High Court Of Delhi
CIT vs. Motor And General Finance Ltd.
Section 2(5A), 2(5B), 4,
Asst. Year 1995-96 to 1999-2000
A.K. Sikri & Siddharth Mridul, JJ.
IT Appeal Nos. 254, 255, 261 and 282 of 2008
30th October, 2009
Counsel Appeared :
Sanjeev Sabharwal, for the Appellant : O.S. Bajpai with B.K. Singh, for the Respondent
JUDGMENT
A.K. Sikri, J. :
These appeals relate to the asst. yrs. 1995-96 to 1999-2000 in respect of the same assessee, i.e., Motor & General Finance Ltd. The issues involved are identical. In fact, four appeals relating to these assessment years filed by the assessee as well as the Revenue against the orders of the CIT(A) have been disposed of by the Tribunal (hereinafter referred to as “the Tribunal”), vide its common judgment dt. 27th July, 2007. It is for this reason all these appeals were heard together. The questions of law on which we heard the arguments are the following :
“(a) Whether the Tribunal was correct in law in holding that the assessee is neither a financial company nor a credit institution in terms of s. 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 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 is perverse as it has ignored several factual aspects of the decisions relied upon by the CIT(A) 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 s. 2(5B) of the Interest-tax Act, 1974. The assessee-company is engaged, in the business of hirepurchase and leasing activities. It had not been filing return under the Interest-tax Act, 1974 (hereinafter referred to as “the Act”). A letter dt. 22nd Sept., 2003 was issued, by the AO to the assessee seeking its explanation for non-filing the interest-tax return for the period in question. In reply, the assessee submitted that it was not liable to file any return. The AO, however, proceeded further by issuing notice to the assessee under s. 10 of the Act on 30th March, 2005, for all the four assessment years. The reasons for issuing such a notice, as recorded by the AO, are as under : “Reason for issue of notice under s. 10 of the Interest-tax Act, 1974, in the case of the Motor & General Finance Ltd. for the asst. yr. 1999-2000.
As per the provisions of the Interest-tax Act, 1974 ‘finance companies’ means companies engaged in the business of hire purchase transaction or financing such transactions, investment companies, house financing companies engaged in the business of providing finance by making loans advances or otherwise, mutual fund, finance companies or companies which carry on business consisting of one or more of the activities referred to above.
The interest income chargeable to tax includes interest on loans and advances, commission, charges on unutilized portion of any credit, discount on promissory notes, bills of exchange and interest on debentures, bonds, securities, etc. The return of chargeable interest is required to be tiled by 31st December of the relevant assessment year.
On a perusal of IT return of the assessee-company for the asst. yr. 1990-2000, it is observed that the assessee was engaged in financial activities and shown in the P&L for the year, income from net hire purchase charges Rs. 30,32,80,298, lease charges Rs. 40,09,89,489 and bill discounting charges Rs. 98,31,728 apart from other income. The assessee has not filed return of interest-tax for assessment year mentioned above.
In view of the above facts, I have reason to believe that the assessee’s income coming within the purview of the Interest-tax Act, 1974 has escaped assessment for the aforesaid assessment year. Therefore, notices under s. 10 of the Interest-tax Act, 1974 is issued to the assessee for the asst. yr. 1999-2000. (Sd.)…………. S. P. Gupta, Asstt. CIT (OSD). Ward, 16(1), New Delhi.”
These reasons were supplied to the assessee. The assessee did not file return even thereafter which led to issuance of reminder letter dt. 2nd Nov., 2005. In response, the assessee furnished the reply dt. 4th Nov., 2005, reiterating request to drop the proceedings. The AO refused to do so and also rejected the objections of the assessee, vide his letter dt. 2nd March, 2006. Thereafter, he proceeded to complete the assessment and passed the assessment orders dt. 7th March, 2006 under s. 8(3)/10 of the Act. The assessee filed the appeal against this order before the CIT(A). The assessee challenged the validity of notice under s. 10 of the of the Act, which was repelled by the CIT(A). The assessee also contended that it was neither a “credit institution” nor a “finance company” in terms of s. 2(5A) r/w s. 2(5B) of the Act. This contention was also negatived by the CIT(A). However, while dealing with the merits of the addition made by the AO, the CIT(A) deleted the addition on account of hire-purchase under the Interest-tax Act, 1974. In these circumstances, both the assessee as well as the Revenue filed appeals before the Tribunal. The Tribunal, vide the impugned order, has held that the assessee is not a taxable entity, as it is not a finance company and consequently, not a credit institution. The deletion on account of hire-purchase as decided by the CIT(A) has been maintained. Under these circumstances, these appeals are preferred by the Revenue.
