TaxTMI 
TaxTMI 
2009 (10) TMI 485
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....g that the assessee is neither a financial company nor a credit institution in terms of section 2(5B) of the Interest-tax Act, 1974 and as such was not a taxable entity for the purpose of the Interest- tax Act, 1974 ? (b) Whether the Income-tax Appellate Tribunal was correct in law in holding that for deciding the principal business of a taxable entity under the Interest-tax Act, 1974 only receipt form business is the criteria and the other parameters as the turnover, capital employment, head count of persons employed in each line of business activity, etc., are not relevant? (c) Whether the order of the Income-tax Appellate Tribunal is per- verse as it has ignored several factual aspects of the decisions relied upon by the Commissioner of Income-tax (Appeals) in its order?" 2. In essence, the controversy is as to whether the assessee is a "finance company" or a "credit institution" in terms of section 2(5B) of the Interest- tax Act, 1974. The assessee-company is engaged, in the business of hire purchase and leasing activities. It had not been filing return under the Interest-tax Act, 1974 (hereinafter referred to as "the Act"). A letter dated September 22, 2003 was issued....
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....r which led to issuance of reminder letter dated November 2, 2005. In response, the assessee furnished the reply dated November 4, 2005, reiterating request to drop the proceedings. The Assessing Officer refused to do so and also rejected the objections of the assessee, vide his letter dated March 2, 2006. Thereafter, he proceeded to complete the assessment and passed the assessment orders dated March 7, 2006 under section 8(3)/10 of the Act. The assessee filed the appeal against this order before the Commissioner of Income-tax (Appeals). The assessee challenged the validity of notice under section 10 of the of the Act, which was repelled by the Commissioner of Income-tax (Appeals). The assessee also contended that it was neither a "credit institution"nor a "finance company"in terms of section 2(5A) read with section 2(5B) of the Act. This contention was also negatived by the Commissioner of Income-tax (Appeals). However, while dealing with the merits of the addition made by the Assessing Officer, the Commissioner of Income-tax (Appeals) deleted the addition on account of hire-purchase under the Interest-tax Act, 1974. In these circumstances, both the assessee as well as the Rev....
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....hase finance company, that is to say, a company which carries on, as its principal business, hire-purchase transactions or the financing of such transactions ; (ii) an investment company, that is to say, a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the Government or a local authority, or other marketable securities of a like nature ; (iii) a housing finance company, that is to say, a company which carries on, as its principal business, the business of financing of acquisition or construction of houses, including acquisition or development of land in connection therewith ; (iv) a loan company, that is to say, a company not being a company referred to in sub-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 which 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 (1 of 19....
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.... [1966] 17 STC 489 ; AIR 1966 SC 1178 wherein the court held (page 504 of 17 STC) : "30. The appellants are carrying on the business of financiers : they are not dealing in motor vehicles. The motor vehicle purchased by the customer is registered in the name of the customer and remains at all material times so registered in his name. In the letter taken from the customer under which the latter agrees to keep the vehicle insured, it is expressly recited that the vehicle has been given as security for the loan advanced by the appellants. As a security for repayment of the loan, the customer executes a promissory note for the amount paid by the appellants to the dealer of the vehicle. The so-called 'sale letter' is a formal document which is not made effective by registering the vehicle in the name of the appellants and even the insurance of the vehicle was to be effected as if the customer is the owner. Their right to seize the vehicle is merely a licence to ensure compliance with the terms of the hire-purchase agreement. . . We are accordingly of the view that the intention of the appellants in obtaining the hire-pur- chase and the allied agreements was to secure the return of lo....
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....long-term funds and serves as an alternative of long-term debt financing. In financial lease, the leasing company buys the equipment and leases it out to the use of a person known as the lessee. It is a full payout lease involving obligatory payment by the lessee to the lessor that exceeds the purchase price of the leased property and finance cost. Financial lease has been defined by the International Accounting Standards Committee as "a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred". Lessor is only a financier and is not inter- ested in the assets. This is the reason that financial lease is known as full payout lease where contract is irrevocable for the primary lease period and the rentals payable during which period are supposed to be adequate to recover the total investment in the asset made by the lessor.' According to Lease Financing and Hire Purchase by Vinod Kothari (second edition, 1986 at pages 6 and 7) . . . 'A financial lease is a contract involving payment over an obligatory period of specified sums sufficient in total to amortise the capital outlay of the lessor a....
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....r and covers the entire life of the property for which it may remain useful divided either into one term or divided into two terms with clause for renewal. In either case, the lease is non-cancellable." 12. The Special Bench observed that it is necessary to establish that the company carries on a business of the interest specified in various sub- clauses (except sub-clause (va) "as its principal business". In sub-clause (vi), carrying on of two or more business referred to therein is acquired either exclusively or almost exclusively. Normally, therefore, it should be taken that a company receiving deposits is covered by this sub-clause, but if it is read with the other sub-clauses, particularly sub-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 pre- ceding sub-clauses which include sub-clause (va) as well, it gives an impression that unless the company referred to in sub-clause (va) receives any deposit under any scheme or arrangement as a business activity, it would not be a financial company. To put it negatively, if the assessee had another business which is its ....
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....y, whether it is carrying on its principal business in either of sub-clauses (i) to (v) or a business understood in sub-clause (5A) or exclusively or almost exclusively on any two or more businesses referred to in earlier sub-clauses as required by sub-clause (vi) of section 2(5B) of the Act. (iii) Lease business, is not per se excluded from consideration. Distinction is to be drawn between a financial lease and an operating lease. In case a particular lease is a financial lease, then in substance it is a loan transaction and would fall in sub-clause (iv), i.e., "a loan company". (iv) A distinction is to be drawn between lease agreement (whether financial lease or operating lease and hire-purchase agreement). A case of hire-purchase business would fall in sub-clause (i) whereas financial lease would fall in sub-clause (iv) in their respective categories. The next question would be as to whether the hire-purchase or financial lease business is the principal business or not. (v) For application of sub-clause (vi) the hire-purchase and the business falling under sub-clause (i) and sub-clause (iv) can be clubbed together for determining as to whether the assessee carries on ex....
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.... 31-3-1995 31-3-1996 31-3-1998 31-3-1999 Income Amount % of total income Amount % of total income Amount % of total income Amount % of total income Lease charges 408685186 46.68 43846347 45.23 522922013 47.40 400989489 49.33 Hire-purchase charges 326489358 37.29 421559223 43.49 357268011 29.05 303280289 37.31 Bill discounting charges 19148614 2.19 17324043 1.79 20578606` 1.67 9831728 1.21 Other income 121206462 13.84 92050814 9.50 269127363 21.88 98778738 12.15 Total 8755229620 100 969397927 100 122989593 100 812880253 100 19. For this, the matter will have to be referred back to the Assessing Officer as it is the Assessing Officer who can, on the basis of material produced before him, can come to the conclusion as to whether the lease agreements entered into by the assessee with the lessees are financial leases or operational leases or both and in that case how much charges are to be apportioned as income from financial lease and how much is to be assigned as....