TaxTMI 
TaxTMI 
2008 (9) TMI 447
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....e 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 business no longer remains that of a credit institution a....
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....d 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 less than 50 per cent and yet be one of the principal business carr....
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....inance 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 the fact that the principal business is leasing, he submitted, the company is out of interes....
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.... 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 out of the purview of interest-tax under the Interest-tax Act, 1974. 9. The learned CIT Departme....
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....o 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 (on a systematic basis over the period of the lease), i.e., to the extent the aggregate lease premiums ....
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....erred 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 referred to in the preceding sub-clauses. 16. A reading of the definition of the 'financial company', makes it evident that each clause includes a particular company in this def....
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....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 from inter-corporate deposit 1,49,39,205 6% Income from bill discounting 1,48.74,208 6% Income from bank term deposit 32,49,418 1% Income from late payment 41,94,670 2% Income from other interest 3,66,184 ....
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....B) 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, 39 to 42/Ahd/2003 (supra), Ahmedabad Bench held by observing the share of the two activities taken together was around 60 per cent though individual share of these two activities is less than 50 per cent. In these circumstances, in our opinion, it cannot be said that the principal business of the assessee was in either of the two activities, i.e., hire purchase loan business or investment business, the in....
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....r 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 it is to be a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses. In Pinacle Finance Ltd. (supra) where the combined percentage of the businesses of two activities was 58.67 per cent was held to be not such a percentage which could be said to be exclusively or almost exclusively. In the present case, if the entire income of the ....
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....966 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 money by the assessee to the customers or on their behalf to the dealer and recovering the money so advanced through instalments after calculating interest chargeable on the principal amount. He further observed that the hire purchase agreement and the endorsement in the registration book that the vehicle financed by the assessee, are only to secure the recovery of the money advanced so that the customers do not transf....
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....39;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 leasing financing is held to be in the nature of mode of loan or finance, it 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. 30. A reference to the majority view of the Supreme Court decision in the case of Sundaram Finance Ltd. (supra) can be usefully had to wherein after discussing various judgments the Court hel....
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....or 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 same rights over the assets as an owner, the capital allowances applying to asset ownership are transferred in a lease to the lessor. 34. Be that as it may, the question still remains that whether it was in reality a case of sale or leaseback or it was only a case of loan transaction given the colour of the latter. It has to be seen whether it was intended to have real effect as governing their rights and liabilities inter se or it was e....
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....n 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 the term finance lease etc. were referred to and discussed: (i) Accounting & Finance by Rule Brockington (Pitman Publishing, Universal Book Trader 1996s): A finance lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan, SSAP 23 required t....
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....ncellable 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 opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase of assets or equipments or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery enjoys the use of occupation of the property, bears the wear and tear, maintains and operates the machinery/equipment; undertakes indemnity and agrees to bear the risk of loss or dam....
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....ed 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 leases issued by the ICAI all transactions entered by the assessee are classified as finance leases for this year and not operating lease, this is because substantially all the risks are borne by lessee, and also as the same assets are not offered to various parties from time to time as done in operating lease. Prior to AS-19, the company followed the recommendations of the ICAI contained in the guidance note on accounting for leases. 41. It is contended that this is not the case of the AO, nor of the CIT(A) and the necessary facts are also not on record to give a finding thereon. Though the Tribunal has the jurisdiction to allow any new question to be raistid ....
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..... 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 by the Parliament. In respect of each of the item, the matter can be examined. Lease income 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 v. Aloke Mitra [1980] 126 ITR 599 (SC) and stressed that it has always been settled law that in applying the ....
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.... 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 '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' 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 A....
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....eaning 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 financing is held to be in the nature of mode of loan or finance, there is no warrant in holding that lease financing cannot be said to be a loan 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 inh....
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.... 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 portion and bring it to tax. Hire purchase 52. In the appeal by the assessee, the first dispute is with regard to income from hire purchase. The assessee company claimed before the AO that hire purchase transactions are out of the purview of the Interest-tax Act, 1974. AO referred to the Circular No. 760. dt. 13th Jan., 1998 and the Circular No. 738, dt. 25th March, 1996 [(1996) 131 CTR (St) 53], stating that the hire purchase transactions are generally in the nature of finance transactions entered into by the companies engaged in the business of financing and that the finance charges accruing or arising to hire purchase finance companies are in the nature of interest as defined in Section 2(7) of the Interest-tax Act and, ther....
