Madras H.C : Interest-tax cannot be charged on interest received on advances to dealers and suppliers

High Court Of Madras

CIT vs. Integrated Finance Co. Ltd.

Assessment Year : 1994-95

Section : 4

Mrs. Chitra Venkataraman And M. Jaichandren, JJ.

Tax Case (Appeal) No. 524 Of 2004

July 6, 2011

JUDGMENT

Mrs. Chitra Venkataraman, J. – The Revenue is on appeal against the order of the Tribunal Madras ‘C’ Bench, dt. 19th Jan., 2004 in Int. Tax Appeal No. 9/Mad/1997, raising the following substantial questions of law :

“(1) Whether in the facts and circumstances of the case, the Tribunal was right in holding that interest-tax cannot be charged on interest received on advances to dealers and suppliers ?

(2) Whether in the facts and circumstances of the case, the Tribunal was right in holding that interest-tax cannot be levied on interest from bonds ?”

2. As far as the second question is concerned, learned standing counsel for the Revenue as well as the learned counsel appearing for the assessee submit that the issue demands a remand in the light of the decision in the case of Eastman Industries Ltd. v. Dy. CIT (2008) 306 ITR 254 [sic—it should be CIT v. Ratnakar Bank Ltd.(2008) 220 CTR (SC) 7 : (2008) 14 DTR (SC) 241 : (2008) 306 ITR 257 (SC)]. It is further submitted that the decisions of the apex Court in the case of Eastman Industries Ltd. v. Dy. CIT (sic) and in the case of CIT v. Corporation Bank(2008) 214 CTR (SC) 302 : (2007) 295 ITR 193 (SC) have relevance to the facts of the present case to examine the factual position as to whether the interest herein was from Government Securities only. Having regard to the abovesaid aspect, as far as the second question is concerned, the order of the Tribunal is set aside and the issue stands remanded back to the Tribunal for consideration of the factual position as to whether the securities possessed by the assessee are Government Securities.

3. The assessment year herein relates to 1994-95. The assessee is a finance company. The dispute herein relates to the interest received on the advance made to the manufacturer for a sum of Rs. 90,81,702 in respect of the purchase of goods in relation to the hire-purchase/lease agreement entered into with the customers. The AO viewed that the advances made for the purchase of the goods amounted to loan and advance and hence, the interest earned therein was liable to be assessed under the Interest-tax Act, 1974.

4. The assessee contended that the assessee had paid the advance amount to the manufacturer/dealer towards the purchase of machinery in connection with hire-purchase/lease. On account of the delay in the delivery of goods, on the advance made, the assessee received interest from the manufacturer. Interest thus due on the advance was later on adjusted on the price payable by the assessee for the said goods/machinery. Thus, at the time of advancing the money, it was never the intention of the assessee or the recipient to treat it as a loan. Thus the advance could not be treated as loan to attract the provisions of the Interest-tax Act.

5. The said contention of the assessee was however rejected by the AO, who held that the interest earned on the advances/loans lent to parties for entering into hire-purchase and lease were liable to be assessed under the Interest-tax Act. On appeal before the CIT(A), the appellate authority reaffirmed the view of the AO holding that interest as defined under the Interest-tax Act means “interest on loans and advances” and it included trade advances. Thus holding, the CIT(A) rejected the appeal. Aggrieved by the same, the assessee appealed to the Tribunal.

6. The assessee contended before the Tribunal that the interest received related to the advances made for the purchase of goods and was never treated as a loan. The assessee pointed out that the object of advancing money to the manufacturer was for purchase of goods and the same was not a loan. There was never an intention to receive back the amount advanced, since it was only a trade advance for the purchase of goods. The advance was adjusted against the purchase price and it was never returned to the parties. The view of the Officer that the assessee claimed exemption on the ground that this receipt also came under lease rental was factually incorrect. The Revenue, however, took the contention that the amount given to the manufacturer was advance which was invested by the manufacturer in its business. Even though the advance was adjusted against the purchase price, the interest received attracted the charge.

7. The Tribunal pointed out that interest on loans and advances would certainly be ‘interest’ as per the provisions of the Interest-tax Act. Admittedly, as the assessee had made the advance payment for the purchase of goods, the advances were to be adjusted in the cost as and when the goods were delivered. Hence, the advance made by the assessee to the suppliers could not be treated as a loan/advance as contemplated under the Interest-tax Act. The Tribunal further pointed out that it was never in the contemplation of the assessee to receive back the advances from the dealers or suppliers. Interest charged on advances, particularly trade advances for purchase of goods, are not the same as loan and advance and hence, did not come within the purview of the Interest-tax Act. In that view, the Tribunal allowed the appeal. Hence the present appeal by the Revenue.

