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TMI Blog2018 (2) TMI 1966X X X X Extracts X X X X X X X X Extracts X X X X ..... asses of business referred to in the preceding sub clauses. Very clearly, the assessee company was incorporated for carrying on exclusively the business of an investment company and a loan company. All the three principal objects fitted within these two categories. Tribunal therefore correctly held the assessee company to be a financial company. The contention of the counsel for the assessee that not the objects of the company but its real activities during a financial year which should be used as a parameter to decide the status of the company, cannot be accepted. Awaiting other projects, the company has parked its available funds in shares and stocks and yet further surplus was invested in fixed deposits. Accepting the contention as presented before us would lead to a situation where for the purpose of ascertaining whether a company is a financial company or not, its category from year to year would have to be examined ignoring the objects for which the company is incorporated. In turn, would mean for a particular year the company would be a financial company whereas during the later year, it may not fit the description. Clearly something that cannot be easily envisaged. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) Whether in the facts and under the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the appellant is liable to pay interest tax on the interest earned by it? 2. Issue pertains to charging of interest tax in case of the assessee under the Interest Tax act, 1974 ('the Act' for short). 3. Brief facts are as under. 4. Assessee is a company registered under the Companies Act. For the assessment year 1997 98, the assessee had filed the return of income under the Income Tax Act, 1961, but no return was filed under the said Act on the premise that the assessee is not a finance company and in any case has not earned any interest during the relevant year which could be subjected to tax under the said Act. During the course of the assessment of the company under the Income Tax Act, 1961, the Assessing Officer noticed that the company had earned interest income of ₹ 1.70 crores (rounded off) on which tax under the said Act was payable but the company had not filed the return under the said Act. A notice under section 10 of the said Act was therefore issued to the assessee for reassessment of the company's liability un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) rejected the assessee's appeal. He put considerable stress on the nature of activity carried out by the company during the year under consideration rather then the objects of the company contained in the Memorandum of Association. He recorded that the assessee had carried out the activity of investment and purchase and sale of shares and earned considerable interest. In his opinion, therefore, the assessee company was engaged mainly in the activities referred to in section 2(5B) of the Act. 9. The assessee carried the matter further in appeal before the Tribunal. Main ground that the assessee pressed before the Tribunal appears to be of the company not being the financial company. The objects of the company were once again pressed in contention. The Tribunal rejected the assessee's stand. After taking detail note of such objects, the Tribunal observed that when a company has multiple main objects, an individual object may lose significance. The assessee company had listed three main objects which in the opinion of the Tribunal were sufficient to bring the company within the fold of financial company as defined in section 2(5B) of the Act. In the opinion of the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oans and advances and not on the interest on overdue bills. It was held that the amount demanded and calculated by bank in the event of default in regard to overdue bills would not fall within the definition of term 'interest'. IV. In case of Commissioner of Income Tax v. Golden Investments Ltd. reported in [2014] 369 ITR 544 (Mad), the question arose whether the interest earned by a company on debentures would be subjected to tax under the said Act. The Court answered the question in negative and in favour of the assessee. V. In case of Commissioner of Income Tax v. Visisth Chay Vypapar Ltd. reported in [2011] 339 ITR 157 (Delhi), the Division Bench of Delhi High Court in the context of the said Act, interpreted the term 'loan' referred to in section 2(7) of the Act. It was the case in which the assessee had placed intercorporate deposits of ₹ 22 crores at the disposal of one SWC, also a company. The Commissioner (Appeals) had held that the nomenclature of intercorporate deposit was used ornamentally. In order to decide the real nature of transaction, the contract between the parties was looked into and it was held that the transaction was not one of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h tax was expected to have both monetary and fiscal impact as it will raise the cost of borrowed funds and supplement Government revenues. Section (5A) defines the term credit institution as under: [(5A) credit institution means,- (i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) [ x x x x ] (ii) a public financial institution as defined in section 4A of the Companies Act, 1956 (iii) a State financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 and (iv)any other financial company; 14. Clause (iv) of sub section (5A) refers to any other financial company. Since the case of the Revenue is that assessee is a financial company and therefore becomes credit institution, we may refer to the definition of 'financial company' contained in sub section (5B), which reads as under: (5B) financial company means a company, other than a company referred to in sub clause (i), (ii) or (iii) of clause (5A), being- (i) a hire purchase finance company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(5) as to mean the total amount of interest referred to in section 5, computed in the manner laid down in section 6. 16. Section 4 of the Act pertains to charge of tax. Sub section (1) thereof prescribes charging of tax on the chargeable interest at the rate of 7% from every scheduled bank. Sub section (2) of section 4 provides for charging of tax on the chargeable interest from every credit institution at the rate of 3%. 17. Section 5 of the Act pertains to scope of chargeable interest. Section 6 pertains to computation of chargeable interest. 18. In background of the above noted statutory framework, the question is whether the Tribunal was correct in coming to the conclusion that the assessee was the financial company and that the interest earned by the assessee company was chargeable to tax under the said Act. 01.03.18 19. As noted, sub section (2) of section 4 of the Act provides for levy of interest tax at the rate of 3% on the chargeable interest on every credit institution. Term 'credit institution' is defined in sub section (5A) of section 2 of the Act which includes various banking companies and financial institutions. Clause (iv) which is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd expedient and to purchase for investment or resale and to deal in land, house and other properties. As correctly observed by the Tribunal, the main objects of the company may have been divided in three parts. Nevertheless, all three purposes were clearly in the nature of the investment business of the company. The first object directly referred to the business of an investment company which would include investment in and acquisition of shares, bonds, stocks, securities, etc. The second object again was directly in the nature of investing money in personal securities, in land, shares, etc. Such investment can be with individuals, firms, or companies. In the process, if the company would lend money and give advances to such persons to whom the company found expedient. The third main object was also of purchasing for investment or resale and to deal in land and other immovable properties. 21. As noted, the definition of term 'financial company' includes several sub clauses. Sub clause (ii) thereof refers to an investment company i.e. a company which carries on its principal business of acquisition of shares, stocks, bonds, debentures etc. The term 'loan company' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced the portion of the contention of the assessee before the Commissioner of Income Tax (Appeals), recorded by the Commissioner of Income Tax (Appeals). It was argued that the year under consideration was an initial year of the company. No good project was coming forth and therefore in order to avoid keeping the funds idle, the assessee had advanced money and earned interest income and also carried out activities in trading in shares and securities. Thus, clearly even according to the assessee, the interest was earned by advancing its funds. The case now put up before us that such investment was in the nature of a deposit and not by way of advance was never raised earlier. We do not dispute that the term interest defined under section 2(7) of the Act would mean interest on loans and advances and if therefore in a given case it is established that the interest earned by the assessee was not out of either loan or advance but through some other source, the interest tax would not apply to such interest. However, when no such factual dispute was raised, no material on record to hold contrary to what the assessee itself had contended before the Commissioner of Income Tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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