2008 (2) TMI 441 - AT - Income Tax

Investment Company Not a Credit Institution; Interest Income Not Taxable Under Interest Tax Act.

Shardul Securities Limited. Versus Joint Commissioner Of Income-tax (Osd), Range 3 (3), Mumbai.

Shardul Securities Limited. Versus Joint Commissioner Of Income-tax (Osd), Range 3 (3), Mumbai. - ITD 115, 345, TTJ 117, [2008] 22 SOT 409 (MUM.) Issues Involved:1. Liability of the assessee to pay interest tax under the Interest Tax Act, 1974.2. Classification of the assessee as a 'credit institution' under Section 2(5A) of the Interest Tax Act.3. Determination of the principal business activity of the assessee under Section 2(5B) of the Interest Tax Act.4. Consideration of the assessee as a 'Miscellaneous Finance Company' under Section 2(5B)(vi) of the Interest Tax Act.Issue-wise Detailed Analysis:1. Liability of the Assessee to Pay Interest Tax:The primary issue is whether the assessee, an investment company considered as a Non-Banking Finance Company (NBFC) under RBI guidelines, is liable to pay interest tax under the Interest Tax Act, 1974. The Assessing Officer (AO) issued a notice under Section 10 of the Act, directing the assessee to file a return of chargeable interest. The assessee declared chargeable interest as Nil, contending it was not a 'credit institution' under Section 2(5A) of the Act. The AO, however, assessed the interest income of Rs. 4,08,26,000 as chargeable under the Act, a decision upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].2. Classification as a 'Credit Institution':The definition of 'credit institution' under Section 2(5A) includes banking companies, public financial institutions, State Financial Corporations, and any other financial company. It was undisputed that the assessee did not fall under the first three categories. The contention revolved around whether the assessee could be classified as a 'financial company' under Section 2(5B). The AO and CIT(A) categorized the assessee as an 'investment company' and a 'loan company' under Section 2(5B)(ii) and (iv) respectively. The assessee argued that its principal business was equipment leasing, which does not fall under the specified categories of financial companies.3. Principal Business Activity:The term 'principal business' is pivotal in determining the classification under Section 2(5B). The assessee argued that its main activity was leasing of equipment, which does not qualify as providing finance or acquiring shares, stocks, bonds, etc. The Tribunal noted that 'principal business' refers to the predominant activity, and two activities cannot jointly constitute a principal business. The financial statements indicated that income from leasing was the highest, both in terms of income and employment of funds, compared to loans and advances or investments in shares and securities.4. Miscellaneous Finance Company:The revenue's alternative argument was that the assessee could be classified as a 'Miscellaneous Finance Company' under Section 2(5B)(vi), which includes companies carrying on two or more classes of business referred to in the preceding sub-clauses. The Tribunal rejected this argument, stating that 'exclusively or almost exclusively' implies that the company's business must consist predominantly of activities specified in the preceding sub-clauses. Since the assessee's substantial activity was equipment leasing, it could not be classified as a Miscellaneous Finance Company.Conclusion:The Tribunal concluded that the assessee could not be classified as a 'credit institution' under Section 2(5A) read with Section 2(5B) of the Interest Tax Act. Consequently, the interest earned by the assessee was not chargeable interest under the Act. The orders of the CIT(A) and the AO were quashed, and it was directed that any tax paid by the assessee be refunded. The appeal of the assessee was allowed.