8. Learned standing counsel for the Revenue submits that going by the definitions of ‘CreditInstitution’ and ‘Finance Company’ under s. 2(5B) of the Interest-tax Act, 1974, and r/w s. 5 of the Interest-tax Act, the interest earned by the assessee would fall for chargeability under the Interest-tax Act (hereinafter called as ‘the Act’). Learned standing counsel placed reliance on the decision in the case of CIT v. Motor & General Finance Ltd.(2010) 236 CTR (Del) 487 : (2010) 48 DTR (Del) 118 : (2010) 327 ITR 530 (Del) to contend that on the admitted fact that the assessee-company is a credit institution, the interest charged on the advance made would really bring the receipt of interest within the scope of the Interest-tax Act.

9. Per contra, learned counsel for the assessee pointed out that the money advanced by the assessee for the purchase of the machinery was in the nature of trade advance. The interest paid was adjusted in the cost of the machinery payable by the assessee. He pointed out that the assessee claimed depreciation on the machinery purchased, which was later on given under hire- purchase agreement to the customer. Thus even though the assessee is a credit institution, going by the nature of the transaction, the advance made not being by way of loan to be repaid by the recipient, the interest on the trade advance does not partake the character of interest on loan. Consequently, no exception could be taken to the decision of the Tribunal.

10. Heard learned counsel and perused the records.

11. In the decision A.M. Shamsudeen v. Union of India & Ors.(2000) 164 CTR (Mad) 466 : (2000) 244 ITR 266 (Mad) this Court had an occasion to consider the distinction between “loan” and “deposit”. Although this was in the context of s. 269SS and s. 269T of the IT Act, 1961, yet, the elucidation therein is of relevance to the facts of the case. The facts therein were that the assessee repaid two loans in cash. For the violation of s. 269T, the Dy. CIT levied penalty under s. 271E. On the question as to whether s. 269T would apply to a case of repayment of loan, this Court considered the stand of the Revenue that there was no distinction between a loan and deposit to attract s. 269T. Repelling the said contention, this Court held that the provision of s. 269T does not deal with repayment of loan. In this context, it pointed out to the distinction between ‘loan’ and ‘deposit’. This Court pointed out that a loan and a deposit are two different transactions; when all deposits may take the form of loan, it is not necessary that all loan should take the form of deposits. This Court further pointed out that the mere presence of some of the attributes of the loan transaction in a deposit would not be sufficient to regard the loan as a deposit. This Court further held that the expression “deposit”, as defined in s. 269T of the IT Act means the deposit of money which is repayable after notice or after the period.

12. Keeping this distinction in the background, as already pointed out, the case of the assessee herein is that it advanced money to the manufacturing company for the purchase of the machinery. On the advance thus made, for the delay in delivery, the manufacturing company was stated to have paid interest. The advance paid was adjusted against the purchase price. Thus the advance paid to the supplier was not for earning interest to be repaid at a later point of time. The Revenue does not deny this that the amount given was a trade advance towards the purchase of machinery and the interest amount was adjusted against the cost of goods supplied. The Revenue also does not dispute the fact that the intention of the assessee when the assessee advanced the amount was not for earning interest or for repayment of the amount given as advance, but towards the purchase of machinery.

13. Yet, learned standing counsel would submit that the amount paid is an investment; hence, interest paid therein falls under the charging provision. Sec. 2(5A) of the Interest-tax Act defines “credit institution” to mean among other things, a “finance company”. This is defined under s. 2 (5B) of the Act, as follows :

“(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-cls. (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.”

14. A reading of the provisions of the Act reveals that the credit institution earning interest engaged in the business of providing advances and loans are liable to pay interest-tax under the Interest-tax Act. Interest is defined under s. 2(7) of the Interest-tax Act to mean interest on loans and advances made in India and includes (a) commitment charges and on unauthorised portion of any credit sanctioned for being availed of in India and (b) discounts of promissory notes on bills of exchange drawn or made in India. It however does not include interest referred to in sub-s. (1)(b) of s. 42 of Reserve Bank of India Act, 1935 and discount on treasury bills. Thus though the definition of “interest” is an exhaustive one; yet, interest can be assessed under the provisions of the Act only if and when it is an interest on loans and advances, as stated in the definition and not otherwise. Going by the definition of “financial companies” it is evident that each of the clauses under the abovesaid section includes companies which carry on the business of that nature as its principal business. While cl. 1 is as regards the principal business of hire-purchase transaction, cl. 2 deals with the principal business of acquisition of shares, stocks etc. Similarly, cl. 3 deals with companies having the principal business of financing of acquisition or construction of houses. Clause 4, which is relevant to the present case, refers to the principal business as of providing finance by making loans and advances or otherwise. Clause 5 deals with acceptance of deposits from members to the Nidhi or mutual benefit society. Clause 6 refers to carrying on of two or more businesses referred to in the earlier clauses. Thus, a reading of all these provisions shows that loans and advances advanced by companies whose principal business falls under any of those categories alone would make the company a financial company.

