AI Drafter 
TaxTMI 
TaxTMI 
2013 (11) TMI 467
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....one appeal under Interest Tax Act being Interest Tax Appeal No.36/Ahd/2004 for the assessment year 1999-2000 dated 22.09.2006. Thereafter, Special Bench was constituted by Hon'ble President, ITAT and the following question was referred to it: "Whether in the facts and in the circumstances of the case, the assessee company, a non banking financial company (NBFC) u/s 45-I(f) of the Non Banking Finance Companies Act, 1997, is a financial company under the Interest Tax Act, 1974, liable to tax there-under on the revenue income earned on its financial transactions ?" 3. Subsequently, there was a request from the Revenue as per application dated 01.05.2007 and 19.06.2007 requesting for clubbing and fixing one more interest tax appeal and three income tax appeals along with this appeal for which Special Bench has already been constituted. As per the order passed by the Hon'ble President, ITAT on 28.6.2007, it was the direction of the Hon'ble President, ITAT that 'Special Bench may club if deem it proper'. Thereafter, all these four appeals were also clubbed in Special Bench along with Interest Tax Appeal No.36/Ahd/2004 but the question before the Specia....
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.... we reproduce the provisions of Section 2(5B) of Interest Tax Act, 1974, which read as under: "(5B) "financial company" means a company, other than a company referred' to in sub-clause (/), (if) or (Hi) of clause (5A), being- (i) a hire-purchase finance company, that is to say, 'accompany which carries on, as its principal business, hire-purchase transactions or the financing of such transactions; (if) 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 the financing of acquisition or construction of houses including acquisition or development of land in connection therewith; (iv) a loan company, that is to say, a company [not being a company referred to in sub-clauses (/) to (Hi)] which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise; ....
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.... leasing. He further submitted that the contents of this letter were reproduced by the Tribunal on the same page. He also submitted written submission of 10 pages, which are reproduced below: "Government of India office of the Commissioner of Income-tax (DR), (ITAT) -I 2ND floor, neptune tower, Ashram road, ahmedabad. phone No. (079) 26581651 No. CIT(DR)/ITAT-I/Gujarat Gas/2012-13 Date: 08.03.2013 To The Hon'ble Members, Income Tax Appellate Tribunal, 'A' Bench (Special Bench), Ahmedabad. Respected Sirs, Sub:- ITA No. 36/A/2004 & 48/Ahd/2004 for A.Y. 1999-2000 in the case of Gujarat Gas Financial Services Ltd., Ahmedabad. Kindly refer to the above. 2 The CIT(A) has directed that the sum of Rs. 2,78,98,000/- being receipt of lease rental Income are excluded from income chargeable to interest tax. In this regard, it is pointed out that the lease income can be considered to be lease income as such, only if the lease is an Operating Lease. In case of a financial lease the transaction has to be treated as a loan transaction. The most important issue in this case is to determine the true nature of transaction before any conclusion ....
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.... 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 u/s. 10 passed an order to handover the possession of all the 56 cars to the custodian within one week from date of the order since the assessee has failed to make the payment as per the lease agreement. The assessee has 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 meaning of the term finance lease etc. were referred to and discussed: (i) Accounting and Finance by R. Brockkington (Pitman publishing Universal Book Trder, 1996 at page 136) "A Finance Lease is one where the Lessessee 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. ....
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....or is interested in his rentals and not in the asset. He must get his principal back alongwith 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 costs 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. 6. Finally, their Lordships expressed their opinion at Page-4 in Para-10 order 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 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 machi....
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....rentals and the whole agreement was designed as a finance agreement. This contention is further supported by the submission of the assessee itself made by its letter dated 06.12.2006. This letter quoted in the order of the special bench of the ITAT dated 19/09/2008 at page no. 28 in para 39 stated as under: "We refer to the hearing in our cases and are submitting herewith following papers. 1. Note on Finance and operational lease-Anmnexure-1 2 Memorandum of Articles Annexure-2 3. Three agreement of Hire Purchase transaction- Annexure-3 4. One agreement of Lease transaction-Annexure-3 5.One agreement of lease transaction-Annexure-4 We hereby confirm that Bad debt has been written off in the accounts during the financial year 2000-01, and accordingly accounts have been prepared and finalized. "We further confirm that company mainly involves in finance lease and not operating lease as stated in the submission before CIT(A). This is duly stated in the attached note on leasing transactions of the company" 9. The note appended to this letter as Annexure 1 also says so. It reads as under- /. Note on classification of leases by Guiarat Gas Fi....
