TaxTMI 
TaxTMI 
2008 (9) TMI 447
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.... liable to tax thereunder on the revenue income earned on its financial transactions? 2. The main issue in these appeals is the liability "of the assessee company to tax under the Interest-tax Act, 1974 (for short "the Act"), whose principal business is claimed to be of leasing, reckoning the same both from the percentage of turnover, or that of the funds employed (asset) wise. The assessee company claims that the leasing business is not among the prescribed businesses under Section 2(5B) of the Act which defines a financial company which could be treated as a credit institution under Section 2(5A) chargeable to tax under Section 4of the Act. 3. The assessee company while filing the return of chargeable interest claimed that Interest-tax Act is applicable to the credit institution, if it were engaged in the principle business of doing such activities. On the basis of the amounts of income composition it was submitted that during the year under the review, the principle business of the assessee company was leasing as its lease income is more than 50 per cent of the total income. In other words since the major income of the company was from lease business, its principle busines....
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....edings. 4.2 Inasmuch as it is admitted by both appellant and AO that there is no laid down yardstick as to what constitutes a 'principal' business of an assessee, its meaning in present context will need to be ascertained. Appellant says it to be understood as, if receipts are more than 50 per cent or above, it would stand 'first', 'highest" or 'foremost in importance' as per definition of 'principal' in the Oxford Dictionary. But this figure of more than 50 per cent being a criterion cannot be accepted because such an understanding would go against the legislative Intent as contained in Section 5B(vi) of Interest-tax Act wherein a miscellaneous finance company is defined to mean 'a company which carries on exclusively' or almost exclusively, two or more classes of business referred to in the preceding sub-clauses. This definition shows that it can be contemplated that there may be several classes (more than two) businesses earned on 'exclusively'. Thus there can be different business listed in definition of finance company in Sections 5B(i), (ii), (iii), (iv) and (v) of Interest-tax Act, which may Individually be perhaps....
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....arious companies, being a hire purchase finance company, an investment company, a housing finance company, a loan company, a mutual benefit finance company, a residuary non-banking company and a miscellaneous finance company. 7. Further, in respect of each of such company it has to have its principal business of that nature. In other words in order to have applicability of the Interest-tax Act, the company has to have that as its principal business, in respect of item Nos. (i) to (v) or an exclusive or almost exclusive business in one or more of them during the year under consideration. In the case of the assessee company the main business is in respect of leasing, if one looks with reference to income it constitutes 54 per cent of total income. If one looks at assets, then also it is main business as it constitutes 42 per cent of total assets. Without prejudice, oven if lease equalization reserve were reduced the Income from lease constitutes 47 per cent which reflects main business. He however, submitted that lease equalization cannot be reduced as it is only a book entry and it does not form part of income or expense and it is excluded in the computation of income. In view of....
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....der any scheme or arrangement by whatever name called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instalments or in any other manner and thus the assessee did not fall in the category of company defined in Clause (vi) of Section 2(5B) of the Interest-tax Act. Reliance is placed on Rajath Leasing & Finance Ltd. v. Jt. CIT (2004) 83 TTJ(Rajkot) 792 wherein it is held if the break up of income under various heads is examined, then, in all the years under consideration, income from lease rentals constitutes more than 50 per cent of the total receipts; that leasing is not an activity which falls under any of the subclauses from (i) to (v) of Section 2(5B) and in that event, it cannot be said that the company is carrying on exclusively, or almost exclusively, two or more classes of business referred to in Sub-clauses (i) to (v) of Section 2(5B) of the Act. Therefore, the company is not a financial company as defined in Section 2(5B) and consequently, it is not a credit institution as envisaged in Section 2(5A) of the Act. Since it is not a credit institution as defined in the Act, the assessee company will be ou....
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....nance, with all the risks associated with and incidental to the ownership of the asset, the title to which vests in the hire vendor, as to the account of the hirer; the said title under the agreement, enabling to secure the return of the amount advanced. Hire purchase transactions, or financing thereof, stand included as a class of business that qualifies a company to be a financial company. 11. He further submitted that even the lease business of the assessee company would constitute it a financial company as it the nature of the lease(s) entered into by it being admittedly finance lease(s), yielding finance income, as against operating lease(s), which yield income by way of rentals only. A finance lease, by definition is one where substantially all the risks and rewards incident to the ownership of the leased asset are transferred to the lessee and the leased asset is agreed to be transferred to the lessee at the end of the lease term/period at a nominal, normally predefined price. The assessee, accordingly, follows the method of accounting prescribed for finance leases (by the ICAI) which recognizes it, therefore, as only a mode of providing finance, booking finance income (o....
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....tion 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)] 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 Section 620A of the Companies Act, 1956, to be a Nidhi or mutual benefit society; (vi) a residuary non-banking company other than a financial company referred to in Sub-clauses (i), (ii), (iii), (iv) or (v). that is to say, a company which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments or in any other manner; or (vi) a miscellaneous finance company, that is to say, a company which carries on exclusively, or almost exclusively, two or more classes of business ....