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....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 nature of finance transactions and finance charges accruing were in the nature of interest as defined under Section 2(7) of Interest-tax Act. AO observed that company had not given any material to decide the chargeabiiity of hire purchase receipts which were accordingly brought to tax. The CIT(A) held that the assessee had been merely relying on legal arguments which are found to be not acceptable in terms of the definition of financial company as well as definition of interest and in view of CBDT circulars on this subject. He directed the AO to verify the correct figures and Instead of Rs. 10,82,29,000 to adopt correct figure given at Rs. 6,75,23,023 after verification. 55. The learned counsel of the assessee submitted that the break ....
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....sstt. 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) S.E. Investments Ltd. v. Asstt. CIT (2004) 83 TTJ (Agra) 809 : (2004) 88 ITD 620 (Agra), (1) Gujarat State Financial Services Ltd. ITA No. 65/Ahd/2004. 56. We have heard the parties and considered the rival submissions. It is true that originally the CBDT in Circular No. 738, dt. 25th March, 1996 opined as under: ...Hire purchase transactions are generally in the nature of finance transactions entered into by the companies engaged in the business of financing. 4. The Board are of the view that the finance charges accruing or arising to hire purchase finance companies are in the nature of interest as defined in Section 2(7) of the Interest-tax Act and, therefore, chargeable to interest-tax.... 57. It was later clarified in the Ci....
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....rchase 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 absence of any explanation supported with documentary evidence to show that hire purchase business which was apparently the principal business was in fact not the principal business, it has to be held that assessee was a 'financial company' and in turn a 'credit institution' --Interest income stated to be received by assessee from its sister concerns and included in the other income is covered by the definition of chargeable interest, attracting the rigours of the levy of interest-tax --Hire charges do not find mention in the definition of the term 'interest' and are not to be regarded as interest in every case as clarified by Circular No. 760, dt. 13th Jan., 1998--Merely because the words 'amount of loan' are mentioned in the guarantee form the transactions i....
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....e 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 of Sections 2(28A) and 194A of the IT Act, 1961. It is all the more clear that Circular No. 738, dt. 25th March, 1996. clarifies that hire purchase transactions are generally in the nature of financial transactions, but later the Board clarified that the intention of the parties is the dominant factor to decide whether the transaction falls within the ambit of hire purchase transaction or not. In other words, there is no dispute that hire purchase charges received are different from Interest received on loans and advances. Therefore, it is to be noted that the assessee made payments to the first seller of the vehicle and the transaction comes to an end. The assessee is the owner of the vehicle. The mere fact that the vehicle's registration has been done does not lead to the conclusion that the applic....
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....ned 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. The vehicles had already been owned or registered under the Motor Vehicles Act, 1988 in the name of the so called hirer. The delivery of the possession of the vehicles was not given by the assessee company, but it had been delivered directly by the dealers of the vehicle to the so-called hirers. The possession of vehicles had already been passed to the so called hirers without payment of any instalment. Therefore, as per the definition of hire purchase agreement under the Hire Purchase Act, 1972, it could only be said that this was only an act of advancing money or loan and not a transaction of hire purchase. The situation of bailment did not arise because vehicle was already possessed by the customer and, thus, neither the assessee company was bailer nor the customer was bailee. There were invoices issued by the dealers dire....
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....en 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 receipts in the P&L a/c. The assessee company used to obtain from the customers, blank signed documents. Even terms and conditions for so-called hire were also signed blank. On those documents, except the signatures of the hirers/purchasers, all other columns were blank. The factual position showed that various documents were executed by the assessee company Just to safeguard the amount given on advance to the purchasers. In regard to the claim of the assessee company that it was registered with the RBI as a hire purchase company, merely because it was registered so with the RBI, the nature of transaction would not alter. As mentioned in the Board's circular, it is only the intention and substance of the transaction, which are relevant for deciding the issue. Thus, the fact that it was registered with the RBI as a hire purchase company would not make any difference. Further, e....
