- (1.) BY the court : By consent, the matter is taken up for hearing.
(2.) DESPITE repeated adjournments, counter-affidavit has not been filed. Leave granted.
(3.) IN the present case, the assessee is a non-banking financial company registered with RBI. It is engaged in the business of hire purchase and leasing. In the return of income under the IT Act, 1961 it showed the following components of income : (A) Lease charges 40,86,85,186 (B) Hire-purchase charges 32,64,89,358 (C) Bill discounting charges 1,91,48,614 The assessee did not, however, file any return of interest under the Interest-tax Act, 1974 (for short "1974 Act"). The AO served a letter on the assessee asking the assessee to explain the reasons for not filing the interest-tax return for the asst. yr. 1995-96. A reply was filed by the assessee on 15th Oct., 2003 requesting the AO to withdraw his letter, as the assessee claimed that it was not liable to file returns under the 1974 Act. On 31st March, 2005, a notice under S. 10 of the 1974 Act was served on the assessee calling upon it to file its return of interest. According to the AO, the interest chargeable to tax had escaped assessment. According to the AO, on a perusal of the IT return of the assessee for the asst. yr. 1995-96 it was found that the assessee was engaged in financial activities; that it had income from net hire-purchase charges, lease charges and bill discounting charges as indicated hereinabove. Accordingly, notice under S. 10 of the 1974 Act was sought to be substantiated. Since the assessee did not file the required return of chargeable interest the AO assessed the chargeable interest by way of best judgment assessment under S. 8(3) of the 1974 Act. The total interest chargeable, according to the AO, was Rs. 75,43,23,158. One of the issues which arose for determination was whether the transactions undertaken by the assessee were in the nature of hire-purchase and not in the nature of financing transactions. According to the assessee, there is a dichotomy between financing transactions and hire-purchase transactions. According to the assessee, its principal business was of leasing. For the aforestated reasons, the assessee contended that it was not covered by the definition of "financial company" under S. 2(5B) of the 1974 Act. On examination of the facts of the case and looking into all the parameters, including the parameter of the principal business, such as turnover, capital employed, etc., it was held by the CIT(A) that the assessee carried on hire-purchase business activity and bill discounting activity as the principal business and, therefore, the assessee constituted a "credit institution" as defined under S. 2(5A) of the 1974 Act and was, therefore, taxable under the 1974 Act. However, after coming to the conclusion that the reopening of the proceedings was valid and that the assessee constituted a credit institution, the CIT (A) went into the merits of the case and came to the conclusion that the transactions entered into by the assessee were not financing transactions as the ownership of the vehicle in each case remained with the assessee; that the hirer did not approach the assessee after purchasing the vehicle; that the vehicle stood purchased by the assessee and let out to the hirer for use on payment of charges. Consequently, the CIT (A) held that the hire-purchase transactions of the assessee were not financing transactions or loan transactions and, therefore, the AO was not justified in bringing to tax hire-purchase charges of Rs. 32,64,89,358. The CIT(A), however, held that the AO was justified in treating receipts from bill discounting charges of Rs, 1,91,48,614 as "chargeable interest" under the 1974 Act. Lastly, the CIT(A) held that the lease transactions undertaken by the assessee and the lease charges received by it did not fall within the ambit of S. 2(7) of the 1974 Act because the Department had accepted the case of the assessee that it remained the owner of the leased assets for all times to come and, therefore, it was not open for the Department to say that charges received for leasing the vehicles are financial charges exigible to the Interest-tax Act, 1974. Consequently, the CIT(A) came to the conclusion that the AO had erred in bringing to tax lease rental charges of Rs. 40,86,85,186 as chargeable interest under the 1974 Act.;