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....In this case gross sales were found to be more than the interest earned therefore it was held to be not a finance company. Similarly Pune Bench in the case of Dy. CIT v. Ktrloskar Leasing & Finance Ltd. (supra) held that the term 'principal business' has nowhere been defied in the Act. One will therefore, have to apply the rule of reasonable interpretation. As per Chambers' Dictionary, the meaning of the word "principal" is "taking the first place, highest in rank, character of importance". Thus, ordinarily the word "principal" would mean, "main", "major", "substantial". The word "principal", therefore, envisages that other activities are less important than the principal one. In the case before us as is evident from the composition of income as well as from RBI's clarification, principal business is that of leasing and none other. 18. In the case of the assessee company, during the year under review, the break up of the income and deployment of assets is as under: Income break up Income from lease 13,94,90,345 53% Income from hire purchase 6,75,23,023 26% Income from Government securities 67,69,432 3% Income f....
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...., in all the years under consideration, income from lease rentals constituted more than 50 per cent of the total receipts and as the leasing is not an activity which falls under any of the sub-clauses from (i) to (v) of Section 2(5B), it cannot be said that the company was carrying on exclusively, or almost exclusively, two or more classes of business referred to in Sub-clauses (i) to (v) of Section 2(5B) of the Act. Therefore, it was held that the company is not a financial company as defined in Section 2(5B) and consequently, it is not a credit institution as envisaged in Section 2(5A) of the Act. Since it is not a credit institution as defined in the Act, the assessee company will be out of the purview of interest-tax under the Interest-tax Act, 1974. 23. In the present case, on this criterion, its income and assets being less than 50 per cent, its principal business may not be lease and the provision of Interest-tax Act may not be excluded on this ground of negative test Further the mere fact that assessee is a public limited company and the RBI has classified it as a leasing company may not help the assessee. In the case of Pinocle Finance Ltd. Interest-tax Appeal Nos. 47, ....
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....ies Ltd. v. Jt. CIT (2002) 77 TTJ (Cal) 160 : (2002) 80 ITD 9 (Cal) it is also observed that it is only Clause (vi) which is silent about the requirement of carrying on the business. Normally, therefore, it should be taken that a company receiving deposits is covered by this clause, but if it is read with the other clauses, particularly Clause (vi), i.e., a miscellaneous finance company which carries on either exclusively or almost exclusively two or more classes of businesses referred to in the preceding sub-clauses which include Clause (vi) as well, it gives an impression that unless the company referred to in Clause (vi) receives any deposit under any scheme or arrangement as a business activity, it would not be a financial company. It is not the case of the Revenue in this case that the assessee received deposits as part of its business activity. Therefore, it may not be a company falling in Clause (vi) of Section 2(5B) of the Act. 26. Let us now examine the last residuary Clause (vi) of Section 2(5B) of the Act and see whether case of the assessee could be brought under this clause as a miscellaneous finance company. Here in contrast to other clauses the requirement Is that....
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....ase term. Sale and lease back is a new concept of finance lease. 28. In Deep Hire Purchase (P) Ltd. v. Commr. of Interest-tax [2005] 274 ITR 69 (Punj. & Har.), referred to by him, the AO held that the hire charges receipts constituted interest within the meaning of Section 2(7) of the Act. For this purpose, reliance was placed on the decision of the Supreme Court in Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178. The AO also held that the circular of the Board dt. 16th Nov., 1981, on which reliance had been placed by the assessee was only in respect of the requirement of tax deduction under Section 194A of the IT Act, 1961, and had no application to the Interest-tax Act. He referred to the subsequent circular of the Board, viz., F. No. 133/9289/91-TPL dt. 6th March, 1992 in which it had clarified that hire purchase financial companies entering into hire purchase agreements with hirers would fall within the scope of Section 4(2) of the Act and would, therefore, be liable to tax. The appeal was dismissed by the Commr. of Interest-tax (A) who analysed the hire purchase transactions and held that the hire purchase arrangement was basically an arrangement of advancing mone....
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.... legal position and the statutory provisions discussed in the foregoing paras". The Tribunal order is upheld by the High Court by observing that "the effective findings of the Tribunal, as reproduced earlier, clearly show that the scope of remand is merely to separate genuine hire purchase transactions from transactions which are merely in the nature of financing. Otherwise, the Tribunal has accepted the assessee's claim that hire purchase charges earned on hire purchase transactions cannot be treated as interest under the Act." 29. In the case of Union Bank of India v. Addl CIT (2007) 108 TTJ (Mumbai) 720 it was held that while finance lease is a mode of financial accommodation, it is a step short of loan or advance'. A loan or advance has to be a direct monetary transaction, which 'finance leasing' is not. In fact, it is an alternate 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'. While leas....
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....32. It is well-settled principle that it is the substance of the matter which should be looked into rather than the form or the nomenclature by which the parties call it for their own convenience. As held in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. 33. Lease is a contract or bailment where return of goods is provided after a stipulated period. Without envisaging the return of goods it cannot be a proper bailment and hence not a valid lease. Return of goods also necessitates identifying and, therefore, where the assets are not so identified or identifiable, there cannot be a valid lease. Though developed as a commercial device to alternate for traditional loans, leasing has found all over the world massive application as a device to exchange tax burdens. Virtually keeping the ....