We thus proceed to discuss as to whether the case of the assessee could be covered by the aforesaid provisions. Before we delve into the moot question posed above, it would be apposite to scan through the relevant provisions of the Act. Since s. 4(2) is a charging section, we may start with this provision. Sec. 4 (2) reads as under : “4. (2) Notwithstanding anything contained sub-s. (1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the 1st April, 1992, interest-tax in respect of its chargeable interest of the previous year at the rate of three per cent of such chargeable interest.”
5. The charging section thus stipulates that the interest-tax is payable by every credit institution. “Credit institution” is defined in s. 2(5A) in the following manner :
“2. (5A) ‘credit institution’ means,—(i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in s. 51 of that Act); (ii) a public financial institution as defined in s. 4A of the Companies Act, 1956 (1 of 1956); (iii) a State financial corporation established under s. 3 or s. 3A or an institution notified under s. 46 of the State Financial Corporations Act, 1951 (63 of 1951); and (iv) any other financial company;”
6. It is a common case of parties that the assessee is not a banking company or a finance institution or a State financial corporation. It is also an accepted position that the assessee can be treated as credit institution only if it fits into the description of “finance company” as mentioned in sub-cl. (iv) above. “Finance company” is defined in s. 2(5B) of the Act in the following manner : “(5B) ‘financial company’ means a company, other than a company referred to in sub-cl. (i), (ii) or (iii) of cl. (5A), being— (i) a hire purchase 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-cls. (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 s. 620A of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society; (va) a residuary non-banking company other than a financial company referred to in sub-cl. (i), (ii), (iii), (iv) or (v), that is to say, a company which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments or in any other manner; (vi) a miscellaneous finance company, that is to say, a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses;”
Again counsel for the parties agreed that applicability of cls. (ii), (iii), (v) and (va) was ruled out. The controversy rested on the applicability of cls. (i) and (vi). In fact, it was admitted that hire purchase was not the principal business of the assessee. The submission of the learned counsel for the Revenue, however, was that even when the Tribunal had found that leasing was the principal business, it wrongly excluded the same from consideration on the ground that leasing business was not mentioned in all the clause of s. 2(5B) of the Act. He pointed out that for this purpose, the Tribunal had relied upon its earlier judgment in the case of Rajath Leasing & Finance Ltd. vs. Jt. CIT (2004) 83 TTJ (Rajkot) 792 : (2005) 186 Taxation 169 (Rajkot)(Trib). However, a Special Bench of the Tribunal in the case of Gujarat Gas Financial Services Ltd. vs. Asstt. CIT (2008) 119 TTJ (Ahd)(SB) 73 : (2008) 307 ITR 370 (Ahd)(SB)(AT) did not accept the approach of the Tribunal in Rajath Leasing & Finance Ltd. (supra).
The Special Bench did not accept the principle laid down in Rajath Leasing & Finance Ltd. (supra) that lease business is to be excluded altogether. According to it, a distinction had to be drawn between a financial lease and an operating lease. If it is a case of financial lease, then in substance that would not be a loan transaction and would fall in sub-cl. (iv) of s. 2(5B), namely, “a loan company”. It is because of the reason that such a transaction in reality and substance is a transaction of granting loan on the security of the assets stated to have been given a lease. For this proposition, apart from other judgments, the Special Bench referred to the majority view of the apex Court’s decision in the case of Sundaram Finance Ltd. vs. State of Kerala (1966) 17 STC 489 : AIR 1966 SC 1178 wherein the Court held (p. 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-purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions.”
31. The Court also cited the following observations of Lord Esher M.R. in the case of Watson, In re (1890) 25 QBD 27 (p. 502 of 17 STC) : ” . . . . when the transaction is in truth merely a loan transaction, and the lender is to be repaid his loan and to have a security upon the goods, it will be unavailing to cloak the reality of the transaction by a sham purchase and hiring. It will be question of fact in each case whether there is a real purchase and sale complete before the hiring agreement, if there be such a purchase and sale in fact and afterwards the goods are hired, the case is not within the bills of Sale Act. The document itself must be looked at as part of the evidence; but it is only part, and the Court must look at, the other facts, and ascertain the actual truth of the case.”
