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TMI Blog2005 (4) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... NI. JUDGMENT The judgment of the court was delivered by D.A. Mehta J.- The following question is referred by the Income-tax Appellate Tribunal, Ahmedabad Bench "C", under section 256(1) of the Income-tax Act, 1961 ("the Act"), at the instance of the assessee: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee-company was not a financial company within the meaning of clause (c) of Explanation to sub-section (8) of section 40A of the Income-tax Act, 1961, and therefore, the Income-tax Officer was justified in making disallowance from expenditure by way of interest paid by the assessee on deposits?" The assessment year is 1982-83 and the relevant accounting period is the calendar year 1981. The assessee, a private limited company, derives income from business of purchase and sale of shares. While finalising 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and it was stated that the same had to be given due weightage since the RBI took a decision in consultation with the Government of India. Lastly, reference was made to earlier assessments which had become final wherein the assessee had been treated as an investment company. The Judicial Member did not agree with the view of the Accountant Member and held that the provisions of sub-clause (ii) of clause (c) of the Explanation to section 40A(8) of the Act required that for a company to be treated as "investment company" a major part of its income had to be from investments in contradistinction to the income from dealing or trading in shares, stock, debentures, etc. He also referred to various clauses of the memorandum of association, with special reference to clause 66 and the meaning of the term "invest". It was further held that the income from investment should be 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d financial companies and, secondly, to ensure the repayment of the refunds by weeding out the unstable companies. Since banking and financial companies are excluded from the operation of this limitation, it became necessary for the Legislature to define what is a financial company. Therefore, Explanation (c)(ii) was added which said that a financial company means 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, etc. That is it must be an investment company, it must carry on the business of acquisition of shares and, thirdly, that business must be the principal business." Mr. J.P. Shah, learned advocate appearing on behalf of the assessee, read in extenso from the orders of the three members, with special reference to the order of the Accountant Member to submit 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 admitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner of Income-tax and the Tribunal, per majority opinion, had recorded concurrent findings of fact after appreciation of evidence that the assessee-company was a trading company and not a financial company. He referred to and read from the order of the Commissioner of Income-tax and the opinion of the Judicial Member in support of his submissions. Section 40A of the Act as is relevant for the present purposes reads as under: "40A. Expenses or payments not deductible in certain circumstances.-(1) The provisions of this section shall have effect not withstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head 'Profits and gains of business or profession.'... (8) Where the assessee, being a company (other than a banking company or a financial company), incurs any expenditure by way of 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 refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in various sub-sections that follow. Sub-section (8) of section 40A of the Act provides for disallowance of 15 per cent, of expenditure by way of interest in respect of any deposit received by a company. The plain language requires that the said sub-section can be invoked only in the case of a company, not being a banking company or financial company. In other words, a company which is not a banking company or a financial company and has accepted any deposit from any person and pays interest thereon, claims deduction of such interest as an expenditure incurred for the purposes of business, shall not be allowed a deduction to the extent of 15 per cent, of such expenditure. However, by virtue of the bracketed portion certain exceptions are carved out and clause (a) below the Explanation defines "banking company" while clause (c) defines "financial company". Under clause (c) 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 controv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit Society under section 620A of the Companies Act, 1956; lastly, sub-clause (vi) defines a miscellaneous finance company to mean a company which carries on exclusively, or almost exclusively, two more classes of business referred to in the preceding sub-clauses. In each of the categories of finance company there have to be multiple transactions, resulting in turnover of funds and financial instruments. In the absence of such activity there can be no business. Turnover of funds and instruments by its very nature requires inflow and outflow of funds; buying and selling of instruments; floating and termination/maturity of investments or instruments. Thus, it can be seen that each of the categories of a finance company requires financing of transactions and for this purpose, it would need funds, which are acquired by making borrowings on which interest is paid. Such interest 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite conditions for being assessed under any of the specified heads are not fulfilled, can an income be brought to tax under section 56 of the Act. In the present case, admittedly, the assessee-company is chargeable under the head "D" "Profits and gains of business or profession". In the circumstances, there is no question of going to the residual head. Once this is the position, the approach of both the