K.C. Singhal, Judicial Member -
(1.) THE only issue arising in this appeal is whether the assessee is liable to pay interest tax under the provisions of Interest Tax Act, 1974 (the Act).
(2.) Briefly stated the facts are that assessee is an investment company and is considered as Non-Banking Finance Company as per the guidelines of Reserve Bank of India (RBI). No return was filed by the assessee under the provisions of the Act since in its view, the assessee could not be considered as a credit institution within the ambit of definition Clause (5A) of Section 2 of the Act. However, the Assessing Officer was of the view that assessee was liable to pay interest tax under the provisions of the aforesaid Act and consequently, issued notice Under 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 not be defined by the amount of income being raised in a particular year but has to be defined by the objects and the intention by which the company had been incorporated. Considering the relevant portion of the prospectus, it was also observed by him that the assessee company was a hire purchase finance company. Accordingly it was held by him that assessee company was falling under more than one category of Clause (5B) of Section 2 of the Act. Hence, it was liable to be charged under the provisions of the Act. On the facts, it was found by him that the chargeable interest was only Rs. 4,08,26,000/-.
The matter was carried in appeal before learned CIT(A) who has affirmed the order of Assessing Officer for the reasons given by him. The learned CIT(A) also analysed the Balance Sheet and Profit and Loss A/c alongwith the relevant schedules filed by the assessee company. Considering the relevant figures of incomes under various heads as well as employment of funds towards various activities, it was held by him that assessee company was covered by the definition of investment company as well as loan company under the Clauses (ii) and (iv) of Sub-section (5B) of Section 2 of the Act. It would be appropriate to reproduce the factual analysis made by the learned CIT(A) in this regard and therefore, the same is being reproduced as under:
3.6 Further, from the analysis of Balance Sheet and Profit and Loss Account alongwith relevant schedules filed by the appellant company at page No. 47 and 48 of the paperbook, it is seen that out of the total income of Rs. 1007 lakhs, the appellant was having interest income of Rs. 408 lakhs and other income in the form of profit on dealing in investment of Rs. 39.3 lakhs, dividend from subsidiary of Rs. 10 lakhs, dividend from others of Rs. 3.73 lakhs, dividend on current investment of Rs. 34.03 lakhs and miscellaneous income of Rs. 29.65 lakhs which shows that substantial/principal portion of the appellant's income has been earned out of dividend income and interest income, as a result of which, the appellant company is automatically covered under the definition of an "Investment Company" under Clause (i) as well as in the definition of a Loan Company under Clause (iv) of Sub-section (5B) of Section 2 of Interest Tax Act respectively.
3.7 It is further seen from the analysis of Balance Sheet of the appellant that out of total funds of Rs. 6845 lakhs available with the appellant company as on 31.03.1997, 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. 6354 lakhs (Rs. 6845 lakhs (-) Rs. 488 lakhs). Out of the above amount of Rs. 6354 lakhs, the appellant company has made investment in shares, debentures and other Govt. securities of Rs. 1242 lakhs (Dividend yielding) and in current assets and loans and advances of Rs. 3419 lakhs (interest yielding), the aggregate of which works out to Rs. 4661 lakhs (Rs. 1242 lakhs + Rs. 3419 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 income as a result of which, it is automatically covered in the category of a "loan company" as defined in Clause (iv) of Sub-section (5B) of Section 2 of Interest Tax Act, 1974. In view of the analysis of facts and figures as discussed above and from the contents of the prospectus as discussed by the Assessing Officer in the assessment order, it is evident that the principal business of the appellant company is that of an investment company as well as a loan company. Further, various case laws relied upon by the appellant does not come to its aid as the facts of the appellant's case are different.
Aggrieved by the said order, the assessee has preferred the appeal before the Tribunal.
(3.) THE learned Counsel for the assessee has assailed the order of learned CIT(A) as well as the Assessing Officer by contending that on the facts of the case, the assessee cannot be considered as 'Financial Company' within the ambit of Section 2(5B) of the Act. He drew our attention to the scheme of the Act. It was pointed out by him that Section 4 is a charging section under which chargeable interest is the subject matter of assessment to Interest Tax. Section 5 defines the scope of chargeable interest according to which the interest accruing or arising to the credit institution would form part of the chargeable interest. THE credit institution has been defined in Section 2(5A). Clause (i) refers to Banking Company, Clause (ii) refers to public financial institution as defined in Section 4A of the Companies Act, 1956, Clause (iii) refers to State Financial Corporation and Clause (iv) refers to any other financial company. It was submitted by him that the first three clauses are not applicable to the assessee and there is also no dispute on this aspect. THErefore, the question arises whether the assessee can be said to be a 'Financial Company'. He drew our attention to Section 2(5B) which defines 'Financial Company'. Clause (i) refers to Hire Purchase Finance Company. According to him, the assessee is not engaged in the business of Hire Purchase Finance and the Assessing Officer had wrongly observed that assessee is engaged in the hire purchase finance. It was clarified by him that assessee is engaged only in the finance lease business which is entirely different from hire purchase finance. Clause (ii) refers to Investment Company and Clause (iv) refers 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 Clause (ii) or under 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 specified in Clause (5B) of Section 2. It was pointed out by him that the major income was from leasing of equipment. Similarly, the employment of funds was mainly towards leasing business. If the main activity is of leasing business then it cannot be said that the principal business of the assessee was either of granting of loans and advances under Clause (iv) or acquisition of shares, stock, bonds etc under Clause (ii) of Clause (5B) of Section 2. At this stage of hearing, the attention of the assessee's counsel was invited to the decision of the Special Bench in the case of Venkateswar Investment and Finance Pvt. Ltd. 93 ITD 177 (SB) wherein it was held that the issue regarding principal business will have to be decided on the facts and circumstances of each case and various factors like objects of the company, past history of the company, current employment of the capital, break-up of the income earned, etc. would be relevant in deciding such issue. THE learned Counsel for the assessee submitted that even if this test is applied, the assessee company cannot be said to be a finance company. THE assessee's counsel was directed by the Bench to furnish a statement showing the break-up of income, employment of funds in respect of each activity carried on by the assessee.;