7) of the Interest Tax Act, defines interest to mean interest on loans and advances made in India and includes (a) commitment charges on unutilized portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India. It however excludes (i) interest referred to in sub- section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills. According to the assessee the definition of Interest as per section 2(7) of the Interest Tax Act, 1974 is a restrictive definition since the word used is means and not includes . Lease Income - In our opinion, when a part of the finance lease payment is inherently in the nature of interest inasmuch as it is compensation for time value of money, it could not be termed as not to be 'interest on loans and advances' for its inclusion in chargeable interest under the Interest-tax Act. There is no warrant in saying that merely because a payment is in the nature of interest, it would not mean that it was interest on loans and advances and could not be brought to tax under the Interest-tax Act. It is an interest on 'loan and advances'. Lease rental component attributable to interest, would be includible in 'chargeable interest' under the Interest Tax Act. We therefore set aside the order of the CIT(A) and direct the inclusion of interest portion of receipts imbedded in the lease rental, it being a financial lease. Though the assessee had stated in Income-tax proceedings that it was a case of financial lease and in that case as we have held it would be a case of loan transaction and interest portion of the receipts in lease rentals would be chargeable to tax. The necessary material has not been on record to decide as to how much of interest is included in the instalment. The matter thus requires examination in the light of the above decisions of Sundaram Finance Ltd.'s case 1965 (11) TMI 123 - SUPREME COURT and Deep Hire Purchase (P) Ltd. 2004 (11) TMI 38 - PUNJAB AND HARYANA HIGH COURT . We therefore set aside the matter to be work out the interest portion and bring it to tax. Hire Purchase - first dispute is with regard to income from hire purchase - It was concluded that the transaction was in the nature of contract of hire purchase having an element of bailment as well as that of sale, therefore, the hire purchase transaction in the present case cannot be considered as transactions of money-lending or advancing of loans, and therefore, such hire purchase transactions did not attract the provisions of Interest-tax Act. In Kirloskar Leasing Finance Ltd.'s case 2001 (3) TMI 280 - ITAT PUNE , it is held that the ownership is the deciding factor and where the equipment is sold and ownership is with the hirer, the agreement becomes a loan transaction and where the ownership is with the hiring company or with the leasing company and there is no sale of the equipment, it is a hire agreement and hire transaction or lease transaction. In Visharad Automobiles Financiers (P.) Ltd.'s case 2006 (8) TMI 95 - ITAT, DELHI , it is held that the agreements being hire purchase agreements in accordance with the provisions of Hire Purchase Act, 1972 they could not be treated as financing agreements and hire charges could not be brought to charge under the Interest-tax Act, 1974. We therefore set aside the matter to be examined afresh in the light of aforesaid. Interest from inter-corporate deposits - It might be true that assessees had offered it to tax initially but he claimed it as not taxable and therefore the matter has to be examined on merits and to determine as to whether it is taxable under the Act. We find it is not taxable in the light of the decision in the case of Utkarsh Finance (P.) Ltd. 2005 (11) TMI 167 - ITAT AHMEDABAD-A wherein Tribunal after considering the decision in the case of Federation of Andhra Pradesh Chambers of Commerce Industry v. State of AP 2000 (8) TMI 78 - SUPREME COURT , CIT v. Sahara India Savings Investment Corpn. Ltd. 2003 (9) TMI 74 - ALLAHABAD HIGH COURT and following the decisions in the case of Oriental Insurance Co. Ltd. v. Dy. CIT 2004 (1) TMI 311 - ITAT DELHI-A held that interest on inter-corporate deposits are not chargeable to interest tax, as the deposits are in the nature of loan or advances. In these circumstance we hold that interest on inter-corporate deposits is not an interest on loan or advance and therefore would not be includible in the chargeable interest under the Interest Tax Act. Interest on delayed payment from debtors - Assessee contends that interest from delayed payment from debtors is not on account of interest on loans and advance and hence is not liable to interest tax. We get support from the case of Kerala High Court in State Bank of Travancore holding that character of an overdue bill is not synonymous with loans and advances and, therefore, interest on overdue bills is to be excluded for chargeable interest under the Interest-tax Act. Therefore, we hold that interest on interest on delayed payments would not be an interest on loan or advance and therefore would not be includible in the chargeable interest under the Interest-tax Act. Other interest - The next dispute is that for considering other Interest as income liable for interest tax. It is submitted that this is not in the nature of interest and loans and advances. The amount in very meagre and it is not forming part of principal business of the company and hence it was submitted that the same should be excluded. No specific reason is advanced to demonstrate that other income is not in the nature of interest on loans and advances and hence cannot be covered. The income from bill discounting is covered under interest tax is income. The break up of which is Bill Discounting charges plus Processing fees. The processing fees is not in the nature of interest on loans and advances and hence needs to be excluded. The ld CIT (A) has erred in confirming charging of