9. The Supreme Court in the case of Asea Brown Boveri Ltd. vs. Industrial Finance Corporation of India (2005) 126 Comp Cas 332 has also drawn a distinction between a normal lease and a financial lease. It was held that in case of financial lease, it is the lessee who, for all practical purposes, is the owner of the asset and not a lessor.
After posing the question as to whether the agreement between the parties was a financial lease or not, the Court explained what the term “financial lease” would mean and for this purpose referred to the dictionary and books as is clear from the following (p. 338) : “Dictionary of Accounting and Finance by R. Brockington (Pitman Publishing, Universal Book Traders, 1996 at p. 136) : ‘A finance lease is one where the lessee 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. It is thus a disguised way of purchasing the asset with the help of a loan. SSAP 23 required that assets held under a finance lease be treated on the balance-sheet in the same way, as if they had been purchased and a loan had been taken out to enable this.’ (emphasis 1 supplied) In Lease Financing & Hire Purchase by Dr. J.C. Verma (4th Edition, 1999 at p. 33) . . . : ‘Financial lease is a long-term lease on fixed assets, it may not be cancelled by either party. It is a source of 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 interested 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 pp. 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 and give some profit. An operating lease is any other type of lease-that is to say, where the asset is not wholly amortised during the non-cancellable period, if any, of the lease and where the lessor does not rely for his profit on the rentals in the non-cancellable period’.”
10. After considering the aforesaid definitions of lease finance, the Supreme Court observed that the following are the features of the financial lease (p. 339) : “1. The asset is use-specific and is selected for the lessee specifically. Usually, the lessee is allowed to select it himself. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset. Therefore, the lessee bears the risk of obsolescence. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore, the lease is non-cancellable by either party. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation. The lessor is typically a financial institution and cannot render specialised service in connection with the asset. The lease is usually full-pay-out, that is, the single lease repays the cost of the asset together with the interest.”
11. Finally, the Lordships expressed their opinion at p. (520 of 17 STC) (p. 339 of 126 Comp Cas) of the report as under : “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 equipment or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, bears the wear and tear, maintains and operates the machinery/equipment, undertakes indemnity and agrees to bear the risk of loss or damage, if any. He is the one who gets the property insured. He remains liable for payment of taxes and other charges and indemnity. He cannot recover from the lessor, any of the abovementioned expenses. The period of lease extends over 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-cl. (va) “as its principal business”. In sub-cl. (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-cl. (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 preceding sub-clauses which include sub-cl. (va) as well, it gives an impression that unless the company referred to in sub-cl. (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 principal business the provisions of the Interest-tax Act would not apply.
13. In that case, the assessee-company therein had 53 per cent of the total income from leasing. It also took into consideration the break-up of assets and percentage thereof against total assets and found that there also lease assets have its largest share of assets, i.e., 42 per cent of the total assets. The Tribunal thereafter noted the contention of the counsel for the assessee on this negative aspect and the demand of the learned counsel to prove that the leasing was its main and principal business, which is not in the enumerated business. Therefore, the Act has no application to the assessee. Following arguments was raised by the learned counsel for the assessee in this behalf : “In the case before us as is evident from the composition of income as well as from the RBI’s clarification, principal business is that of leasing and none other.”
The Tribunal observed that on the application of negative test, the principal business may not be lease business as income from the said business and assets thereof were less than 50 per cent. However, the Tribunal was of the opinion that to Judge as to whether the assessee is a business company or not, application of positive test was required, viz., whether it was carrying on as its principal business in either of sub-cls. (i) to (v) or a business as understood in sub-cl. (va) or exclusively or almost exclusively in two or more businesses as required by sub-cl. (vi) of s. 2(5B) of the Act. It found that none of the businesses of the assessee in that case was having a share more than 50 per cent
The following aspects surface on the reading of the aforesaid judgment : (i) While considering what constitutes “principal business” as mentioned in sub-cls. (i) to (v) of s. 2(5B) of the Act, will depend upon the facts and circumstances of each case. The income from a particular business is not the sole criteria. Other considerations like past history of the assessee, current business of the assessee, break-up of income, earning during the relevant year would also be relevant. (ii) The negative test applied in Rajath Leasing & Finance Ltd. (supra) is not the correct test whether the assessee is a finance company or not, is to be determined by applying the positive test, namely, whether it is carrying on its principal business in either of sub-cls. (i) to (v) or a business understood in sub-cl. (5A) or exclusively or almost exclusively on any two or more businesses referred to in earlier sub-clauses as required by sub-cl. (vi) of s. 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-cl. (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-cl. (i) whereas financial lease would fall in sub-cl. (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-cl. (vi) the hire purchase and the business failing under sub-cl. (i) and sub-cl. (iv) can be clubbed together for determining as to whether the assessee carries on exclusively or almost exclusively the said two businesses.
