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TMI Blog1987 (6) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax felt that the assessee is not a financial company and does not come under any of the categories enumerated under sub-clauses (i) to (vi) of clause (c) of Explanation to sub-section (8) of section 40A. He also noticed that a sum of Rs. 65,932 representing interest payments on deposits or borrowings had been allowed in full by the Income-tax Officer without disallowing 15% of such expenditure in terms of section 40A(8). Besides, the Commissioner held that the assessee's principal business is that of conducting chits as will be evident from the fact that except for Rs. 3,58,611 being interest earned on advances, the major component of the total income of Rs. 31,11,079 comprised of commission from chit fund business, dividends from own chits and chits with other organisations and also miscellaneous receipts of Rs. 4,00,734. In this view of the matter, he was of the view that the order of the Income-tax Officer suffered from an error prejudicial to the interests of the revenue and, therefore, he directed the Income-tax Officer to modify the assessment by disallowing 15% of the expenditure on interest in accordance with the provisions of section 40A(8). 4. Sri Ch. Partha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty. But, they are only subsidiary objects but not main objects. A perusal of the profit and loss account would reveal that nearly 75% of the income was derived mainly from the chit fund business which is the main object of the company, the balance 25% being referable to the other objects of the company viz. making loans or advances. A perusal of the balance-sheet also would show that as against the assets relating to chit fund amounting to Rs. 3.47 crores, the assets referable to the subsidiary objects viz. making of advances and loans were only of the order of Rs. 0.07 crore. Thus, he submitted that the principal business was not that of making loans or advances and, therefore, the assesses cannot be classified as a financial company in terms of s. 40A(8), read with Explanation (c). Sri Santhanam further submitted that the term ' otherwise ' occurring in sub-cl. (iv) of cl. (c) of Explanation to sub-s. (8) of B. 40A would not include each and every activity within its ambit but must be construed in the context of loans and advances. In other words, the principle of ejusdem generis should be applied in interpreting the term ' otherwise '. 6. Having regard to rival submissions an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other property, to discount bills and securities, to become Sureties and guarantors for any purposes and generally to carry on business as financiers, and merchants and any other business, but the Company shall not carry on the business of Banking as defined in the Banking Regulation Act (X of 1949). 5. To draw, make, issue, accept and to endorse, discount and negotiate Promissory Notes, Hundies, Bills of Exchange, Bills of Lading, Delivery Orders, Warrants, Warehouse-keepers Certificates and other Negotiable or Commercial or mercantile instruments connected with the business of the Company. 6. To borrow or raise or secure the payment of money or to receive money in deposit at interest, for any of the purposes of the Company and at such time or times as may be thought fit, by Promissory Notes, . . ." We take up for consideration whether the assessee's Chit Fund business can appropriately be classified under the activities of " loan company " as defined in the Act. The learned counsel for the assessee pleads that it is a loan company because it provides finances to the prized subscriber whether or not chit subscriptions have been collected from the subscribers ; in other word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subscriber (which means a subscriber entitled to receive the prize amount) who is ascertained either by lot or by tender or by the highest bid offered or by any other mode prescribed in the chit agreement. For these reasons, we hold that the foreman, or for that matter the promoter of a chit, cannot be said to be loaning his or others' funds and, therefore, the assessee company is not a " loan company " in respect of chit business. 3. In terms of Explanation to s. 40A(8), financial company means--- (i) a hire-purchase finance company, that is to say, a company which carries on, as its principle business, hire-purchase transactions or the financing of such transactions ; or (ii) an investment company, that is to say, a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the government or a local authority, or other marketable securities of a like nature ; or (iii) a housing finance company, that is to say, a company which carried on, as its principle business, the business of financing of acquisition or construction of houses, including acquisition or development of land in connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mostly of items referable to chit subscriptions due from prized members, subscriptions in arrears and company's investments on own chits, on vacant chits and on chits with other organisations. A small portion of this total is represented by stock of stationery and stamps and cash and bank balances. Even the Schedule of Loans and Advances amounting to Rs. 0.07 crore (Rs. 6,56,832.11 to be exact) consisted mainly of chit loans of the order of Rs. 0.04 crore (Rs. 4,41,435 to be exact). Thus, on a perusal of both the profit and loss account and the balance-sheet ', the conclusion is irresistible that the principal business of the assessee was not that of making loans or advances or providing finance otherwise. 9. We are not persuaded by the contention of Sri Parthasarathy that the term ' otherwise ' occurring in sub-cl. (iv) of cl. (c) of Explanation to sub-s. (8) of s. 40A would cover the chit fund business. The Legislature in its superior wisdom has used the term ' otherwise ' in juxtaposition with ' loans ' and ' advances '. There is force in the contention of the learned departmental representative that the principle of ejusdem generis should be applied and the term should be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is different from the type of business referred to in sub-paragraph (2) above." In part II of the said directions, certain conditions or restrictions are imposed on the receipt or renewal of deposits and for maintenance of certain registers and also for provision of information in regard to such deposits or the renewals thereof in the report of the Board of Directors of the company. On a perusal of these directions, it can be said that the assessee-company was treated as a financial company for the purpose of the notification, but the question before us is whether it is a financial company as explained in the provision of clause (c) of Explanation to s. 40A(8) of the Income-tax Act, May be it is a Financial concern for the purpose of notification of the Reserve Bank of India cited above, but certainly, for the purpose of Income-tax Act it is not a financial company in the sense of a loan company for the reasons stated in the preceding paragraphs. If the term ' financial company ' had not been defined or explained in the Income-tax Act, perhaps recourse can be had to the notification issued by the Reserve Bank, but when a definition is staring at us in the Income-tax Act, it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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