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....mount of Rs. 30,96,948 was paid by the assessee to Fair Growth till December. 1992 while the amount of Rs. 44,61,273 was paid to the custodian IFCI. The assessee made a communication to the custodian clarifying that the assessee would be entitled under the agreement to the amounts on account of security deposit and interest accrued thereon at the time of buy-back of purchase of leased assets. Accordingly, it forwarded a cheque of Rs. 17,800 in their favour and final settlement of the dues under the lease agreement, The Special Court under Section 10 of the Special Court passed an order to handover the possession of all the 26 cars to the custodian within one week from the date of the order since the assessee had failed to make the payment as per the lease agreement. The assessee had taken a plea before the Special Court that it was a case of lease finance but the said plea had been rejected on the ground that in the pleadings the assessee had termed the agreement as "lease agreement". The matter was carried in appeal. In appeal the Supreme Court posed the question for adjudication 'whether the agreement between the parties was a finance lease or not'. Various meanings of th....
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....the features of the financial lease. 1. The asset is use-specific and is selected for the lease specifically. Usually, the lessee is allowed to select it himself. 2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset. 3. Therefore, the lessee bears the risk of obsolescence. 4. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore the lease is non-cancellable by either party. 5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period. 6. The lessor enters into the transaction only as a financier. He does not bear the casts of repairs, maintenance or operation. 7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset. 8. The lease is usually full pay out, that is, the single lease repays the cost of the asset together with the interest. 37. Finally, their Lordships expressed their opinion at p. 520 of the report as under: 10. In our ....
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....ard 19 (leases) defines the finance and operating leases. The standard came in effect from 1st April, 2001. Gujarat Gas Financial Services (GFSL/company) has classified its leased assets as per the definitions given under AS-19. Relevant abstracts from AS-19 are reproduced below: The classification of leases adopted in this statement is based on the extent to which risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return due to changing economic conditions. Rewards may be represented by the expectation of profitable operation over the economic life of the asset and of gain from appreciation in value or realization of residual value. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Title may or may not eventually be transferred. At the inception of the lease the present value of the minimum lease payments amounts to at feast substantially all of the fair value of the leased asset. In accordance with the provisions of AS-19 on....
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....ancial company to which the provisions of Interest-tax Act would apply. It would be a residuary financial company cumulatively engaged almost exclusively in one or more businesses enumerated in Section 2(5B) of the Act. On merits 43. On merits of the case the submission of the assessee is that most of the receipts are not interest on loans and advances. It is submitted that Section 2(7) of the Interest-tax Act, defines "interest" to mean interest on loans and advances made in India and includes (a) commitment charges on unutilized portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India. It however excludes (i) interest referred to in Sub-section (1B) of Section 42 of the RBI Act, 1934 (2 of 1934); (ii) discount on treasury bills. According to the assessee the definition of "interest" as per Section 2(7) of the Interest-tax Act, 1974 is a restrictive definition since the word used is "means" and not "includes". In other words, even though interest is the basis for levy of interest-tax, by the adoption of a restricted meaning the parameters of levy of interest-tax have been clearly defined....
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....e substance of the transaction. He also referred to CIT v. Nirhherarn Daluram [1997] 224 ITR 610 (SC). 46. The assessee submits that 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. In other words, it means leasing is outside the purview of chargeability of interest-tax. Reliance is placed on the decision of Union Bank of India v. Addl. CIT (supra) wherein It is held that merely because of a receipt in the nature of interest, it is not sufficient that it can be brought to tax under the Interest-tax Act; that it must also be interest on loans and advances. While lease financing is in the nature of mode of loan or finance, lease financing cannot be said to be a loan simpliciter and unless that condition is specified, there cannot be any occasion to bring it to tax under the Interest-tax Act. Therefore the AO is to exclude lease rental components attributable to interest from chargeable interest brought to tax under Interest-tax Act. In this case of Union Bank of India (supra) it was held that while finance lease is a mode of financial accommodation, it is a step short of 'lo....
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....d if in substance the receipt is interest on loan or advance, it has to have that character irrespective of the name or a form given to it otherwise in the documents evidencing the transaction. We have already taken note of the fact while discussing the chargeability of the assessee to tax that, it being a financial company under Section 2(5B) the lease granted by the assessee is a financial lease in contradiction to an operation lease. A financial lease is a transaction of providing finance where lease rent includes a recoupment of capital/finance provided by the assessee as well as interest/finance charges for providing the finances. The recovery of finance charges would be interest on loans and advances within the meaning of Section 2(7) of the Act in substance of the matter though given a name of lease rent. We therefore vacate the order of the CIT(A) in holding that leasing is outside the purview of chargeability of interest-tax as the definition of interest. being not inclusive but restrictive in Section 2 of Interest tax Act and in directing AO to exclude from the total amount of chargeable interest. 49. The decision of Union Bank of India (supra) when admits that lease f....
