9911796707
TMI Blog2005 (4) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... lising the assessment on March 1, 1983, the Assessing Officer held: "2. The provisions of section 40A(8) are not applied as the assessee-company is a financial company (investment company) as defined in clause (c) of section 40A(8)." The Commissioner of Income-tax, Gujarat-I, Ahmedabad (the CIT), felt that the assessee-company was a trading company and the provisions of section 40A(8) of the Act were applicable and hence 15 per cent, of the interest payment was liable to be disallowed and added to the total income. He, therefore, issued notice under section 263 of the Act. The assessee replied on March 20,1985. It was contended that the assessee was a "financial company" within the meaning of Explanation (c) to section 40A(8) of the Act and hence, it was not liable to be hit by the main provision of section 40A(8) of the Act. The assessee also invited attention to section 45 of the Reserve Bank of India's Non-banking Financial Companies (Directions), 1977, to point out that the assessee-company was treated as an investment-company under the said directions, it had been so classified by the Reserve Bank of India (the RBI) and has been registered with the RBI. The Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of "unearned" income and should not partake of the character of "earned" business income. He, therefore, held that regardless of whether the assessee-company is treated as an investment company under the Companies Act, 1956, or by the RBI would be of no relevance and the distinction between dealing in investment and holding an investment had to be borne in mind. Accordingly, he upheld the view of the Commissioner of Income-tax. Referring to the past assessments wherein the assessee was treated as an investment company, the Judicial Member held that this would neither create a bar nor an estoppel against the Revenue to ascertain the true character of the company for computation of its income for the year under consideration, as each assessment, was separate and independent. In the light of the difference of opinion between the Accountant Member and Judicial Member, the appeal was referred on the following point of difference to the Third Member: "Whether the Commissioner of Income-tax erred in setting aside the assessment for the assessment year 1982-83 on the ground that the Income-tax Officer failed to make the disallowance in accordance with section 40A(8) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmit that the majority had committed an error while holding that the principal business of the assessee was dealing in shares and not acquisition of shares. According to him, both the activities were necessary and acquisition of shares was the requirement for the purpose of trading in shares. That it was an admitted fact that the shares were acquired by utilising borrowed funds and considering the market rate of the shares and the dividend yield thereon, it was inconceivable that a person would carry on business of only investing in shares, because the difference in rate of interest qua the yield from the shares would always result in loss; and no person would, in the usual course, enter into a transaction for the purpose of incurring loss. The next submission was that in the earlier assessment years, on identical facts the activity which was identical in nature had been treated in the hands of the assessee as business of investment and the assessee had been treated as an investment company. That the majority view of the Tribunal in brushing aside this aspect of the matter was an incorrect approach. Inviting attention to the documents, with special reference to the communication fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest in respect of any deposit received by it, fifteen per cent, of such expenditure shall not be allowed as a deduction. Explanation.-In this sub-section,- (a) 'banking company' means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in section 51 of that Act; ... (c) 'financial company' means- (i) a hire-purchase finance company, that is to say, a company which carries on, as its principal 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 carries on, as its principal business, the business of financing of acquisition or construction of houses, including acquisition or development of land in connection therewith ; (iv) a loan company, that is to say, a company [not being a company referred to in sub-clauses (i) to (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Explanation to sub-section (8) of section 40A of the Act a "financial company" means-(i) a hire-purchase finance company; (ii) an investment company ; (iii) a housing finance company ; (iv) a loan company ; (v) a mutual benefit finance company ; and (vi) a miscellaneous finance company. The present controversy centers around the definition of an "investment company" as stated in sub-clause (ii) of clause (c) of the Explanation. Date: April 13, 2005: An investment company is a company which carries on the acquisition of shares, stock, bonds, etc., or securities issued by the Government or a local authority, or other marketable securities of a like nature. Therefore, in other words, an investment company can carry on as its principal business the acquisition of shares, stock, etc.; or it could carry on as its principal business securities issued by the Government or a local authority; or it could carry on as its principal business the acquisition of other marketable securities of a like nature. Thus, for a limited company, to be governed by the definition of "investment company" it has to carry on as principal business acquisition of either any one or all the three categor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest is otherwise allowable as a deduction while computing the taxable income under the head "Profits and gains of business or profession". The stipulated percentage of interest is disallowable under section 40A(8) of the Act but a company which is a financial company is kept out of the purview of the non obstante provision by carving out the exception. Therefore, admittedly, each of the companies, which are financial companies, within the meaning of clause (c) of the Explanation would be a company which is carrying on one or the other business. On a conjoint reading of clause (c) with reference to different categories specified in the sub-clauses, it is apparent that a company can carry on business only if there are transactions. When one talks of an "investment company", in the light of the definition which appears under sub-clause (ii) of clause (c) of the Explanation to sub-section (8) of section 40A of the Act one has to bear in mind the placement of the provision. Under Chapter IV which deals with "computation of total income", section 14 of the Act lays down the heads of income. The section provides that all income shall, for the purposes of charge of income-tax and computa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income from other sources". Therefore, the approach adopted by