2015 (2) TMI 328 - HC - Income Tax

Interest tax charged on interest received on trade advances - whether advance could not be treated as loan to attract the provisions of the Interest-tax Act? - Held that - Assessee's case does not fall for consideration under sub-clause (iv) of Section 2(5B). The assessee is a credit institution. As a finance company engaged in hire purchase and leasing transaction, the assessee also does not deny that its activities in respect of financing, falls for consideration under sub clause (iv). As rightly pointed out by the assessee, when the payment of money as advance was towards the purchase of machinery, there exists a distinct feature from all those transactions of financing on hire purchase and leasing that an exception has to be made in respect of the amount advanced by the assessee for the purpose of purchase of machinery. On the delay in delivery, the manufacturer had paid interest. As already pointed out, going by the fact - a fact which is not disputed by the Revenue, that the amount given by the assessee was towards the purchase of machinery as advance, we hold that the case of the assessee does not fall for consideration under sub-clause (iv) of Section 5(B). Going by the definition therein, we hold that the trade advance given does not fall under the phrase loan or advance or otherwise so as to cover the nature of transactions herein. - Decided in favour of the assessee.

Summary

Issues:
- Whether interest tax can be charged on interest received on trade advances?

Analysis:
1. Background: The appellant, a finance company, received interest on advances made for purchasing goods during the assessment year 2000-2001. The Assessing Officer brought the interest earned by the appellant to tax, rejecting the claim that it was not on loans and hence not subject to interest tax.

2. Appellate Proceedings: The appellant appealed to the Commissioner of Income Tax (Appeals), who upheld the Assessing Officer's decision. Subsequently, the appellant filed an appeal before the Tribunal challenging the order.

3. Tribunal Decision: The Tribunal allowed the appeal based on the appellant's argument that the advance made was not intended as a loan but for the purchase of machinery, and the interest received was adjusted against the price payable for the goods. The Tribunal relied on a previous decision in the appellant's favor for the assessment year 1994-1995.

4. Legal Contention: The appellant contended that the advance given was not for earning interest or repayment but specifically for purchasing machinery, which distinguished it from typical financing transactions. A Division Bench decision in a similar case supported this argument, emphasizing the distinct nature of the advance for the purchase of machinery.

5. Precedent: Previous Division Bench judgments in the appellant's case for earlier assessment years consistently ruled against the Revenue, supporting the appellant's position. The Senior Standing Counsel for the Revenue acknowledged that the question of law raised was settled by these precedents.

6. Judgment: Considering the consistent legal stance in previous judgments and the specific circumstances of the case, the Court dismissed the appeal, ruling in favor of the appellant and against the Revenue. The Court cited the previous decisions and concluded that the interest tax cannot be charged on interest received on trade advances.