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.... between genuine hire purchase transactions and other transactions which are merely in the nature of financing. We find that in the instant case, no such exercise was carried out by the Revenue official for separating the genuine hire purchase transactions on the anvil of the legal position and the statutory provisions discussed in the foregoing paras". The High Court upheld Tribunal view by observing that "the effective findings of the Tribunal, as reproduced earlier, clearly show that the scope of remand is merely to separate genuine hire purchase transactions from transactions which are merely in the nature of financing". 51. Though the assessee had stated in income-tax proceedings that it was a case of financial lease and in that case as we have held above it would be a case of loan transaction and interest portion of the receipts in lease rentals would be chargeable to tax. The necessary material has not been on record to decide as to how much of interest is included in the instalment. The matter thus requires examination in the light of the above decisions of Supreme Court and the Punjab & Haryana High Court. We therefore set aside the matter to work out the interest porti....
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....ujarat [1992] 85 STC 25; that though there is an element of interest, it does not fall under definition of Interest-tax Act which enropes only interest on loans and advances; that in view of judgment of Supreme Court in case of Bombay Steam Navigation Co. (1953) (P) Ltd. v. CIT [1965] 56 ITR 52, every debt does not involve a loan and every creditor who is entitled to receive a debt cannot be regarded as a lender. In that connection Bombay High Court decision in Tata Engg. & Locomotive Co. Ltd. v. Bharat Mining Corporation AIR 1980 Bom. 168 holding that this would be a sale; the CBDT Instruction No. 1425, dt. 16th Nov., 1981 saying that per se hire charges are not interest and cases N.K. Leasing & Construction (P) Ltd. v. Dy. CIT (2002) 74 TTJ (Hyd) 261, Commercial Motors Finance Ltd. v. Asstt. CIT (2002) 76 TTJ (Lucknow) 918 and Kirloskar leasing & Finance Ltd. (supra) were referred to. 54. The CIT(A) held that CBDT Circular Nos. 738 and 760, dt. 25th March, 1996 and 13th Jan., 1998 state that as to what constitute a transaction in the nature of hire purchase would have to be re-examined by the AO to decide the matter because hire purchase transactions were generally in the natu....
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....fore, be characterized as interest payable in any manner within the meaning of Section 2(28A) of the IT Act, as it is not in respect of any money borrowed or debt incurred. In this view of the matter it is clarified that the provlsions of Section 194A of the IT Act are not attracted in such transaction. Even as per the judicial pronouncement hire purchase is not liable to interest-tax. viz., (a) Groivth Leasing v. State of Gujarat (supra) --wherein it is held that hire purchase transaction is a method of sale. (b) Bombay Steam Navigation Co. (1953) (P) Ltd. (supra) --It is held that hire purchase transaction does not give rise to loan, (c) N.K. leasing & Construction (P) Ltd. v. Dy. CIT (supra), (d) Commercial Motors Finance Lid. v. Asstt. CIT (supra), (e) CIT v. Harita Finance Ltd. [2006] 283 ITR 370 (Mad.), (f) Kirloskar Leasing & Finance Ltd. (supra), (g) Muthool leasing & Finance Ltd. v. Jt. CIT (2003) 79 TTJ (Coch) 773 : (2003) 84 ITD 477 (Coch), (h) Commr. of Interest tax v. G.E. Capital Transportation (2007) 160 Taxman 329 (Del), (i) Asstt. CIT v. Visharad Automobiles Financiers (P) Ltd. (2007)109TTJ(Del)829, (j) CIT v. Sri Ram Investment Ltd. [2006] 283 ITR 371 (Mad.), (k) ....
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....mount of hire purchase price is towards the hire and part towards the payment of price. The agreed amount payable by the hirer in periodical instalments cannot, therefore, be characterized as interest payable in any manner within the meaning of Section 2(28A) of the IT Act, as it is not in respect of any money borrowed or debt incurred. In this view of the matter it is clarified that the provisions of Section 194A of the IT Act are not attracted in such transaction; that hire purchase transaction is a method of sale whereby goods are sold under a scheme of payment in instalments. If the hire purchase transaction is a sale, the hire charges paid are for outstanding purchase price and that as held by the Supreme Court in Bombay Steam Navigation Co. (1953) (P) Ltd. (supra) the hire purchase transactions would not give rise to loan or an advance. 59. In the case of N.K. Leasing & Construction (P) Ltd. v. Dy. CAT (supra). Tribunal. Hyderabad Bench held as under (headnote): Chargeable interest--Financial company/credit institution--Interest from sister concerns, hire charges etc.--Assessee was engaged in the business of leasing, hire purchase finance and real estate--In the a....
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.... transaction will not amount to 'interest' within the meaning of Section 2(7) for the purpose of interest-tax. The assessee was providing only financial assistance to a party for purchase of the vehicle. The terminology is not that important. It is only the intention of the assessee that is relevant. The certificate issued by the RI3I clearly shows that the assessee is a hire purchase finance company and the hire purchase assets form a major part of the assessee's assets, i.e., 76 per cent of the total assets and the income from hire- purchase and leasing constitutes almost the same percentage. The P&L a/c of the assessee company shows that hire purchase charges constitute a dominant portion of the assessee's income, i.e., hire purchase business is the principal business carried on by the assessee. There is no dispute for the Revenue that hire purchase charges cannot be said to be interest on loans and advances in any manner, unless the hire charges have resulted in the execution of agreements which are nothing but agreements for loans and advances. Hire purchase charges are not interest, according to the clarification Issued by the CBDT, of course, in the context o....