interest u/s 12A and 12B of the Act. No arguments are raised by the assessee as to why interest is not chargeable. It is consequential and there be modified accordingly. Disallowance of bad debts and provision for bad debts - contention of the assessee is that the company is a finance company and as per the requirements of Reserve Bank of India, the company is lending money in different ways by way of leasing, hire purchase, inter-corporate deposits and bill discounting. The incomes in respect of all these activities are offered for taxation under the head Business income . As this is the business of the company, the company is granting, leasing, hire purchase, inter-corporate deposits or bill discounting in its ordinary course of business. The revenue authorities' claim is these transactions cannot be considered as regular transactions in the business of banking or money lending since they are in respect of bill discounting and inter-corporate deposits. As regards Bill discounting we are not in agreement with the CIT(A) that it cannot be equated with the business of banking or of money lending business. In this activity the finance is provide against bills that are discounted and the income therefrom is appearing in profit and loss account. The mere fact that it is less or not earned this year as on 31-3-2001 does not make any difference so long as the carries the business as an activity. We therefore vacate the order of the revenue authorities on this issue and allow the claim of the assessee. Inter-corporate deposits debts in respect of Mafatlal Industries Ltd. and Precession Fasteners Ltd. the amounts relate to various advances/deposits made by the appellant company which have been made out the deposits received by the appellant itself from various companies including the parent company. Such receipt of advances/deposit, the advancement of the deposits in other concerns is not the business of the assessee and we have held that it in interest tax appeals that these are not loans or advance these cannot be allowed as bad debt arising in money lending business of the assessee. Bad debts claim in hire purchase business which is though, one of the main business of the assessee, the claim u/s 36(1)(vii) r/w section 36(2) cannot be allowed unless a finding is reached that hire purchase business was its financing business and we have set aside this aspect in interest tax appeal, we set aside the issue in these appeals as well and the AO shall also be examine the issue in that direction. Disallowance of Rs. 60,000 towards administrative and other expenses relating the same as expenditure incurred in earning dividend income, which is exempt from tax - HELD THAT - There is no dispute and there cannot be any doubt, that some expenditure is incurred for making or earning the income from dividend. In case of mixed accounting the expenditure is not identified as such, which directly relates to earning of dividend. But that cannot be a ground to say that no expenditure is incurred for earning dividend income or that no expenditure could be related to that Income. Upon hearing both parties and considering material available on record, interest of justice will be served if 10 per cent of the expenditure is allocated for earning dividend and disallowed under Section 14A of the Act. We direct accordingly. Provision made for non-performing assets of Rs. 1,32,12,521 in asst. yr. 2001-02 and Rs. 2,22,96,657 in asst. yr. 2002-03 as per the directives of the RBI - HELD THAT - The decision of Madras High Court in the case of TN. POWER FINANCE AND INFRASTRUCTURE DEVELOPMENT CORPORATION LTD. VERSUS JOINT COMMISSIONER OF INCOME-TAX. 2005 (10) TMI 38 - MADRAS HIGH COURT is on the issue and decides it against the assessee by holding The assessee was not entitled to deduction, in view of the Explanation to Section 36(1)(vii) which says that the provision for bad and doubtful debts made in the accounts of the assessee is not an allowable deduction - the order of the CIT(A) on this issue upheld. Deletion of disallowance of proportionate interest expenses amounting to Rs. 22,77,840 under Section14A of the IT Act - HELD THAT - The observation of the CIT(A) that factual position which was found to be correct with reference to the balance sheet of the relevant financial year, the plea of the assessee company that no borrowed funds have been utilized for the small investment of Rs. 12.17 lacs where income is claimed to be exempt is therefore valid and Justified, cannot be found fault with. The figures shown above which also reflected in the relevant balance sheet do not indicate that the investment made by the assessee are out of borrowed funds, this being so, there is no reason that warrants for interference of the order of the CIT(A) on this issue, which is accordingly upheld, and this ground of Revenue is dismissed. Non-inclusion of lease income of Rs. 4,44.367 in respect of various assets given on lease - HELD THAT - The assessee is subsidiary of Gujarat Gas Company. The report was prepared by a firm of chartered accountants, Ernst and Young on the direction of GGCL for amalgamation and merger for efficient and effective functioning of GGCL and group companies. The charges bill was originally prepared in the name of GGCL, though later on the name of appellant company has been inserted by hand showing C/o GGCL. As this study was not commissioned by the assessee company, this expenditure does not relate to them and has nothing to do with the assessee. It could not be said to have been incurred wholly and exclusively for the carrying on business of the assessee. These findings were not successfully challenged or shown to be wrong in law therefore, considering the reasons given by AO and the CIT(A) we are of the opinion that the Revenue authorities are justified in disallowing the claim. Appeal allowed in part.

