High Court Of Madras
CIT, Chennai Vs. Tamilnadu Industrial Development Corpn. Ltd.
Section 2(5B)
Assessment Years 1993-94 To 1997-98
R. Sudhakar And G. M. Akbar Ali, JJ.
T. C. (A.) Nos. 1401 To 1405 Of 2007
August 27, 2014
JUDGMENT
R. Sudhakar, J. – These appeals are filed by the Revenue challenging the order of the Income Tax Appellate Tribunal Chennai ‘B’ Bench, dated 4.9.2006 made in ITA Nos.91 to 95/Mds/2003 for the assessment years 1993-1994 to 1997-1998.
2.1 The brief facts of the case are as under: The assessee is a company incorporated under the provisions of the Companies Act. The department issued notices under Section 10 of the Interest Tax Act calling upon the assessee to file return of chargeable interest for the assessment years 1993-1994 to 1997-1998, since no returns were filed by the assessee. The assessee claimed that the provisions of the Interest Tax Act are not applicable to them, as it is not a credit institution and is mainly engaged in the promotion of industries in the State of Tamil Nadu.
2.2 The Assessing Officer, on facts, found that the assessee was claiming benefit under Section 36(1)(viii) of the Income Tax Act, which applies to financial corporations engaged in providing long-term finance for industrial or agricultural development. In such view of the matter, the Assessing Officer held that the assessee is a financial corporation advancing loans to other institutions for earning interest falling within the purview of Section 2(5B)(iv) of the Interest Tax Act and, therefore, it is liable to pay interest tax.
2.1 Aggrieved by the said decision, the assessee filed appeals to the Commissioner of Income Tax (Appeals), who also concurred with the view of the Assessing Officer. The Commissioner of Income Tax (Appeals), after going through the nature of the transactions in details, came to the conclusion that the business conducted by the assessee would come within the ambit of “any other financial company” and, thus, it is a credit institution under Section 2(5A)(iv) of the Interest Tax Act and therefore, they are liable to pay tax on the interest as per the provisions of the Interest Tax Act.
2.3 Assailing the said order, the assessee appealed to the Tribunal. The Tribunal accepted the assessee’s plea and allowed the appeals holding that the assessee company does not come within the purview of the definition of term “finance company”, as defined under Section 2(5B) of the Interest Tax Act, and therefore, is not a credit institution within the meaning of Section 2(5A) of the Interest Tax Act.
2.4 Impugning the said order passed by the Tribunal, the Revenue has filed these appeals and the same were admitted on the following substantial questions of law:
“1.Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee does not fall within the definition in either Section 2(5A) or 2(5B) of the Interest Tax Act?
2.Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is not liable to interest tax as its main object is promotion of industry within the state, even though such promotion is done by means of advancing loans?”
3. We have heard the learned counsel on either side and perused the orders passed by the Tribunal and the authorities below.
4. As the issues raised in these appeals are entwined, we deal with them together.
5. For the purpose of considering the issues raised in these appeals, it will be useful to refer to the scope and ambit of the the Interest Tax Act, which reads as under:
“The tax is levied on the gross interest income of ‘credit institutions’, that is, banks, including co-operative societies engaged in the business of banking (except co-operative societies which provide credit facilities to farmers or village artisans), public financial institutions, state financial corporations and financial companies. For this purpose, financial companies will mean companies engaged in the business of hire purchase transactions or financing such transactions, investment companies, house finance companies, companies engaged in the business of providing finance by way of making loans, advances or otherwise, mutual benefit finance companies and companies which carry on business consisting of one or more of the activities referred to above. The interest income chargeable to tax will include commitment charges and discount on promissory notes and bills of exchange. However, interest on deposits made by a bank with the Reserve Bank of India under Section 42(1B) of the Reserve Bank of India Act and discount on treasury bills will not form part of the chargeable interest. Interest earned by a credit institution on loans and advances made to another credit institution will also not form part of the chargeable interest.