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.... ...one has to read Section 2(7) in the context of the scheme of the Act. If so read, interest received from the RBI on dated Government securities will not fall within the meaning of the expression 'interest on loans and advances' under Section 2(7). The deletion of the exclusionary clause by the Finance (No. 2) Act of 1991 would have no effect on Section 2(7) as the exclusionary clause was only clarification in nature. 64. In the case of S.E. Investments Ltd. v. Asstt CAT (supra). Tribunal held that hire purchase transaction was in the nature of financial transaction. In this case statements of the customers were recorded who deposed that the assessee company had advanced loan for purchase of vehicles and that invoices were directly issued by the company in the name of hirer and thus vehicle stood owned by the hirer. In this case Tribunal held as under: The vehicles had already been registered in the name of the so called hirers and even the sale invoice had been issued In the name of the hirers, however, declaration form given in the so-called hire purchase agreement was just to ensure the recovery of the loan/advance along with interest thereon. Th....
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....d not deal in motor vehicles. Though it head been stated by the assessee company that with the RTO, they were registered as a dealer within the meaning of the 1988 Act. It was contended that in the assessment order for the asst. yr. 1998-99, the AO had given the finding that the closing stock of vehicles shown in the balance sheet was running stock in the amounts financed to the hirers, which clearly indicated that the stock was a capital stock and not the revenue stock and that the same had not been disclosed In the trading and P&L a/c. It nowhere affected the trading result. The assessee company had only given the name of stock to create confusion, rather it was an advance/loan to the customers, which only was affecting the asset side of the balance sheet by reducing cash/bank balance and increasing advance/loan to the customers. Further, only the amount of advance had been taken in this stock and not the total value of motor vehicles financed, which further proved that the assessee was not dealing in hire purchase but it was a finance company giving advance on which interest was charged by the assessee company and such interest income had been declared as the revenue re....
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....l position, it was clear that the assessee company was engaged in financing business and only advancing loan on interest and by no stretch of imagination it could be considered as a hire purchase company. Thus, the appeal of the assessee company was dismissed and the order of the CIT(A) was upheld. 65. In the case of Commercial Motors Finance Ltd. v. Asstt. CIT (supra). Tribunal examined the agreement carefully and on close examination of various clauses it found that Intention of the parties in executing the agreement is not to advance or take loan, but to give and take the vehicle on lease on certain conditions including the condition that on total payment of charges, the hirer shall have the option to get the vehicle transferred in his name. It was concluded that the transaction was in the nature of contract of hire purchase having an element of bailment as well as that of sale, therefore, the hire purchase transactions in the present case cannot be considered as transactions of money lending or advancing of loans, and therefore, such hire purchase transactions did not attract the provisions of Interest-tax Act. In Kirloskar Leasing & Finance Ltd. (supra) it is held that the ....
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....the assessee are only to secure the recovery of the money advanced so that the customers do not transfer the vehicles without getting "no dues clearance" from the assessee company. The Tribunal has held that although the hire purchase finance companies fall within the meaning of "credit Institutions", yet such companies were not liable to pay tax on their entire income. The tax under the Act was leviable only on interest earned on loans and advances. It further held that hire purchase financing was one of the recognised methods in the commercial world and hire charges earned by such companies were different and distinct from Interest and, therefore, do not fall within the definition of interest under Section 2(7) of the Act. The Tribunal has also observed that even the Board in its Circular No. 760, dt. 13th Jan., 1998 [see (1998) 144 CTR (St) 37 : (1998) 229 ITR (St) 42], had clarified that in the case of transactions which are in substance in the nature of hire purchase, the receipt of hire charges would not be in the nature of interest. The Tribunal, accordingly, disposed of the appeals in the following terms : "Accordingly, instead of routinely treating all hire purchase transa....
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....ound justified and is upheld. 69. The submission of the assessee is that these ICDs being neither loans nor advances, interest earned on these is not exigible to interest-tax in view of the decision of Ahmedabad Tribunal in the case of Utkarsh Fincap (P) Ltd. (supra). Reliance is also placed on the decision of Housing &. Urban Development Corporation Ltd. v. Jt. CIT (2006) 102 TTJ (Del)(SB) 936, Stonrose Holding Ltd.. ITA No. 25/Mum/1996 and PersepoUs Investment Co. (P) Ltd., ITA No. 51/Mum/1997. The learned Departmental Representative on the other hand supported the decision of the CIT(A) and submitted that when assessee itself had offered it to tax where the question of allowing it as not taxable. He also submitted that it is taxable as held in Bqjaj Auto Holdings Ltd. v. Dy. CIT (2005) 96 TTJ (Mumbai) 856 : (2005) 95 ITD 356 (Mumbai). 70. We have heard the parties and considered the rival submissions. It might be true that assessee had offered it to tax initially but he claimed it as not taxable and therefore the matter has to be examined on merits and to determine as to whether it is taxable under the Act. We find it is not taxable in the light of the decision in the case....