Summary

Issues Involved:
1. Whether the assessee company is a financial company under the Interest-tax Act, 1974.
2. Taxability of income from various sources including leasing, hire purchase, government securities, inter-corporate deposits, bill discounting, and bank term deposits.
3. Allowability of bad debts and provisions for bad debts.
4. Disallowance of expenses related to earning exempt income under Section 14A of the IT Act.
5. Disallowance of consultancy fees paid to Ernst and Young.
6. Disallowance of lease equalization.

Detailed Analysis:

1. Financial Company Status Under Interest-tax Act, 1974:
The primary issue was whether the assessee company qualifies as a financial company under the Interest-tax Act, 1974. The assessee claimed its principal business was leasing, constituting 54% of total income, and argued it should not be taxed under the Interest-tax Act. However, the AO and CIT(A) found that the income from hire purchase and investments exceeded the income from leasing, thus qualifying the company as a financial company under Section 2(5B). The Tribunal upheld that the assessee's leasing activities were financial leases, thus making it a financial company liable to interest-tax.

2. Taxability of Various Income Sources:
- Leasing Income: The Tribunal held that income from financial leases is subject to interest-tax, as it constitutes interest on loans and advances.
- Hire Purchase: The Tribunal remanded the case to the AO to determine if hire purchase transactions were genuine or merely financing transactions. Genuine hire purchase transactions were not to be taxed under the Interest-tax Act.
- Government Securities, Inter-Corporate Deposits, and Bill Discounting: The Tribunal upheld that interest from these sources is taxable under the Interest-tax Act, except for inter-corporate deposits, which were deemed not to be loans or advances and thus not taxable.
- Bank Term Deposits and Other Interest: The Tribunal upheld the inclusion of these incomes under chargeable interest.

3. Allowability of Bad Debts and Provisions for Bad Debts:
- Bill Discounting and Hire Purchase: The Tribunal allowed bad debts from bill discounting as it was part of the assessee's regular business. However, it remanded the issue of bad debts from hire purchase to determine if it constituted a financing business.
- Inter-Corporate Deposits: The Tribunal disallowed bad debts from inter-corporate deposits, as they were not considered part of the assessee's regular business activities.

4. Disallowance of Expenses Related to Earning Exempt Income (Section 14A):
The Tribunal upheld the CIT(A)'s decision to disallow Rs. 60,000 in administrative expenses related to earning exempt dividend income, but deleted the disallowance of proportionate interest expenses, as the investments were made from the assessee's own funds and not borrowed funds.

5. Disallowance of Consultancy Fees Paid to Ernst and Young:
The Tribunal upheld the disallowance of consultancy fees paid to Ernst and Young, as the study was commissioned by Gujarat Gas Company Ltd. for the group's restructuring, not specifically for the assessee's business.

6. Disallowance of Lease Equalization:
This ground was not pressed by the assessee at the time of hearing and was dismissed.

Conclusion:
The Tribunal's decision addressed multiple aspects of the assessee's business activities and their tax implications under the Interest-tax Act and IT Act. The key determinations included the classification of the assessee as a financial company, the taxability of various income sources, the allowability of bad debts, and the disallowance of certain expenses. The Tribunal's detailed analysis provided clarity on the application of relevant tax provisions to the assessee's business operations.