The rate of tax is three per cent of the gross amount of interest received by the credit institution two percent on chargeable interest accruing or arising after March 31, 1997. Interest-tax levied under the Interest-tax Act is allowed as a deduction in computing the income of the credit institution chargeable to income-tax under the head ‘Profits and gains of business or profession’.” (Emphasis supplied)
6. Section 4 of the Interest Tax Act provides for charge of tax and the same reads as under:
“Section 4. Charge of tax:
(1)Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the 1st day of April, 1975, a tax (in this Act referred to as interest-tax) in respect of its chargeable interest of the previous year at the rate of seven per cent. of such chargeable interest:
Provided that the rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1983, shall be three and a half per cent of such chargeable interest.
(2)Notwithstanding anything contained in sub-section (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 day of 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.” (Emphasis supplied)
7. The term “credit institution” used in Section 4(2) of the Interest Tax Act is defined under Section 2(5A) of the Interest Tax Act and the term “finance company” is defined under Section 2(5B) of the Interest Tax Act. The said provisions read as under:
“Section 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 section 51 of that Act);
(ii)a public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);
(iii)a State Financial Corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); and
(iv)any other financial company.
Section 2(5B) ‘financial company’ means a company, other than a company referred to in sub-clause (i), (ii) or (iii) of clause (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-clauses (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 section 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-clause (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;
or
(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.” (Emphasis supplied)
8. In the light of the said provisions, we perused the Memorandum and Articles of Association of the assessee company and it will be apposite to refer to the following clauses contained in the Memorandum of Association of the assessee company:
“(14) To aid, assist and finance any industrial undertaking, project or enterprise, whether owned or run by Government, statutory body, private company, firm, or individual with capital, credit, means, or resources for prosecution of its works and business. …
(17) To grant or guarantee loans or advances to any company, association or concern engaged in any industry or to assist its establishment, development or expansion or to enable it to undertake and start new lines of production.
(18) To underwrite the issue of stock, shares bonds, debentures by any company, association or concern engaged or proposing to engage in any industry.
(19) To retain as part of its assets any stock, shares, bonds or debentures which it may have to take up in fulfilment of its underwriting liabilities.
(20) To take, subscribe, hold shares, debentures, securities in any company, association or concern engaged or proposing to engage in any industry.” (Emphasis supplied)
9. On leafing through the Memorandum and Articles of Association of the assessee company, we find that though principally the assessee company is embarked in the promotion of industries in the State of Tamil Nadu, it assists and finances any industrial undertaking, project or enterprise; and also grants or guarantees loans or advances to any company, association or concern engaged in any industry.
10. The said objects of the assessee company have been considered by the Original Authority as well as the Appellate Authority threadbare. We are inclined to refer to paragraphs (9) and (10) of the order passed by the Commissioner of Income Tax (Appeals), as the figures referred to therein are self-explanatory in respect of the issue under consideration:
“9. On going through the P & L A/c. and the Balance Sheet of the appellant for all the years relevant to the assessment years under appeal, it is seen that the appellant has been deriving income mainly from interest and dividend. The break-up of interest income and dividend income and their comparison with the total income receipts are reflected in Table below which also shows how the funds have been deployed.
| Asst. Year | Interest Income | Dividend Income | Total/Total receipt |
| (a) | (b) | (c) | |
| 1993-94 | 10,27,24,057 | 5,37,37,324 | 15,64,61,381/17,15,49,002 |
| 1994-95 | 16,84,14,031 | 6,43,93,103 | 23,28,07,134/23,90,28,936 |
| 1995-96 | 10,71,44,830 | 10,83,94,730 | 21,55,39,560/27,51,42,066 |
| 1996-97 | 12,40,16,121 | 11,71,81,860 | 24,11,97,981/26,23,79,557 |
| 1997-98 | 14,36,37,718 | 12,19,15,341 | 26,55,53,059/26,88,99,088 |
| Asst. Year | Loans & Advances | Investments | Total/Asset |
| 1993-94 | 87,08,33,791 | 1,55,10,33,433 | 2,46,73,41,865 |
| 1994-95 | 1,28,51,11,533 | 1,71,08,83,878 | 3,05,06,28,777 |
| 1995-96 | 75,54,13,844 | 1,80,34,80,884 | 2,73,46,01,667 |
| 1996-97 | 82,89,69,075 | 1,96,09,25,552 | 2,89,83,09,712 |
| 1997-98 | 1,14,18,37,651 | 1,87,78,57,985 | 3,13,99,82,520 |
10. On going through the Table above, it would be clear that the dominant receipt is from Interest on Loans and Advances in all the assessment years except in the asst. year 1995-96 wherein the interest income and the dividend income are almost the same. However the figures in the Balance Sheet are compared in respect of assets represented by Loans and Advances and investments. It would be seen that the majority of the fund of the appellant lies as investments. As explained earlier, the fund deployed in investments represents such shares which the appellant had acquired in the companies promoted by it. Similarly, the fund shown as Loans and Advances is such amount which remained lent to such companies promoted by the appellant whose shares have not been acquired so far. The dividend income is from the shares of the companies promoted. Similarly, the interest income is derived from the Loans and Advances made to the company promoted. Since both the investments and the loans and advances are made in course of its business of promotion and development of industries in the State of Tamilnadu, the dividend income and also the interest income are claimed as business receipts by the appellant and also, held so by the appellate authorities including the Hon’ble ITAT. The shares acquired by the appellant are thus business assets and profit on sale of such shares is, therefore, admitted as business income and credited to P & L A/c. of respective years as and when sold.”