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....ty and its decision on facts cannot be tampered with by the courts unless it is proved that the findings of the facts are perverse. In the instant case, the special bench of the IT AT has given a finding of fact that the lease agreements entered into are finance leases. This being a finding of fact and not being perverse is settled and thus it becomes clear that the lease agreements entered into by the appellant company are finance 11. The appellant company before the CIT(A) during income tax proceedings vide its letter dated 06.02.2006 (quoted above) had stated that it was a finance company and all the leases entered into are finance leases. The company did a turn around and filed a completely opposite statement during interest tax proceedings before the CIT(A). In fact, vide its letter dated 09.01.2008, photo copy of which is enclosed at page 42 to 45 of the paper book in paragraph 6 has stated in respect of lease as under: - "Lease: The main activities of the company is leasing and the company is granting various machineries to parties and equipments relating to distribution of gas by them on lease. The lease transactions entered into by the company are mainly in the na....
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.... For determining the nature of transaction the circular has given certain guidelines in line with the decision of the Supreme Court. It would be seen that the hire purchase agreement by the appellant company is clearly in the nature of financial agreement. The sample hire purchase agreement as given on page No. 128 to 137 of the paper book clearly brings out that the appellant is into a financial agreement. 16. In view of the above, it is clear that both the transactions that of leasing and that of hire purchase entered into by the appellant is in the nature of financial transactions. As per the decision of the ITAT 'F' Special Bench Delhi in the case of Maruti Countrywide Auto Financial Services Vs. ITO reported in (2009) 120 TTJ (Del) (BB) 760 (2009) 29 SOT 151. The ITAT Special Bench has over ruled the decision in the case of Bank of India V CIT 108 TTJ (Mum) 720 by ITAT Mumbai to hold that interest tax Act was applicable on lease transaction. In the case of Maruti Countrywide Auto Financial Services Vs. ITO (supra) it was held as under: "19. It is clear from the above observations of the Special Bench that in a case where there is no dispute to the nature of transactions ....
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.... and the appellant are identical hence the decision of the Special Bench of the IT AT Delhi in that case would squarely be applicable on the linstant case. 18. Further it would be seen that the appellant is a finance company which is apparent from a plain reading of the section 45 of the RBI Act relating to Non Banking Finance Companies. The relevant provisions of the RBI Act relating to non banking finance companies are enclosed at paper book pages 65 to 81. On page 66 a financial institutions has been defined. Thus it would be seen that any company entering into hire purchase agreement is clearly covered as a financial institutions by the sub clause section 45 I (c)(iii) of the RBI Act. The leasing activities of the appellant company also clearly shows that it is also a financial institutions sub clause (i) of clause (c) of section 45 I of the RBI Act. In the instant case as the appellant company is only entering into financial leasing and not operating leasing, thus the appellant company is only financing the money required to the lessee company and is earning interest on the principal amount so deployed by way of financing. 19. It is also seen that from the annua....
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....n decided that Interest Tax Act was applicable on the lease income earned by the assessee. In the case of CIT Vs. Motor & General Finance Ltd. reported in 327 ITR 530 (Del.) which is enclosed at pages 31 to 41 of the paper book. It has been held by Delhi High Court that Interest Tax Act is clearly applicable on interest portion of the lease rental in case of finance leases. In view of the above Interest Tax Act would also apply to the appellant company as it is a financial company. 23. Further in the case of Jindal Lease Finance Ltd. Vs. ACIT reported in (2005) 94 TTJ (Del) 452 dated 6/1/2005 it has been held that Interest Tax Act is applicable on financing done through hire purchase agreement. In view of the above it is clear that Interest Tax Act is clearly applicable to the income earned by way of interest by the appellant company. Submitted for your kind consideration. Sd./- (RAVINDRA KUMAR) Commissioner of Income Tax (DR), (ITAT)-I, Ahmedabad." 8. He further submitted that on page 42-45 of the departmental paper book is a copy of letter dated 09.01.2003 filed b....
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....t be said that during the lease period, the assessee is able to recover the principal amount along with normal return of investment but if the IRR from lease finance is worked out @ 18.76% then it has to be accepted that assessee is able to do so. He further submitted that on page 119 of the paper book is the value of asset given but it is not clear as to whether the entire amount was financed by the assessee or only part thereof was financed and whether any security deposit was taken by the assessee from the lessee and in the absence of all these facts, it is not possible to work out as to whether it is a finance lease or operating lease. Both the sides placed reliance on various judgements but before deciding this factual aspect, the judgements' applicability cannot be examined. We feel it proper to first analyze the facts to examine as to whether the assessee is undertaking finance lease or operative lease but for doing so, complete facts are not available on record. We can analyze the applicability of various judgements cited by both the sides only after that. 9. In the light of the facts noted by us in above paragraphs, we find that sufficient material is not available on r....