the Commissioner of Income-tax and the Tribunal is against the basic scheme of the Act resulting in a situation whereby both of them have erred in law. The assessee had placed on record the fact that it was treated and registered as an "investment company" by the RBI in the light of the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, 1977 (see [1977] 47 Comp Cas (St.) 138), but except for the Accountant Member, the Judicial Member and the Third Member failed to appreciate the true import of the said approval and registration. It is necessary to take into consideration as to in what circumstances the said provisions have been incorporated. As can be seen from the preamble to the Non-Banking Financial Companies (Reserve Bank) Directions, 1977 (see [1977] 47 Comp Cas (St.) 138), the said Directions have been formulated by the Reserve Bank of India ("the RBI"), in exercise of the powers conferred by sections 45J, 45K and 45L of the Reserve Bank of India Act, 1934 ("the RBI Act"). The purpose and the object of issuing such directions is stated to be that the RBI considered it necessary in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-banking financial company referred to in clause (f) ; 45-I.(c) 'financial institution' means any non-banking institution which carries on as its business or part of its business any of the following activities, namely:- (i) the financing, whether by way of making loans or advances or otherwise, of any activity other than its own; (ii) the acquisition of share, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature; (iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972 (26 of 1972); (iv) the carrying on of any class of insurance business; (v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto; (vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts whether i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 45J of the RBI Act the Reserve Bank has power to regulate or prohibit issue of prospectus or advertisement soliciting deposits of money and under section 45JA, the Reserve Bank is empowered to determine policy and issue directions if it is satisfied that it is necessary to do so in the public interest or to regulate the financial system of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in a manner detrimental to the interest of the depositors, etc. Similarly, under section 45K, the Reserve Bank has power to collect information from non-banking institutions as to deposits and to give directions and under section 45L to call for information from financial institutions and to give directions. It is not necessary for the present to deal with the other provisions of Chapter III-B of the RBI Act but it is necessary to take note of section 45Q which provides that the provisions of Chapter III-B of the RBI Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. In other words, the powers which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an overriding effect. In these circumstances, what would be the effect of a company registered as a NBFC, treated as an investment company by the RBI has to be taken into consideration. The question that would then require to be addressed is whether there is any conflict between the provisions of the Act and the RBI Act as well as the NBFC Directions which have been issued by the RBI in exercise of powers available under the RBI Act. The definition of a "non-banking financial company" under the RBI Act as well as the NBFC Directions, 1977, would make it clear that there is no inconsistency or conflict between the said provisions. In fact under section 45-I(c)(ii) the definition of "financial institution" to mean any non-banking institution which carries on as its business the acquisition of shares, etc., or securities issued by a Government or local authority or other marketable securities of a like nature would go to show that under both the Acts, namely, the RBI Act as well as the Income-tax Act the definitions are identically worded and, therefore, it cannot be successfully urged that the decision by the RBI would have no bearing or relevance while resolving the controversy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities of a like nature. In other words, securities which are in the nature of shares, stock, debentures, etc., or securities issued by a Government. Furthermore, such securities have to be marketable. The concept of marketability cannot be lost sight of when one talks of acquisition of marketable securities. To put it differently, any kind of security as specified in sub-clause (ii) of clause (c) of the Explanation to section 40A(8) of the Act when acquired has to be marketable. It would be a paradox if one ascribes the narrow view adopted by the Tribunal to the term "acquisition" of shares, etc., so as to mean acquiring of shares and securities only for the purposes of receiving dividend or interest therefrom. In these circumstances, there would be no business. In the case of Bengal and Assam Investors Ltd. v. CIT [1966] 59 ITR 547, the apex court was called upon to answer the following question which was in the first instance referred to the High Court of Calcutta under section 66(1) of the Indian Income-tax Act, 1922, by the Appellate Tribunal: "Whether, in the case of the assessee, an investment company, its dividend income is part of its profits and gains chargeable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on business within section 10 of the Act." Therefore, applying the aforesaid principles to the facts of the case, it is apparent that merely because the investments are held as stock-in-trade it would not debar the assessee from being treated as an investment company. The provisions of sections 10 and 12 of the 1922 Act are similar to the provisions of sections 28 and 56 of the 1961 Act. To the contrary, as held by the apex court if the shares were merely bought and held for the purposes of earning dividends it cannot be stated that they were acquired and held with the object of carrying on any business within the meaning of section 10 of the 1922 Act, i.e., section 28 of the Act. Despite the aforesaid legal position, a further issue might arise in the circumstances as to what would amount to a business of investment in contradistinction to a business of trading, with special reference to the nature of the goods, namely, shares and securities. One sure test in this regard could be as to whether the shares and securities are in fact acquired; in other words, whether an assessee has taken delivery of the scrip. In a case where the shares or securities are merely traded so as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Thus, the various decisions on which reliance has been placed by the Tribunal cannot carry the case of the Revenue any further. In the case of Hoystead v. Commr. of Taxation [1926] AC 155 (PC), it has been held that: "Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle. Thirdly, the same principle-namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken." [The above paragraph has been quoted wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
