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TMI Blog2003 (10) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... evy of interest tax under the Interest-tax Act, 1974 (the Act) by holding the assessee to be a credit institution under section 2(5A) of the Act. Since the assessee had not filed its returns of chargeable interest under the Act, notice under section 10(a) was issued to the assessee. No returns were filed in response to the notice, however, written submissions were made by the assessee claiming that it was not a credit institution as envisaged under section 2(5A) of the Act and was not chargeable to interest tax. The Assessing Officer, on the basis of the information furnished by the assessee, referred to the main object of the Company as set out in its Memorandum of Association, and observed that pursuant to the said object, assessee had given loans and earned interest therefrom. Further, it was admitted by the assessee that it was registered as a Non-banking Finance Company (NBFC for short) with Reserve Bank of India (RBI) and hence, according to the Assessing Officer, the assessee was a finance company. The Assessing Officer also observed that even if there is no money-lending activity, hire purchase and finance loan activities would make the Company a finance company. In support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... @ 3% (Rs.) 1992-93 69,55,946 2,08,678 1993-94 68,38,998 2,05,169 1994-95 60,12,088 1,80,362 1995-96 57,36,493 1,72,094 1996-97 91,36,880 2,74,106 1997-98 1,50,57,882 4,51,736 6. The CIT(A) confirmed the action of the Assessing Officer. In doing so, he referred to the statements issued by the Financial Accounting Standard Board (FASB) explaining the expressions "Capital lease", "Operating lease", "financial lease" and "equipment lease". He also referred to the Accounting Standard 19(AS 19) issued by the Institute of Chartered Accountants of India (ICAI) about finance leasing business. Finally after referring to the various terms and conditions of the agreement entered into by the assessee with its constituents, the CIT(A) held that, in substance, a capital lease or finance lease is a transaction of purchase and sale by instalment and that a long-term non-cancellable lease is a capital or finance lease. He also came to the conclusion that the principal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, but actual business done during each year should be seen. Next, it was contended that nothing turned on the fact that the leased assets were sold at the end of the lease period, as there was no contractual right or obligation on the part of the lessee to buy the asset. The obligation was to return the asset at the end of the lease period. Moreover, it was gross lease rent which was brought to tax. Had it been a financial lease, then only profit element would have been brought to tax. Not only that, by allowing depreciation to the assessee on the leased assets, the department itself had held the assessee to be leasing company. Similarly, creation of Lease Equalisation Fund did not mean that a lease transaction became a loan or a hire-purchase transaction. It was mainly for the presentation of a true and fair view to comply with the matching cost concept. The ld. counsel then took us through a specimen of the lease agreement placed on record, mainly to show that the lease period was non-cancellable, that the right, title and interest were to remain with the lessor during the lease period, that the lessee was under an obligation to deliver back the asset on expiry of the lease pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessees and that it is interest-specific. For the first time it came into effect from 1-8-1974 and remained in force upto 28-1-1978. It was revived from 1-7-1980 and continued upto 31-3-1985. Finance (No.2) Act, 1991 again brought into force the Act with effect from 1-10-1991. The operation of the Act has again been suspended since 1-4-2000. In its last re-incarnation in 1991, the Act was put into operation with added vigour and vitality. During the first tenure of its operation, the Act was applicable only to scheduled banks. During the second tenure, the definition of "scheduled banks" was widened to include institutions like IFCI, IDBI, IRCI and ICICI. In the third tenure, the scope was further widened by amending the charging section 4 to include credit institutions and make them liable to tax. Simultaneously, clause (5A) was added in section 2 to define the term "credit institution". By the term "credit institution" was meant, (i) a banking company to which the Banking Regulation Act, 1949 applied, (ii) a public financial institution as defined in section 4A of the Companies Act, 1956, (iii) a State Financial Corporation, and (iv) any other financial company. Consequently, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he preceding sub-clauses. At the outset, it may be mentioned that for the years under appeal, we are not concerned with clauses (ii), (iii), (v) and(va). Therefore, let us examine whether the assessee is a finance company or not having regard to the provisions of clauses (i), (iv) and (vi). Before we proceed further, we take note of one of the main arguments of the ld. counsel that RBI has classified the assessee company as "equipment leasing company" and hence it is not a finance company. On the very threshold we reject this argument. The reasons follow. Firstly, when a specific definition of the term "finance company" has been given in the Act, we need not refer to the definitions in other enactments. Secondly, if we consider this argument, then the assessee company would be a finance company, because the enactment under which it is classified as "equipment leasing company" is the "Non-Banking Financial Companies (Reserve Bank) Directions, 1977". These Directions are applicable to financial companies other than banking companies. Hence, by applying these directions, assessee becomes a financial company. Thirdly, the definition itself states that "equipment leasing company" mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x, the ld. counsel has relied on the decision in Muthoot Leasing Finance Ltd.'s case. Hence, we shall have to examine as what extent the argument of the ld. counsel is acceptable. 15. Hire Purchase Act, 1972 defines a hire purchase agreement as an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which: (a) possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical instalments; (b) property in the goods is to pass to such person on the payment of last such instalment; and (c) such person has a right to terminate the agreement at any time before the property so passes. Thus, hire purchase, as held in the case of N.K. Leasing Construction (P.) Ltd., has an element of sale in it, but not a concluded element of sale. It merely provides the hirer with an option to buy but does not cast an obligation to buy. Keeping the above principles in view, we have scanned the specimen copy of the hire-purchase agreement placed on record. All the necessary ingredients of a genuine hire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of the term "financial company" given in section 2(5B) of the Act. Firstly, the definition has used the word "means' and not "includes". This indicates that it is an exhaustive definition and not an inclusive definition. Hence, the definition given in the Act cannot be enlarged by rending into it what is not there. A close look at the definition shows that it has specified certain financial activities, which, if they form part of the principal business of a company, will make the company a financial company. The definition does not include leasing activity. Per se, a leasing activity may be a finance activity, but for the purposes of the Act with which we are concerned, if a company is exclusively a leasing company or whose principal activity is that of leasing, then, the company would not be a financial company in terms of section 2(5B) of the Act. The fact that leasing activity is a distinct finance activity from those mentioned in section 2(5B) is also evident from the definitions given in paragraph 2 of the Non-Banking Financial Companies (Reserve Bank) Directions, 1977. In the said directions, definitions of inter alia, hire purchase finance company, investment company ..... X X X X Extracts X X X X X X X X Extracts X X X X
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