TaxTMI 
TaxTMI 
TaxTMI 
2008 (2) TMI 441
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....nder section 10 of the Act directing the assessee to file the return of chargeable interest for the year under consideration. In response to the said notice, the assessee filed its return declaring chargeable interest at Nil. In the course of assessment proceedings, the assessee company was asked to show cause as to why the interest income of Rs. 6,28,56,000 should not be assessed under the Act. The assessee contended before the Assessing Officer that it could not be treated as a Finance Company under either of the sub-clauses of the definition clause (5B) of section 2 and consequently, could not be treated as credit institution. Hence, assessee was not liable to be assessed under the provisions of the Act. However, the Assessing Officer was of the view that it can be treated as investment company as per section 2(5B)(ii) in as much as it was engaged in the business of lease financing, trading in shares and securities. He was also of the view that assessee company can be considered as a loan company under the provisions of section 2(5B)(iv) since the assessee itself admitted that they are in equipment leasing business. It was also observed by him that the principal activity could n....
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....of total funds of Rs. 6,845 lakhs available with the appellant company as on 31-3-1997, funds amounting to Rs. 488 lakhs were deployed in fixed assets like office premises, computers, furniture and fixtures, vehicle, etc. After excluding the said amount of funds locked up in fixed assets, the balance amount of deployable funds available with the appellant company works out to Rs. 6,354 lakhs [Rs. 6,845 lakhs (-) Rs. 488 lakhs]. Out of the above amount of Rs. 6,354 lakhs, the appellant company has made investment in shares, debentures and other Government securities of Rs. 1,242 lakhs (Dividend yielding) and in current assets and loans and advances of Rs. 3,419 lakhs (interest yielding), the aggregate of which works out to Rs. 4,661 lakhs (Rs. 1,242 lakhs + Rs. 3,419 lakhs). From the above analysis, it is clear that the appellant company has deployed principal/substantial part of its funds for the purpose of earning dividend by investment in shares, debentures, etc. as a result of which it is automatically covered under the definition of an "investment company" and has also deployed the funds in the form of current assets and loans and advances from which it is earning interest inco....
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....rs to loan company which have been invoked by the Assessing Officer as well as learned CIT(A) in order to assess the assessee company. Clauses (iii), (v) and (va) are not relevant since neither the Assessing Officer nor the learned CIT(A) has relied on these clauses. Proceeding further, it was submitted that it is the principal business which is relevant for invoking the sub-clauses (ii) and (iv) of clause (5B) of section 2. According to him, it is the main or chief activity of the assessee which should be considered for holding that assessee is engaged in the principal business of an activity either falling under sub-clause (ii) or under sub-clause (iv). It was also submitted by him that principal business cannot be defined by taking into consideration two activities together. Accordingly, it was submitted by him that Assessing Officer was not justified in observing that the two activities constituted the principal business for bringing the assessee into the net of taxation. Proceeding further, he referred to the statement of accounts for the year under consideration to point out that the main activity was leasing of equipment which does not fall under either of the categories spe....
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....vity falls under any of the preceding sub-clauses, then the question of applying sub-clause (vi) would not arise. Further, if any activity does not fall in the preceding sub-clauses and the same is considered for the purpose of sub-clause (vi) then every company would fall within the ambit of Miscellaneous Finance Company which cannot be the intention of the Legislature. 6. Rival submissions of the parties have been considered carefully. There is no dispute to the legal position that if the assessee company falls within the ambit of 'credit institution' then, it will be liable to pay interest tax on the chargeable interest earned by it. 'Credit Institution' has been defined in clause (5A) of section 2 of the Act which reads as under : "(i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act.) (ii) a public financial institution as defined in section 4A of the Companies Act, 1956. (iii) a State Financial Corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporation Act, 1951 (63 of....
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....ws that sub-clauses (i) to (v) refer to the specified activities carried on as principal business. The expression 'Principal business' has not been defined in the Act. As per the Oxford Dictionary, the word 'principal' means - first in rank or importance, chief, main leading etc. If the assessee carries on various business activities then, it would mean the predominant activity out of the various activities carried on by the assessee. Therefore the principal business would refer to only one activity. If one activity is the principal activity then other activities would be outside the scope of the principal activity. Thus, two activities of business taken together cannot be characterized as principal business. Therefore, in our humble opinion, both the lower authorities were not justified in considering two activities together and then holding that principal business of assessee was that of investment company and loan company as per sub-clauses (ii) & (iv) of definition clause (5B). The view taken by us is also fortified by the following observations of their Lordships of the Apex Court in the case of CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377 :- "If ....