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....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 ownership is the deciding factor and where the equipment is sold and ownership is with the hirer, the agreement becomes a loan transaction and where the ownership is with the hiring company or with the leasing company and there is no sale of the equipment, it is a hire agreement and hire transaction or lease transaction. In Assti. CIT v. Visharad Automobiles Financiers (P) Ltd. (supra) it is held that the agreements being hire purchase agreements in accordance with the provisions of Hire Purchase Act, 1972 they could not be treated as financing agreements and hire charges could not be brought to charge under the Interest-tax Act, 1974. 66. However the assessee company has not provided any material to decide the chargeabllity of the interest-tax on the hire purchase transactions, in absence of the same the income from the hire purchase of Rs. 10,82,29,000 the AO brought under the purview of the Interest-t....
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....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 transactions as mere financing transactions, the AO may be advised to examine each transaction in the above light and charge interest-tax in such of those transactions which are not in the nature of hire purchase. A careful reading of the extracts of the above circular divulges that all the hire purchase transactions cannot be construed as financing transactions and it is not open to the Department to levy tax on the hire charges resulting from genuine hire purchase transactions. It is the duty of the AO to separate the grain from the chaff by examining all the transactions separately with a view to draw a line 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 statutor....
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.... 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 of Utkarsh Fincap (P) Ltd. v. ITO (supra) wherein Ahmedabad Bench of the Tribunal after considering the decision in the case of Federation of Andhra Pradesh Chambers of Commerce & Industry and Ors. v. State of Andhra Pradesh [2001] 247 ITR 36 (SC). CIT v. Sahora India Savings & Inwestment Corporation Ltd. (2003) 185 CTR (All) 136 : (2003) 264 ITR 646 (All) and following the decision in the case of Gujarat Industrial Investment Corporation Ltd. (2004) 89 ITD 520 (Del) [sic-Oriental Insurance Co. Ltd. v. Dy. CIT (2004) 82 TTJ (Del) 1084 : (2004) 89 ITD 520 (Del)] held that Interest on inter-corporate deposits are not chargeable to Interest-tax, as the deposits are in the nature of loan or advances. It held as under: The term 'loans and advances' should be understood conjointly and not in Isolation. If so read, the advances which are in the nature of loan alone should be covered in the term. Ordinarily an advance ....
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....rds 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 certain cases it may be a loan but it cannot be said that a sum paid by way of advance is necessarily a loan. In Raja of Venkatagiri v. Krishnayya Rao Bahadur AIR 1948 PC 150 at p. 155, it was observed that ordinarily an advance does not connote any idea of repayment. It is, therefore, clear that the word 'advance' used in Section 296 means an advance in the nature of a loan and not merely an advance as is understood in common parlance in the sense of payment of money beforehand and which is likely to become due at some future time. 72. It has also referred to Section 296 of Companies Act regulating loans to directors for book debt which was in the nature of loans or advances from its inception. 73. In the case of Housing & Urban Development Corporation Ltd. v. Jt CIT (supra), the Special Bench after considering various decisions and (Circulars of CBDT held that deposits in the form of securities and bonds cannot be considered as....
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....ccept 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 which are subject to interest-tax, and there being no finding of the Jurisdictional High Court in the matter or of the learned Tribunal, Ahmedabad, in the matter. I uphold the finding of the AO. 77. The submission of the assessee is that interest from delayed payment from debtors is not Interest on loans and advances and hence is not exigible for interest-tax. Reliance is placed on the following decisions : (a) CIT v. State Bank of Tavancore [1997] 228 ITR 40 (Ker.), (b) CIT v. State Bank of Indore (supra), (c) State Bank of Hyderabad v. Dy. CIT (1998) 61 TTJ (Hyd) 678 : (1998) 66 ITD 464 (Hyd). (d) G.E. Capital Transportation financial Services Ltd. v. CIT (2006) 101 TTJ (Del) 298, (e) Addl CIT v. G.E. Capital Transportation Financial Services Ltd. (2006) 101 TTJ (Del) 304 and (f) BFIL Finance Ltd. v. ITO (2007) 17 SOT 631 (Mmnbai). 78. We have heard the parties and considered the rival submissions. We find force in what the assessee contends that Interest from de....
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.... 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 which is the subject matter of an overdue bill gets snapped. In other words, the moment the maker presents the overdue bill to the bank for recovery, it becomes a document negotiable in itself on its own strength empowering the bank to effect recovery and creating the liabilities of the parties as regards prompt payment thereof. In such a situation, ignoring the intermittent acrobatics as to whether the amount can be understood as interest or could continue to have the character of its description as compensation in accordance with the provisions of Section 32 of the Negotiable instruments Act, 1881, would be wholly unnecessary, at least for the purpose of consideration as to whether the amount can assume the character of 'chargeable interest'. It is elementary in the context that taxation liability has to be understood and established and unless this is apparent from the material on record, the imposition of tax does not get justified. In other words, unless ....