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....ent of the assessee. Consequently, the levy of penalty made would also not stand. They are, accordingly, deleted. 71. It has considered the decision of Bajaj Auto Holdings Ltd. v. Dy. CIT (supra) referred to by the CIT(A) and distinguished by stating that Mumbai Bench has proceeded on a footing that deposit would be an advance and would be includible in the term 'interest on deposit and advance". The Bombay Bench is more persuaded by the reason that the interest on deposit was not excluded from the definition of interest and the term 'interest on loans and advances' was wide enough to include the same. It had not considered that whether it was not a loan nor an advance and as to whether the amended definition of 'interest' under the Act was exhaustive or inclusive. In holding that the ICD is not an advance the Ahmedabad Tribunal also noticed that the meaning of term advance as understood in the commercial words and as stated under the title 'what is advance' in the following words: It was held in K.M. Mohammed Abdul Kadir Rowther v. Section Muthiah Chettiar [1960] 2 Mad. LJ 13 that 'advance' means literally a payment beforehand; in ce....
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....le in the chargeable interest under the Interest-tax Act. Interest on delayed payment from debtors: 75. As regards interest on delayed payment from debtors of Rs. 41,94,670 the AO held that the above charges though penal in nature (that what we can gather from wordings of the said sub-head) but are directly and inevitably connected to the loans and advances. Hence the said income is subject to interest-tax. Therefore he added back Rs. 41,94,670 to the total chargeable interest of the assessee company. 76. Before CIT(A) it was submitted that interest from delayed payment by customers is in the nature of late payment of amount due from debtors, which is not at all in the nature of interest on loans and advances. Reliance was placed on decision of the Madhya Pradesh High Court in the case of CIT v. State Bank of lndore [1988] 172 ITR 24 holding that this would not be covered in the definition of interest as given in Interest-tax Act. CIT(A) did not accept the contention of the assessee and held that: 5.2.1 I have carefully considered the matter. But to the extent that delayed payment do cover the interest on such delay and are relatable to the loans and advances whic....
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....terest, its connection with loans and advances could not be ignored. In the context of the factual matrix, the real question would be to understand as to what are these overdue bills which are taken up by the bank for the purpose of recovery. In this context, the factual matrix presents no difficulties and the statutory provision of the Negotiable Instruments Act, 1881, is also crystal clear. These overdue bills are presented to the bank by the makers for the purpose of their recovery. As far as the makers are concerned, there may be justified or required circumstances for them to approach the bank. The bank has ready facilities for recovery, more statutory powers of stringent character and, therefore, the practice gets established that the makers handover the overdue bills to the bank for recovery. It is thereafter that the bank sets in motion. In other words, what is undertaken by the bank is the recovery of the amount covered by the bill and in regard to which, by virtue of Section 32 of the Negotiable Instruments Act, 1881, a statutory liability is created with regard to the prompt payment. The details that are available in the context would show that the origin of the amount w....
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....nsation on delayed payment of bill beyond the grace period does not constitute interest. In this case, reference was made to Madhya Pradesh High Court decision in the case of CIT v. State Bank of Indore (supra) holding that the amount charged by the assessee for delayed payment of bill cannot be held to be interest on loans and advances. It is only a compensation for late payment. In the case of G.E. Capital Transportation Financial Services Lid. v. CIT (supra) it was held that interest on delayed payment of lease rent, hire purchase instalment, etc. is not exigible to interest-tax. It was also held that when the transaction in question is a hire purchase transaction, income was not chargeable to interest tax. Similarly in the case of BFIL Finance Ltd. v. ITO (supra), Mumbai Bench of the Tribunal with regard to the interest on delayed payment on account of bill discounting transactions, hire purchase instalments and lease rental payments held that "The term 'interest' has been defined under Section 2(7) of the Act. The Supreme Court, various High Courts and the various Benches of the Tribunal have extensively considered and analysed the definition of 'interest' in v....
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....ch payment was made before the fixed date. The interest was payable only when debt was not paid by the fixed date. So, the service charges, though amounted to interest as per the judgment of Madhya Pradesh High Court in the case of CIT v. State Bank of Indore (supra), could not be considered as interest on loans. For the similar reasons, the amount due from the cardholders could not be considered as an advance because advance contemplates beforehand payment against future commitment which was not the case in the instant appeal. Accordingly, the service charges received by the assessee from credit cardholders on overdue payments could not be considered as interest on loans and advances and, consequently, the provisions of the Act would not apply to the instant case. 82. In these circumstances, we hold that interest on delayed payments would not be an interest on loan or advance and therefore would not be includible in the chargeable interest under the Interest-tax Act. Other interest 83. The next dispute is for considering other interest of Rs. 3,66,184 as income liable for interest-tax. It is submitted that the same is not at all interest on loans and advances. It is amoun....