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....nal in the case of Union Bank of India v. Addl. CIT [2007] 14 SOT 75 (Mum.) wherein it has been held that Finance Lease, though a mode of financial accommodation, is a step short of loan or advance. It has also been held that a loan or advance has to be a direct monetary transaction while finance lease is an alternate to loan or advance and therefore finance lease business would not fall within the scope of sub-clause (iv) of definition clause (5B). No other decision has been brought to our notice taking contrary view. Therefore, following the same, it has to be held that finance lease activity also cannot be brought within the ambit of sub-clause (iv) of definition clause (5B) of the Act. 12. The analysis made by the learned CIT(A) in paras 3.6 and 3.7 of his order on the basis of financial statement for the year under consideration also does not lead to the conclusion that the principal business of the assessee is in respect of an activity of loans and advances falling under clause (iv) or in respect of an activity of acquisition of shares, stocks, bonds, debentures, securities etc., so as to fall under sub-clause (ii) of clause (5B) of section 2 of the Act. It is pertinent to n....
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.... of deposit cannot be included. Regarding loan to subsidiary, it is clarified that it is the interest-free loan which is also not part of the business activity and therefore the same also cannot be taken into consideration. Admittedly, the advance income-tax cannot be considered as loans and advances. If these three figures are excluded then the actual loans and advances are to the extent of Rs. 1,061 lakhs out of the total assets of Rs. 6,354 lakhs (after excluding Rs. 488 lakhs in respect of Fixes Assets). Thus, percentage-wise, the employment of funds in the activity of loans and advances comes to 17 per cent (approx.). In view of these figures, either relating to income or relating to employment of funds, it cannot be said that the principal business of the assessee was that of an activity of loans and advances. Consequently, the learned CIT(A) was not justified in holding that assessee company fell within the scope of a Loan Company under sub-clause (iv) of clause (5B) of section 2 of the Act. With reference to the activity as that of an investment company, the analysis made by the learned CIT(A) shows that income from the activity of acquisition of shares, stocks, debentures....
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....ss of financing of industrial or other companies and enterprises as well as to lend or advance money to builders and their persons on securities or to grant loans on mortgage of immovable properties and to lend money in all other manners but shall not carry on the business of banking, as defined under Banking Regulation Act, 1949. The Memorandum also refers to various businesses which can be carried on by the assessee by way of incidental or ancillary to the attainment of main objects. Then the Memorandum specifies various businesses under the head 'Other Objects' which is likely to include all kinds of businesses. It is the settled legal position that Memorandum of Association by itself is not sufficient to adjudicate upon the nature of business carried on by the assessee. Such objects are to be considered along with the actual activities carried on by the assessee. As per the direction of the Bench, the assessee has furnished necessary details showing the income earned from various activities carried on by the assessee as well as the details of funds employed by the assessee towards such activities. The Special Bench has observed that in considering the issue regarding th....
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....s) Percentage (%) Employment of Funds (in lakhs) Percentage (%) As Investment Company A.Y. 1996-97 186.34 15% 583.67 8.21% A.Y. 1997-98 87.12 9% (approx.) 1242.06 18.14% A.Y. 1998-99 68.64 12% (approx.) 1901.79 34.13% As Loan Company A.Y. 1996-97 477.71 38.97% 1653.91 23.26% A.Y. 1997-98 408.26 40.54% 1061.16 15.50% A.Y. 1998-99 220.39 38.17% 641.41 11.51% Income (in lakhs) Percentage (%) Employment of Funds (in lakhs) Percentage (%) As Leasing Company A.Y. 1996-97 409.08 33.38% 1660.64 23.36% A.Y. 1997-98 456.04 45.28% 1610.57 23.53% A.Y. 1998-99 231.88 40.16% 1169.92 20.99% 14. The perusal of the above financial statement shows that none of the activities can be said to be the principal business activity carried on by the assessee. The details regarding investment in shares, debentures and securities shows that by no standard, the assessee can be said to be in the business of investment so as to fall within the ambit of sub-clause (ii) of section 2(5B) of the Act inasmuch as the income in each year is below 15 per cent whi....
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....dered together then such activities taken together would constitute principal/pre-dominant business of the assessee which would bring the case of the assessee within the definition of Miscellaneous Finance Company. We are unable to accept such contention of the learned D.R. for the reasons given hereafter. The perusal of sub-clause (vi) mentioned above shows that the Legislature has not used the expression 'Principal business' as referred to in the preceding sub-clauses. On the contrary, the Legislature has used the expression 'exclusively or almost exclusively, two or more classes of business referred to in the preceding sub-clauses'. The word 'exclusively' has been defined by the Oxford English Dictionary as 'excluding or not admitting other things'. According to the Webster's Comprehensive Dictionary, it means - (i) intended for or possessed by a single group or individual; not shared (ii) restricting membership or patronage; fastidiously reluctant to accept outsiders (iii) singly devoted; undivided (iv) not including, not comprising etc. In view of the above definition, the word 'exclusively' would restrict only to those business act....