11. On such premise, the Commissioner of Income Tax (Appeals) came to the conclusion that for almost all the assessment years, substantial amount has been received by way of interest income, besides dividend income. The interest income is derived from loans and advances made by the assessee to the company promoted. After a period of time, when the loans and advances are converted as shares, the assessee received dividends. In such an event, it is very clear that prior to conversion of the loans and advances as shares, the amount advanced by the assessee is predominantly in the nature of loans and advances. Otherwise, the question of dividend does not arise. The Commissioner of Income-tax (Appeals), on facts, held that the majority of the fund of the assessee lies in investments and the funds deployed in investments represents such shares, which the assessee had acquired in the companies promoted by it and, therefore, the shares acquired by the assessee are business assets and profit on sale of such shares is admitted as business income and credited to the profit and loss account of the respective years, as and when sold. The contention of the assessee that the provisions of Section 36(1)(viii) of the Income Tax Act cannot be made applicable for the purposes of Interest Tax Act was also considered by the Commissioner of Income Tax (Appeals) and it was held that the assessee is treated as credit institution not because of its being a financial corporation within the meaning of Section 36(1)(viii) of the Income Tax Act, but by virtue of it being “any other financial company” within the meaning of Section 2(5A)(iv) of the Interest Tax Act.
12. The above said reasoning of the Commissioner of Income Tax (Appeals) that the assessee company would come within the purview of “financial company” in terms of Section 2(5A)(iv) of the Interest Tax Act, which is more fully defined under Section 2(5B) of the Interest Tax Act, is justified. We find that the Tribunal has misdirected itself to conclude that the primary intention of the assessee company is to promote development of industries and not financial company. A bare reading of the Memorandum and Articles of Association of the assessee company, in no uncertain terms, makes it clear that one among the primary objects of the assessee company is to grant loans or advances to any company. In such view of the matter, the reasoning given by the Tribunal on an interpretation of the term “financial company” does not appear to be correct. Moreover, the facts culled out by the Commissioner of Income Tax (Appeals) and the claim made by the assessee under Section 36(1)(viii) of the Income Tax Act make it clear that the character of the assessee company is also a “financial company”, as defined under Section 2(5B) of the Interest Tax Act.
13. The learned counsel for the assessee relied upon a decision of the Supreme Court in CWT v. Ellis Bridge Gymkhana [1998] 229 ITR 1/[1997] 95 Taxman 143, wherein it is held that the rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section and no one can be taxed by implication.
There is no dispute with regard to the said legal proposition. In the case on hand, the nature of business conducted by the assessee and the transaction of finance, for which interest has been received for all the assessment years running to several crores of rupees, establishes that the assessee is also engaged in the business of financial company. Therefore, the interest earned by the assessee company is liable to tax under the provisions of the Interest Tax Act. In view of our finding that the assessee is a credit institution falling within the definition of “financial company” under Section 2(5B) of the Interest Tax Act, the decision of the Supreme Court in Ellis Bridge Gymkhana, (supra), does not enure to the benefit of the assessee.
For the foregoing reasons, we answer the substantial questions of law against the assessee and in favour of the Revenue. These appeals are allowed. No costs.
[Citation : 368 ITR 545]