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....' 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 various cases and have held that only the interest on the loans and advances is chargeable under the Act. As the expression 'means and includes' is used in the definition of 'interest' it is an exhaustive definition and cannot bring all receipts in the nature of interest under its purview. In the instant case, the overdue interest was against the delayed payments on account of bill discounting transactions, hire purchase instalments and lease rental payments. Thus, it was clear that this overdue interest was in the nature of the compensation for damages caused to the assessee due to the delayed payments. Hence, the overdue interest earned by the assessee was not chargeable to tax under the Act." 81. In the case of Central Bank of India v. Jt CIT (2006) 102 TTJ (Mumbai) 280 : (2006) 99 ITD 34 (Mumbai), Mumbai Bench of the 'tribunal held that service charges received by the assessee from credit cardholders on overdue payments could not be considered as ....
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....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 amount from customers and employees including delayed payments. This includes (i) Rs. 2,56,352 being income from LPG connection and C&G Kits given, (ii) Rs. 3,624 being the interest on deleted (delayed) payment by parties, (lii) Rs. 35,023 being interest from employees and (iv) Rs. 41,055 being income from advance against fixed deposit. The assessee also disputes bills discounting amount of Rs. 1,48,74,208. It is submitted that this is not in the nature of interest and loans and advances. The above amount is very meager and it is not forming part of principal business of the company and hence it was submitted that the same should be excluded. 84. The CIT(A) did not accept the contention and held: 5.5.1 I have considered the matter and do not find any reason to exclude the amount since the company itself is held to be having amongst its principal business, that of finance. As regards bills discounting amount of Rs. 1,48,74,208 it is submitted that strive the processing fees is not in the nature ....
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....;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 industrial/commercial enterprises and other customers by way of leasing, hire purchasing, bills discounting, inter corporate deposits, investments etc. The income of the assessee is therefore, by way of lease rent, hire charges, discounting charges, interest and dividend which is offered to tax as income from business. The assessee company is also said to be registered as non-banking financial company (NBFC) by the RBI under Non-Banking Financial Companies Act, 1997. 89. First ground and third ground are interconnected and revolve around issue of disallowance of bad debts and provision for bad debts. The assessee in its return of income claimed bad debts of Rs. 2,71,64,237 under Section 36(1)(vii) of the IT Act. The AO asked the assessee to give details of bad debts, nature of transactions, copies of bad debts accounts, copies of parties accounting since beginning with PAN, Circle and Ward duly confirmed, efforts made for recovery. To this, assessee furnished bad debts in respect of following parties: Sr. No. Part....
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....essee and held that as per the provisions of Section 36(2) the bad debts have to be taken into account in the P&L a/c for the previous year or any other earlier previous years, and therefore, the claim, of the bad debts cannot be allowed. The contention of the assessee that it being registered as NBFC with RBI and that as per Section 36(2) the money was lent in the ordinary course ; of business and therefore allowable as deduction, was not excepted by AO on the ground that nowhere in the P&L a/c there was income from giving loans and that the assessee earns income mainly from lease hire purchase, bill discounting and Government securities and no income on account of lending and/or advancing of loan. It was further observed by the AO that in the statement of total income, the assessee has claimed bad debts of Rs. 2,71,64,237 and in the P&L a/c the assessee declared provision of bad debts for Rs. 1,32,12,521 and bad debts of Rs. 1,63,31,615. These two amounts have been disallowed in statement of total income and amount of Rs. 2,71,64,237 has been claimed as bad debts. The primary condition for claiming bad debt is that first amount should be written off as bad debts in books. In the ....