15. As far as the present case is concerned, the question herein is not as to whether financing was the principal business or not. The assessee does not deny as a matter of fact that it is a credit company. Being engaged in the business of hire-purchase and financing, the assessee does not dispute that the principal business does fall under the enumerated clause under sub-cl. (4). However, the question raised by the assessee is that the trade advance made by the assessee-company for the purchase of machinery, however, does not fit in with loans, advances or otherwise as given under sub-cl. (4) of s. 2(5B).

16. The question whether “advance” or “otherwise” would include trade advance, hence, need to be seen in the context of the setting of these phrases. In the decision CIT v. Raj Kumar(2010) 228 CTR (Del) 506 : (2009) 23 DTR (Del) 304 : (2009) 318 ITR 462 (Del) the Delhi High Court considered the question as to whether trade advance would also amount to deemed dividend under s. 2(22)(e) of the IT Act. Listing the object behind treating the “loans and advances” given to the shareholders of a closely held company as deemed dividend, the Delhi High Court pointed out as follows :

” … the word ‘advance’ has to be read in conjunction with the word ‘loan’. Usually attributes of a loan are that it involves positive Act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term ‘advance’ may or may not include lending. The word ‘advance’ if not found in the company of or in conjunction with a word ‘loan’ may or may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term ‘advance’. The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day (1879) 5 AC 63 by observing ‘it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them’ and our Supreme Court in the case of Rohit Pulp & Paper Mills Ltd. v. CCE 1990 (47) ELT 491 (SC) and State of Bombay v. Hospital Mazdoor Sabha (1960) I LLJ 251 (SC).”

17. Thus the Delhi High Court held that the word “advance” could only mean such advances which carried with it an obligation of repayment. It further held :

“Trade advance which are in the nature of money transacted to give effect to a commercial transactions would not, in our view, fall within the ambit of the provisions of s. 2(22)(e) of the Act. This interpretation would alloy the rule of purposive construction with noscitur a sociis, as was done by the Supreme Court in the case of LIC of India v. Retd. LIC Officers Assn. AIR 2008 SC 1485. The observation in para 24 of the report being apposite are extracted hereinbelow :

‘Each word employed in a statute must take colour from the purport and object for which it is used. The principle of purposive interpretation, therefore, should be taken recourse to’.”

18. Thus in the decision in CIT v. State Bank of Travancore(1997) 140 CTR (Ker) 358 : (1997) 228 ITR 40 (Ker) the Kerala High Court treated the interest on overdue bills as compensation to be excluded from the chargeable interest. The Kerala High Court pointed out that overdue bill is wholly distinct from loans and advances. What is taxable under the Interest-tax Act is interest on loan and advance only and the character of an overdue bill is not synonymous with loans and advances. We do not think there could be any second thought on this line of thinking. We respectfully agree with the views expressed by the Delhi High Court and Kerala High Court.

19. Going by the facts, we hold that the assessee’s case does not fall for consideration under sub-cl. (iv) of s. 2(5B). The assessee is a credit institution. As a finance company engaged in hire-purchase and leasing transaction, the assessee also does not deny that its activities in respect of financing, falls for consideration under sub-cl. (iv). The AO has assessed the transactions relating to hire-purchase financing. However, as rightly pointed out by the assessee, when the payment of money as advance was towards the purchase of machinery, there exists a distinct feature from all those transactions of financing on hire-purchase and leasing that an exception has to be made in respect of the amount advanced by the assessee for the purpose of purchase of machinery. On the delay in delivery, the manufacturer had paid interest. As already pointed out, going by the fact—a fact which is not disputed by the Revenue, that the amount given by the assessee was towards the purchase of machinery as advance, we hold that the case of the assessee does not fall for consideration under sub-cl. (iv) of s. 2(5B). Going by the definition therein, we hold that the trade advance given does not fall under the phrase loan or advance or otherwise so as to cover thenature of transactions herein.

20. In view of the above, we have no hesitation in holding that the Interest-tax Act does not stand attracted to the facts of the case. On the admitted facts, the assessee had financed for the purpose of purchase of machinery. We reject the tax case and accordingly, question No. 2 is answered against the assessee. As far as the first question is concerned, the same is answered in favour of the Revenue (sic-assessee). The tax case stands allowed in part.

[Citation : 339 ITR 391]

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