TaxTMI 
TaxTMI 
2008 (12) TMI 243
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....g to Rs. 33,12,880 and the same was added to interest chargeable to tax. An appeal was filed by the assessee before the CIT(A), who relying on his order in the case of assessee for asst. yr. 1997-98 has held that transaction terms of lease were in fact in the nature of loan recoverable in instalments and it was a purely financing arrangement and, thus, the interest component is chargeable to Interest-tax Act. Learned CIT(A) has further observed that according to certificate of chartered accountant of the assessee filed during the course of appellate proceedings for asst. yr. 1998-99 only a sum of Rs. 85,26,302 out of the lease rentals of Rs. 1,84,04,890 pertained to recoverable towards principal and, therefore, balance of Rs. 98,78,588 would be the interest component. He provided the show-cause notice to the assessee in terms of s. 15(4) of the Act to show as to why interest component should not be enhanced to Rs. 98,78,588 and, thus, the figure of Rs. 33,12,880 has been substituted by CIT(A) to a sum of Rs. 98,78,588. The assessee is aggrieved by such findings of CIT(A), hence, in appeal. 3. During the course of appellate proceedings learned Authorised Representative relied on ....
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.... the case of loan transaction, given the colour of latter, it is to be seen whether it was intended to have real effect as governing their rights and liabilities inter se or it was executed by way of pretence to escape or postpone the liability to tax without any intention that its provision showed in truth have effect as defining the rights of the parties as between themselves. In these circumstances though a transaction of lease if in its form and fact were not a lease transaction, but in substance and reality a loan or a finance transaction it may be so held that the assessee company was engaged in providing finance and was in fact a loan company and considering the facts and circumstances of that case it was found that the assessee company was a financial company to which the provisions of Interest-tax Act would apply. In para 48, it is observed that definition of interest as given in s. 2(7) of Interest-tax Act is an exhaustive definition as it defined interest by using the word "means" and, thus, even though interest is the taxable event and basis for levy of interest-tax, it can be assessed only if it were an "interest on loans and advances" as stated in the definition and n....
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....bsp; 3,66,184 0% Investment income 23,34,203 1% Other income 61,03,106 2% ------------ ---- Total 25,98,43,794 100% ....
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....a company which carries on, as its principal business, hire purchase transactions or the financing of such transactions; (ii) an investment company, that is to say, a company which carries on, as its principal business, the acquisition of shares, bonds, debenture stock, or securities issued by the Government or a local authority, or other marketable securities of a like nature; (iii) a housing finance company, that is to say, a company which carries on, as the principal business, the business of the 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-cls. (i) to (ii)] which, carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise; (v) a mutual benefit finance company, that is to say, a company carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under s. 620A of the Companies Act, 1956, to be a Nidhi or mutual benefit society; (va) a residuary non-banking comp....
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....charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized." 9. Referring to the above definition, learned Authorised Representative contended that definition of interest under s. 2(28A) of IT Act is wide enough to cover any type of charge in respect of the monies borrowed or debt incurred and, therefore, the decision given in respect of income-tax assessment cannot be strictly applied to the proceedings under Interest-tax Act. In this regard, learned Authorised Representative referred to the decision of Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. vs. CIT (1985) 56 ITR 52 (SC) to contend that even payment of interest on outstanding balance of purchase price of machinery was held to be an expenditure incurred after the commencement of business., 10. It was contended that according to the above-mentioned decision of Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. vs. CIT a loan of money undoubtedly though results in a debt, but every debt does not involve a loan. It was contended that definition of interest given in IT Act (sic-Interest-tax Act), is a vast definition whereas th....
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....t-tax Act does not include interest on securities, bonds and debentures. 12. Reference was made by the learned Authorised Representative to the decision of Hon'ble Supreme Court in the case of Shreeram Mills Ltd. vs. CEPT (1953) 23 ITR 120 (SC) to contend that the word 'loan' imports a positive act of lending coupled with an acceptance by the other side of the money as a loan. The relationship of borrower and lender cannot ordinarily come about by mere inaction. Thus, it was pleaded that it should be a positive act of giving money which could lead to charge, of interest under Interest-tax Act. 13. Reference was also made to the two decisions of Hon'ble Supreme Court in the case of Mahalakshmi Oil Mills vs. State of A.P. AIR 1989 SC 335 and in the case of P. Kasilingam vs. PSG College of Technology AIR 1995 SC 1395 copies of which are placed at pp. 1-8 and 9-16 of the paper book. To contend that the definition as given in s. 2(7) of Interest-tax Act which utilizes the words 'means' and 'includes' which afford exhaustive explanation of the meaning for the purposes of the Act. 14. Concluding his arguments it was pleaded by learned Authorised Representative that cl. (iv) of s.....