Commissioner of Income-tax and the Tribunal in holding that an investment company cannot deal in shares is against the scheme of the Act. A company which makes investment only for the purposes of yield from the investments cannot be taxed under the head "Profits and gains of business or profession" as the said item, namely, yield by way of dividend or interest from shares or securities would fall within either the head "B", i.e., "Interest on securities" or the head "F" "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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fixed deposit mobilization from the public Chapter III-B of the RBI Act is incorporated and pertains to "Provision relating to non-banking institutions receiving deposits and financial institutions". Under section 45-I of the RBI Act various definitions are given including definition of the terms "business of a non-banking financial institution", "company", "deposit", "financial institution", "non-banking institution", "non-banking financial company", etc. The definitions which are relevant for the present purpose are that of "business of a non-banking financial institution", "financial institution", "non-banking institution" and "non-banking financial company" which respectively read as under: "45-I.(a) 'business of a non-banking financial institution' means carrying on of the business of a financial institution referred to in clause (c) and includes business of a non-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of financial institution means any non-banking institution which carries on as its business or part of its business any of the specified activities and one of them is as provided by sub-clause (ii) (the acquisition of shares, stock, bonds, debentures, or securities issued by a Government or local authority or other marketable securities of a like nature). Under section 45-IA it is provided that no NBFC shall commence or carry on the business of a non-banking financial institution without obtaining a certificate of registration under Chapter III-B of the RBI Act and having the net owned fund as specified. Under section 45-IB every NBFC is required to invest and continue to invest in India in unencumbered approved securities as per valuation and prescribed percentage. Similarly, section 45-IC provides for creation of a reserve fund and maintenance thereof. Under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipment leasing, will be decided after taking together the volume of both these types of business.] Therefore, on a plain reading it becomes apparent that any decision of the RBI which has been arrived at after consultation with the Central Government as to the status of a company, namely, whether it is a financial institution or not; and whether a company which is a financial institution is an investment company or not, would be final in so far as the financial system is concerned. The other parts of the Directions indicate that the powers exercised by the RBI relate not only to the procedural aspect of functioning of the NBFC but more importantly, in relation to its existence as a NBFC and its categorisation and sub-categorisation. The Directions have been issued by the RBI by exercise of powers available under the RBI Act and as noticed, Chapter III-B of the RBI Act has 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here no conflict between the provisions of the RBI Act, the Directions issued by the RBI and section 40A(8) of the Act, but they are enacted to achieve the same object. They are part and parcel of the larger scheme under the financial system/credit system of the national economy and dovetail into each other to attain a common goal. The question that remains to be answered, despite the aforesaid legal position, is as to what is the distinguishing line which can be drawn in the case of investment and trade simpliciter, considering the language employed by the provisions, namely, acquisition of shares or securities, etc. An inherent indication is available in the provision itself. Sub-clause (ii) of clause (c) of the Explanation to section 40A(8) of the Act which defines an "investment company" states that one of the principal businesses could be acquisition of marketable securities 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed it may not necessarily come into existence for the purpose of carrying on a business'. He further observed that 'the objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business'. Apart from showing mere investment, no facts have been brought out in this case to show that the company was-in any way carrying on business in respect of shares. Its position, on the facts placed before us, is in no way different from an individual merely buying shares with a view to holding them for the purpose of earning dividends. No authority has been cited before us that in the case of an individual to acquire and hold shares with the object of receiving dividends is to carry on business. We are unable to hold that if a company does the same, it carried 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he various tests as applicable, on the facts and circumstances of a given case, stand satisfied, the question whether a company could be treated as an investment company or not can be urged to be a question of fact in the light of the findings recorded by the authorities. The Tribunal while dealing with the controversy has placed reliance on various decisions dealing with the definition of "investment company" within the meaning of section 23A of the 1922 Act and hence adopted an incorrect approach. As held by the hon'ble Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120, it is most unsafe to try to arrive at the true meaning of a statutory provision by reference to an interpretation which might have been placed on an earlier statutory provision which is not only couched in different language but is also structurally different. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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