We are in agreement with the aforesaid approach taken by the Special Bench in Gujarat Gas Financial Services Ltd. vs. Asstt. CIT (supra) requiring that for the purpose of applicability of sub-cl. (v), i.e., to determine whether the company carrying lease business would be covered as loan company or not, distinction will have to be drawn between a financial lease and an operating lease and financial lease would be relevant for the applicability of sub- cl. (iv) as that would fall in the category of a loan company.
Learned counsel for the respondent-assessee also agreed with the aforesaid principles which would be applicable in the instant case. In view thereof, we may straightway observe that reliance by the Tribunal on its earlier judgment in the case of Rajath Leasing & Finance Ltd. (supra) and on that basis concluding that lease business per se is not covered by s. 2(58) of the Act would not be correct. On this aspect Rajath Leasing & Finance Ltd. does not lay down correct law. As pointed out above, it was necessary to determine as to whether lease business in question is that of financial leasing or operational leasing. In the event it is a financial lease, the case can be covered under sub-cl. (iv). However, the matter has not been examined from this angle by any of the authorities below. Though there is some indication in the order of the AO inasmuch as the AO has observed that the assessee was claiming higher rate of depreciation, the AO also referred to two judgments of this Court in CIT vs. Suidu Trade Links Ltd. (2004) 189 CTR (Del) 41 : (2003) 131 Taxman 302 (Del) and CIT vs. Madan & Co. (2002) 174 CTR (Mad) 172 : (2002) 254 ITR 445 (Mad). But, apart from referring to these two cases, there is no discussion specifically on the two kinds of leases and it appears that that did not even occur to any of the authorities. It is, therefore, necessary to undertake this exercise and to determine as to whether the lease business of the assessee falls in the category of operational lease or financial lease.
The reason is simple. If it is financial lease and gets covered under sub-cl. (iv), then the assessee can be termed as “credit institution”. It is clear from the following table showing income of the assessee from different activities :
31.03.1995 31.03.1995 31.03.1995 31.03.1995 Lease 408685186 46.68 43846347 45.23 522922013 47.40 400989489 49.33 charges Hire-326489358 37.29 421559223 43.49 357268011 29.05 303280289 37.31 purchase charges Bill 19148614 2.19 17324043 1.79 20578606′ 1.67 9831728 1.21 discounting charges Other 121206462 13.84 92050814 9.50 269127363 21.88 98778738 12.15 income Total 8755229620 100 969397927 100 122989593 100 812880253 100
19. For this, the matter will have to be referred back to the AO as it is the AO 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 income from the operational lease. We may point out at this stage that Mr. Bajpai, learned senior counsel for the assessee, had pleaded that the assessee was engaged in operating lease business only and not the financial lease business and made a fervent plea that there is no necessity to refer back the matter to the AO. However, in the absence of complete material before us, it would not be possible to undertake this exercise. In any case, this Court cannot assume the function of fact finding authority and it would be apposite if the AO deals with such an aspect in the first instance. We, therefore, answer the questions as under : (b) This question is decided in the negative, i.e., in favour of the Revenue and against the assessee. (a) and (c) Since the Tribunal did not apply the correct principle and based on its decision in Rajath Leasing & Finance Ltd. vs. Jt. CIT (supra), the decision of the Tribunal is set aside. At the same time, it is not possible to conclusively determine, in these proceedings, as to whether the assessee company is a financial company or a credit institution or not. For this purpose, the matter is remitted back to the AO for fresh determination keeping in view the correct criteria as stated in this order.
20. As a consequence, the Tribunal’s order is set aside. No costs.
[Citation : 327 ITR 530]