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....ic reason is advanced to demonstrate that other income is not in the nature of interest on loans and advances and hence cannot be covered. The income from bill discounting covered under interest-tax is income. The break up of which is bill discounting charges--Rs. 1,37,21,234 plus processing fees Rs. 11,52,974 aggregating to Rs. 1,48,74,208. The processing fee is not in the nature of interest on loans and advances and hence needs to be excluded. 87. The learned CIT(A) has erred in confirming charging of interest under Sections 12A and 12B of the Act. No arguments are raised by the assessee as to why interest is not chargeable. It is consequential and thereby modified accordingly. 88. Now we come to IT appeals. The first common ground in IT appeals is regarding assessee's claim for bad debts being Rs. 2,52,41,464 in assessee's appeal for asst. yr. 2001-02 in ITA No. 35/Ahd/2005, Rs. 12,52,424 in Revenue's appeal for asst. yr. 2001-02 in ITA No. 515/Ahd/2005 and Rs. 2,71,07,143 in assessee's appeal for asst. yr. 2002-03. Briefly stated facts of the case are that the assessee company is claimed to be a finance company engaged in the business of financing industri....
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....sion. the same was written off and claim in income tax in the respective year. Second was Inter-corporate deposit to Mafatlal Industries Ltd. and Precision Fasteners. In these cases also, the amount written off was towards principal outstanding only. The amount written of Rs. 12,11,182 was for ear hire purchase finance and the outstanding amount wrillen off was the principal outstanding amount only. Further, there were few home appliances finance written off amounting to Rs. 41,242 towards principal outstanding amount only. Hence, there was no interest portion written off in these cases. With regard provisions of Section 36(2) of the IT Act, assessee replied that the amount written off includes money lent in the ordinary course of business of banking or money lending which is carried out by the assessee. As you are aware that the company is an NBFC, which is duly registered with RBI under Section 451A of the Banking Regulation Act and hence the principal amount written off is also available as deduction. 90A. The AO. however, did not accept the explanation of the assessee and held that as per the provisions of Section 36(2) the bad debts have to be taken into account in the P&L ....
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....hat the various bills which are discounted for are not appearing in P&L a/c items as on 31st March, 2001. Similarly, in respect of Mafatlal Industries Ltd. and Precision Fasteners Ltd. the amounts relate to various advances/deposits made by the appellant company which have been made out of the deposits received by the appellant itself from various companies including the parent company. Such receipt of advances/deposits and further advancement of the deposits in other concerns is not the regular business of the appellant: the alternative plea of the appellant's representative in respect of these items that the same may be considered as business loss under Section 28 of the IT Act cannot be accepted. No evidence had been adduced by the appellant company before the AO except that in the case of Mafatlal Industries Ltd., the amounts have been written off since the said company has gone into BIFR and the amounts have been written off in the books. In respect of Overseas Synthetics Ltd. and Precision Fasteners Ltd. deduction is claimed on the basis of amounts written off in the books. Merely writing off in the books of account would not make the claim as business expenditure and als....
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....deduction shall be allowed unless such debt or part thereof has been taken into account In computing the income of the assessee or represents money lent in the ordinary course of business of banking or money lending which is carried on by the appellant. It is fact that under hire purchase the appellant has not lent money to the debtor but the asset has been given to the customer from whom instalments are being recovered towards principal and interest. The ownership of the asset remains with the appellant. Therefore, it cannot be equated with the business of banking or money lending and the principal amount cannot be termed as money lent in the ordinary course of business of banking or money lending. Every finance business cannot be termed as banking or money lending business. The appellant has also not given the bifurcation of amount of write off into principal and interest and has not shown as to how the interest income, if any which is written off has been taken as income in earlier year. The onus was on the appellant which has not been discharged. Considering these facts and reasons given by the AO, I find that the conditions of Section 36(2) of the IT Act are not fulfilled and ....
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....ss or not earned this year as on 31st March, 2001 does not make any difference so long as the assessee carries the business as an activity. We therefore vacate the order of the Revenue authorities on this issue and allow the claim of the assessee. 95. As regards inter-corporate deposits debts in respect of Mafatlal Industries Ltd. and Precession Fasteners Ltd. the amounts relate to various advances/deposits made by the appellant company which have been made out of the deposits received by the appellant itself from various companies including the parent company. Such receipt of advances/deposits, the advancement of the deposits in other concerns is not the business of the assessee and we have held that in interest-tax appeals that these are not loans or advance, these cannot be allowed as bad debts arising in money lending business of the assessee. The alternative plea of the assessee for allowance as business loss under Section 28 of the IT Act cannot also be accepted in absence of any business in this activity and also in absence of evidence brought before the AO except that in the case of Mafatlal Industries Ltd., the amounts have been written off since the said company has go....
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....business of non-banking finance business and to advance money as inter-corporate deposits and also business of leasing business. In the case of ITW Signode India Ltd. v. Dy. CIT (supra), the assessee company had placed Rs. 1 crore as inter-corporate deposit which was written off in the books. It became bad and was allowed as deduction by observing that it was not the case of the Department that the inter corporate deposit placed with 'SW' was for some personal reasons. The inter-corporate deposits are quite common and corporate houses accommodate each other on short-term basis on grounds of commercial expediency. If placing of inter-corporate deposits is in the normal course of business, the loss arising therefrom cannot be anything else but arising in the usual course of business. It was the contention of the assessee that the debt due from 'SW had become irrecoverable. Further the interest accrued on this very inter-corporate deposit was also claimed as a bad debt and the AO had also allowed the same. Therefore, considering the facts of the case, the claim of the assessee for deduction of Rs. 1 crore was to be allowed. These cases are of no help to the assessee. That ....