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....ent of money received. 16. Further, learned Departmental Representative referred to the decision of Tribunal in the case of Bajaj Auto Holding vs. Dy. CIT (2005) 96 TTJ (Mumbai) 856 : (2006) 281 ITR 154 (Mumbai) (AT) to contend that the object and purpose of Interest-tax Act is to levy tax on interest income earned on loans and advances. Thus, it was pleaded by CIT, Departmental Representative that interest-tax has rightly been charged and the appeal of the assessee should be dismissed. 17. The learned Authorised Representative reiterated his arguments. It was pleaded that if following the aforementioned decision of Special Bench in the case of Gujarat Gas Financial Services Ltd., it is held that the assessee is liable for Interest-tax Act on the financial lease, then, for quantification of the computation of chargeable interest, the matter may be restored back to the file of AO as there is a dispute between fixation of quantum. It was pointed out by him that the AO brought to the tax an amount of Rs. 33,12,880 whereas the CIT(A) has directed the AO to include another sum of Rs. 98,72,558. 18. We have carefully considered the rival submissions in the light of the material ....
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.... an inherent debtor-creditor relationship which underlines the transactions. The CIT(A) accepted the argument of the assessee that leasing is outside the purview of chargeability of Interest-tax Act and he directed the AO to exclude the said interest from chargeable interest. It was the argument of the Department at the stage of Tribunal that assessee itself had admitted the fact vide letter dt. 7th March, 2006 that it was a case of financial lease and not an operational lease and, thus, it was pleaded by the Revenue that it is the substance which has to be the deciding factor and not the form and reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT vs. Durga Prasad More 1973 CTR (SC) 500 : (1971) 82 ITR 540 (SC). As against those arguments of the Department it was submitted by the assessee that the lease does not find its place in the gamut of Interest-tax Act and hence even in the definition of credit institution, leasing company nowhere appears. It was pleaded that leasing is outside the purview of chargeability of Interest-tax Act and reliance was placed on the decision of Tribunal in the case of Union Bank of India vs. CIT wherein it is held that mer....
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....44. Lease income is excluded by the CIT(A) and is in dispute in Revenue's appeal. The AO assessed Rs. 2,78,98,000 as interest out of lease rent by observing that the lease rent contains two parts-One of the capital and the other being the interest; that the interest is charged from the lessee, forms an integral part of the lease rentals and that there is an inherent debtor creditor relationship which underlies the transactions. He relied upon the decision in the case of CED vs. Aloke Mitra (1980) 19 CTR (SC) 367 : (1980) 126 ITR 599 (SC) and stressed that it has always been settled law that in applying the Act to any particular transaction regard must be had to its substance, that is, its true legal effect rather to the form in which it is carried out. A party cannot escape the consequence of law merely by describing an agreement in a particular form though in essence and in substance it may be a different transaction. As the break-up of the capital and component are not given 1/5th of the lease rent was treated as interest portion of Rs. 2,78,98,000 (1/5th of Rs. 13,94,90,000). The CIT(A) found the argument of the assessee that leasing is outside the purview of chargeability of in....
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....rect monetary transaction, which 'finance leasing' is not. In fact, it is an alternative to loan or advance, it is a source of long-term funds and serves as alternative to long-term debt financing. Therefore, while a part of the finance lease payment is inherently in the nature of interest inasmuch as it is compensation for time value of money, it cannot be termed as 'interest on loans and advances' which is a condition precedent for its inclusion in chargeable interest under the Interest-tax Act. Merely because a receipt is in the nature of interest, it is not sufficient that it can be brought to tax under the Interest-tax Act; it must also be interest on 'loans and advances'. In the present case, while lease financing is held to be in the nature of mode of loan or finance, lease financing cannot be said to be a loan simpliciter and unless that condition is satisfied, there cannot be an occasion to bring it to tax under the Interest-tax Act. Lease rental component attributable to interest is excludible from 'chargeable interest' under the Interest-tax Act-Utkarsh Fincap (P) Ltd. vs. ITO (2006) 101 TTJ (Ahd) 210 and Life Insurance Corporation of India vs. Jt. Commr. of Interest-tax....
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....an and therefore cannot be brought to tax under the Interest-tax Act. When agreed that a finance lease is a mode of financial accommodation, there is no reason to hold that it is a step short of 'loan or advance'. It drew uncalled for distinction in a loan or advance that has to be a direct monetary transaction, in contradistinction to a 'finance leasing' which in fact, is an alternate to loan or advance by stating that it is a source of long-term funds and serves as alternative to long-term debt financing. In our opinion, when a part of the finance lease payment is inherently in the nature of interest inasmuch as it is compensation for time value of money, it could not be termed as not to be 'interest on loans and advances' for its inclusion in chargeable interest under the Interest-tax Act. There is no warrant in saying that merely because a payment is in the nature of interest, it would not mean that it was interest on loans and advances and could not be brought to tax under the Interest-tax Act. It is an interest on 'loans and advances'. Lease rental component attributable to interest, would be includible in 'chargeable interest' under the Interest-tax Act. We, therefore, set a....