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....ooks. Merely writing off in the books of account would not make the claim as business expenditure and also the fact that the final outcome of the claim of the appellant in respect of Mafatlal Industries Ltd. whereby proceedings are pending with BIFR has not reached finality. In view of the same, the alternative plea of the appellant under Section 28 can also not be accepted in respect of these Items. However, in respect of bad debts claim of Rs. 12,11,182 in respect of Hanskamal Grover who has since expired and Rs. 41,242 in respect of other parties whereby the transactions relate to hire purchase which is one of the main business of the appellant company, the claim of the appellant under Section 36(1)(vii) r/w Section 36(2) is justified and the claim is allowed. The AO is directed to allow bad debt claim in respect of these 2 parties, namely, serial Nos. 4 and 5 discussed at p. 2 of the order. Accordingly, the disallowance of Rs. 2,64,93,888 is reduced to Rs. 2,52,41,464 and the appellant company gets relief of Rs. 12,52,424 on this ground. 92. In assL yr. 2002-03, the claim was for Rs. 2,71,07,143 and disallowed by the CIT(A) even for debts by observing as under: 2.4 I have co....
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....iven by the AO, I find that the conditions of Section 36(2) of the IT Act are not fulfilled and therefore AO was justified in disallowing the claim of bad debt of Rs. 1,20,45,621 which is hereby confirmed. Accordingly, this ground of the appellant is dismissed. 93. The contention of the assessee Is that the company Is a finance company and as per the requirements of RBI, the company is lending money in different ways by way of leasing, hire purchase, inter-corporate deposits and bill discounting. The Incomes in respect of all these activities are offered for taxation under the head "Business Income". As this is the business of the company, the company is granting, leasing, hire purchase, inter-corporate deposits or bill discounting in its ordinary course of business. Reliance Is placed on the decision of Hon'ble Supreme Court in the case of CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 wherein it has been held in the case of banking or money lending business, any amount given as loan in the ordinary course of business is stock-in-trade and when the same is non-recoverable the same is to be allowed as bad debts. It is contended that the amount has been advanced to above parties i....
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.... 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. Merely writing off in the books of account would not make the claim as business expenditure and also the fact that the final outcome of the claim of the appellant in respect of Mafatlal Industries Ltd. whereby proceedings are pending with BIFR has not reached finality. In view of the same, the alternative plea of the appellant under Section 28 can also not be accepted in respect of these items. Bangalore Bench in the case of K. Raheja Development Corporation (supra) held in the case of a business of property development that the amount was advanced for acquiring certain lands for development were in the course of business and accordingly to be allowed otherwise proved to be bona fide written off; that when the assessee wrote off the sum, he was under bona fide belief and hence the bad debts written off as bad is allowable. Principal sum is allowable as loss under Section 28/37 of the Act. The compensation and interest components is allowable under Section 36(1)(vii) r/w Section 36(2). In the case of Poysha Oxygen (P) Ltd. (supra)....
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....uction of Rs. 1 crore was to be allowed. These cases are of no help to the assessee. That is not the situation here and we have held that deposits are not loans or advances aforesaid. 96. In respect of bad debts claim in hire purchase business which is though, one of the main business of the assessee, the claim under Section 36(l)(vii) r/w Section 36(2) cannot be allowed unless a finding is reached that business was its financing business and we have set aside this aspect in Interest-tax appeal, we set aside the issue in these appeals as well and the AO shall also examine the Issue in that direction. In the case of Jt CIT v. Walchand Capital Ltd. (supra), the assessee company had claimed that money is lent during the ordinary course of business on carrying on hire purchase business which is akin to money lending business. But if it is not a money lending business or a financing business nothing turn on that. 97. It is true that a Bench of the Delhi Tribunal in the case of SBEI International Finance Ltd. has held that "there was no qualification in Section 36(2) that the business of money lending should be understood only in a traditional sense. The business of a NBFC apart from l....
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....nd part of disallowance under Section 14A relates to Rs. 1,20,000 @, Rs. 10,000 per month for 12 months by correlating that expenditure relates to earning of income which is tax free. In this respect having regard to the total investments made of Rs. 12.17 lacs and tax free income earned of Rs. 98,716, 1 would consider it reasonable and fair that disallowance of Rs. 60,000 on this account as some part of the manpower and reserves would certainly be utilized for earning such investment. The appellant gets relief of Rs. 60,000 out of this amount of Rs. 1,20,000. To summarise, the total addition under Section 14A is reduced to Rs. 60,000 as against Rs. 23,27,840 and the appellant gets relief of Rs. 22,67,840 on this account accordingly. 101. There is no dispute and there cannot be any doubt, that some expenditure is incurred for making or earning the income from dividend. In case of mixed accounting the expenditure is not identified as such, which directly relates to earning of dividend. But that cannot be a ground to say that no expenditure is incurred for earning dividend income or that no expenditure could be related to that Income. Upon hearing both parties and considering materi....