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....allowance under Section 14A of the IT Act. It was the contention of the assessee that it had earned dividend income of Rs, 98,716 which was less than 1 per cent of the total revenue. No expenses have specifically been incurred for earning this income, therefore, no expenses against the same have been disallowed. However, the AO worked out proportionate interest expenses amounting to Rs. 22,07.840 to be disallowable and added back to total income. The AO further held that for the purpose of making investment and thereafter control of investment as well as purchase, sale of shares, assessee has used its office and its staff, the proportionate administrative expenses and employees cost are to be disallowed, which is estimated to be Rs. 1,20,000 and disallowed. 100. The assessee being aggrieved preferred first appeal, where the CIT(A) deleted disallowance of interest of Rs. 22,07,840 and restricted the administrative and other expenses to Rs. 60,000. The relevant observations of the CIT(A) in respect of administrative expenses, for which the assessee grieved and came up before us are as under: The second part of disallowance under Section 14A relates to Rs. 1,20,000 @, Rs. ....
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.... 7.1 I find that this issue has not been discussed by the AO in the body of the assessment order. This claim has also not been reflected in the return of income or computation of income. Therefore, this ground is also not emanating either from the assessment order or on account of statement of income. Accordingly, this ground is not admitted. However, if there is any error on facts on record, the appellant is free to file petition under Section 154 of the Act. 103. The decision of Madras High Court in the case of T.N. Power Finance & Infrastructure Development Corporation Ltd. v. Jt. CIT [2006] 280 ITR 491 is on the issue and decides it against the assessee by holding as under: Merely because the RBI has directed the assessee to provide for non-performing assets, that direction cannot override the mandatory provisions of the IT Act contained in Section 36(1)(vii) which stipulate for deduction not exceeding 5 per cent of the total Income only in respect of the provision for bad and doubtful debts which are predominately revenue in nature or trade related and not for provision for non-performing assets which are of predominately capital nature. The assessee was not....
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....iture cannot be apportioned and part relating to income which is exempt cannot be disallowed. It is further held that on the facts whether all the ventures carried on by him constituted one indivisible business or not, if they do the entire expenditure will be a permissible deduction, if they do not, the principle of apportionment of expenditure will apply, because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee. Accordingly, the AO held that assessee made investment of Rs. 319,93 lacs and the own funds available with the assessee were only Rs. 2,100.32 lacs. The assessee had borrowed funds of Rs. 1,730.88 lacs and the total funds available were Rs. 3,831.20 lakhs and held that proportionate interest expenses amounting to Rs, 22.07,840 is held to be disallowable and added back to total income. 107. This action of the AO was challenged before the CIT(A), who deleted this addition by following observations and findings: SI No, Particulars Investment mode (Rs. in lakhs) Income exempt (Rs.) Income offered (Rs.) ....
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....ve which also reflected in the relevant balance sheet do not indicate that the investment made by the assessee are out of borrowed funds, this being so, there is no reason that warrants for interference of the order of the CIT(A) on this issue, which is accordingly upheld, and this ground of Revenue is dismissed. 109. As regards non-inclusion of lease income of Rs. 4,44.367 in respect of various assets given on lease, it is contended that since in asst. yr. 1996-97 depreciation has not been granted on certain assets given on sale and lease back, the income thereof should not be considered as lease income. The same is of capital recovery and the AO has not discussed or granted the same. 110. The CIT(A) however directed the AO to give consequential benefits as per the earlier order for asst. yr. 1996-97. In view of this issue has go to back light of the fact that similar issue pending for decisions, which has to be decided accordingly. 111. In assessee's appeal for asst. yr. 2002-03 the other dispute is with regard to disallowance of consultancy fees of Rs. 15,77,350 paid to Ernst and Young. The AO disallowed the claim of the assessee by observing in that the consultancy....
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.... GGGL and the assessee company i.e. the group as a whole. This was the underlined principle of the study. As a result the Ernst and Young was asked to submit report regarding the restructuring of the assessee company so that operations of the group become more efficient and effective. The steps suggested by consultant in its report included amalgamation of the assessee company with GGCL, demerger sale of the business of leasing etc. in addition to several other steps. Had the objective been to improve the efficiency and effectiveness of assessee company only, not of the group then Ernst and Young would have not suggested the amalgamation or sale of business as the options at all. It was not underlined principle of study at all that the assessee company would remain in existence. In such a scenario it is not difficult to understand for whose purpose the study was meant. Obviously, at least, not for the purpose of assessee company. (ii) Although payment might have been made by the assessee company, it cannot be a deciding factor. No company can be supposed to claim an expenditure for conducting a study for its extinction. For claiming an expenditure, it is essential that the....