2016 (8) TMI 320 - HC - Income Tax

Finance company within the meaning of Section 2(5B) of the Interest Tax Act - Held that - The principle business of the assessee was in either of the two activities i.e., hire purchase loan business of investment business, the individual activity being less than 50%. The combined percentage of these two activities is 58.67% but by virtue of definition of clause (vi) of the residuary definitions of the Finance Act in section 2(5B), for a miscellaneous finance company, that is to say, a company which carries on exclusively or almost exclusively two or more classes of businesses referred to in the preceding sub-clauses. The percentage of the two activities which is 58.67%, cannot be said to be exclusively or almost exclusively. Therefore, it will not be a miscellaneous company within the meaning of clause (vi) of section 2(5B) of the Act. There is no other provision which is stated to be applicable to the assessee. In these circumstances, it is right in holding that the assessee was not a finance company and not liable to interest tax Act. Appellate tribunal is right in law and on facts in holding that the assessee company is not a finance company within the meaning of Section 2(5B) of the Interest Tax Act

Summary

Issues:
Challenge to judgment of Income Tax Appellate Tribunal regarding classification of company under Interest Tax Act.

Analysis:
1. The Appellant, the Department, challenged the Income Tax Appellate Tribunal's judgment and order dated 26.10.2007 regarding the Assessment Year: 1998-1999. The substantial question of law raised was whether the assessee company qualifies as a finance company under Section 2(5B) of the Interest Tax Act.

2. The CIT (Appeals) had made additions to the total income of the assessee for the assessment year, including interest, bill discounting charges, and hire purchase charges. The Tribunal, in its order dated 26.10.2007, dismissed the Department's appeals and partly allowed the assessee's appeal, concluding that the assessee did not fall under the definition of a company within the meaning of Section 2(5B) of the Interest Tax Act.

3. The Department argued that the assessee should be considered a finance company based on the income from financing activities exceeding 51% of the total income for the Assessment Year: 1998-1999. The Department contended that the principle business of the assessee, involving security trading, broking, and merchant banking, was lower compared to the interest income, making it eligible as a financial company under Section 2(5B) of the Interest Tax Act.

4. On the contrary, the respondent's counsel argued that the Tribunal's decision was well-founded, citing a similar case where it was held that the combined percentage of activities did not meet the criteria of being exclusively or almost exclusively related to finance activities. The Tribunal's findings emphasized that the company's activities did not predominantly fall under the purview of the Interest Tax Act, leading to the conclusion that the assessee was not liable under the Act.

5. After considering the arguments and reviewing the Tribunal's findings, the Court agreed with the Tribunal's decision. The Court concurred that the assessee did not qualify as a company chargeable under the Interest Tax Act based on the percentage of activities and income related to finance activities. Consequently, the issue was resolved in favor of the assessee and against the Department.