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....ominately capital nature. The assessee was not entitled to deduction, in view of the Explanation to Section 36(1)(vii) which says that the provision for bad and doubtful debts made in the accounts of the assessee is not an allowable deduction. 104, Similar is the decision of the Tribunal decision in the case of New India Industries Ltd. v. Asstt. CIT in ITA No. 3958/Del/2003 (reported at (2007) 112 TTJ (Del)(SB) 917--Ed.) disallowing a similar claim of the assessee. No contrary decision has been brought to our notice by the parties. We therefore respectfully following the aforesaid decisions uphold the order of the CIT(A) on this issue. 105, In Revenue's appeal for asst. yr. 2001-02 the other issue is that the CIT(A) has erred in law and on facts in deleting the disallowance of proportionate interest expenses amounting to Rs. 22.77,840 under Section 14A. 106, As regards deletion of disallowance of proportionate interest expenses amounting to Rs. 22,77,840 under Section14A of the IT Act, assessee made investment of Rs. 319.93 lacs. The income earned therefrom is dividend, which is exempt under Section10(33) of the IT Act. The proportionate expenses incurred in this activity a....
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....Rs.) Income offered (Rs.) 1. Investment in Government securities (as required by RBI) 307.24 37.65,701 2. Investment in shares (net) 12.17 98,716 3. Investment in debentures 0.52 18,195 Total 319.93 98,716 37,84,491 It is therefore pleaded that tax free investments are only Rs. 12.17 lacs and other Investment out of Rs. 319.93 lacs are in Government securities/debentures which are taxable. Further, my attention is drawn towards Investment of Rs. 98,716 in the written submissions, filed and it is pointed out that the investments have been made in earlier years commencing from financial years 1994-95 to 1998-99 and has strongly argued that the appellant company had its own funds of Rs. 12.15 crores as on 3lst March, 1995, Rs. 24.87 crores as on 31st March, 1996, Rs. 39.21 crores as on 31st March, 1997, Rs. 46.34 crores as on 31st March, 1998, Rs. 59.57 crores as on 3lst March. 1999, Rs. 59 crores as on 31st March, 2000 and Rs. 67.65 crores as on 31st March. 2001. A detailed chart as per Annex. 10 has been submitted in the paper book filed before me at p. A-40 of the said paper book represent investment in shares which are exempt under....
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....r the study related to complete restructuring of the assessee company, that the study was commissioned by Gujarat Gas Company Ltd. and the report was also submitted to Gujarat Gas Company Ltd. only. Several other issues were also noted with regard to the study carried out by Ernst and Young. The AO required the assessee to furnish details as to "(i) Who commissioned the study, Gujarat Gas Corporation Ltd. or the assessee company ? Produce relevant evidence to prove it; (ii) Whether some payment has been made by GGCL also to Ernst and Young for this study ? If yes, furnish details; (iii) What action have been taken on the basis of recommendation of the study. Furnish copy of the action taken report also; (iv) Furnish details of all expenditures made towards this exercise. Justify as to why such expenditure, including consultancy fees should not be treated as capital expenditure. ...." In response thereto the assessee submitted that (i) The study has been conducted for and on behalf of our company and not on Gujarat Gas Company Ltd; (ii) The said payment was made by the company as can be seen from the copy of accounts submitted. It is further submitted that against the said payment e....
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....or the purpose of business. In light of aforesaid discussion it cannot be said that the study was meant for the purpose of business of the assessee company. Had the study meant for restructuring for expansion of the business or improving the efficiency, it would have been an expenditure for the purpose of business of assessee company. But it was not the case. Therefore, it cannot be said that the study was commissioned for the purpose of the business of the assessee company. Hence the expenditure made towards such consultancy cannot be treated as business expenditure allowable under Section 37 of the IT Act, 1961. 4.4 Without prejudice to the above, even if such expenditure is considered as laid out and expended for the purpose, business of the assessee company, it cannot be said to be in the nature of revenue. It is because, the study was meant for complete restructuring of the assessee company and suggestions given by Ernst and Young were quite radical having impact of enduring nature. Although as claimed by assessee, no action might have been taken on the suggestions of consultant till now, but it cannot rule out the possibility of any action in future. Therefore such expend....