ASMAN INVESTMENT LTD. V. ASSTT. COMMISSIONER OF INCOME TAX

TAXAP/154/2007

AI Insights

The case revolves around the classification of Asman Investment Ltd. as a 'financial company' under the Interest Tax Act, 1974, and the consequent liability to pay interest tax on the income earned from interest. The company argued that it is not a financial company and thus not liable for the tax. However, the Income Tax Appellate Tribunal and the Gujarat High Court found that the company's activities and objects align with those of a financial company as defined in the Act. The court dismissed the appeal, affirming the Tribunal's decision.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 753658 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 01-03-2018
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-Tax v. Amritlal and Co. Ltd., Commissioner of Income-Tax v. Sahara India Savings and Investment Corporation Ltd., Commissioner of Income-Tax v. State Bank of Travancore, Commissioner of Income-Tax v. Golden Investments Ltd., Commissioner of Income-Tax v. Visisth Chay Vypapar Ltd.
• Laws Referred To: Interest Tax Act, 1974, Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: SWATI SOPARKAR
• Keywords: Assessment Year 1997-98; Financial Company; Interest Tax; Investment company
• Section: 6; 10; 5; 4; 2(7); 2(5B)

Judgement Text

"C/TAXAP/154/2007 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 154 of 2007 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== ASMAN INVESTMENT LTD. Versus ASSTT. COMMISSIONER OF INCOME TAX ========================================================== Appearance: MRS SWATI SOPARKAR for the PETITIONER(s) No. 1 MRS MAUNA M BHATT for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA Date : 28/02/2018 & 01/03/2018 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This appeal is filed by the assessee. At the Page 1 of 22 C/TAXAP/154/2007 JUDGMENT time of admission of the appeal, following substantial question of law was framed: “(A) Whether in the facts and under the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the appellant is liable to pay interest tax on the interest earned by it?” 2. Issue pertains to charging of interest tax in case of the assessee under the Interest Tax act, 1974 ('the Act' for short). 3. Brief facts are as under. 4. Assessee is a company registered under the Companies Act. For the assessment year 1997­98, the assessee had filed the return of income under the Income Tax Act, 1961, but no return was filed under the said Act on the premise that the assessee is not a finance company and in any case has not earned any interest during the relevant year which could be subjected to tax under the said Act. During the course of the assessment of the company under the Income Tax Act, 1961, the Assessing Officer noticed that the company had earned interest income of Rs.1.70 crores (rounded off) on which tax under the said Act was payable but the company had not filed Page 2 of 22 C/TAXAP/154/2007 JUDGMENT the return under the said Act. A notice under section 10 of the said Act was therefore issued to the assessee for reassessment of the company's liability under the said Act. During the course of such assessment proceedings, the assessee contended that the assessee company is not an investment company and does not derive any income from investment. The assessee company is trading in shares and securities and has derived income from such business which has been offered to tax under the Income Tax Act, 1961. The assessee drew attention of the Assessing Officer to the objects of the company to contend that the company does not fall within the definition of term “financial company” as defined in section 2(5B) of the Act. 5. The Assessing Officer was however not convinced. He was of the opinion that the assessee is covered under section 2(5B) of the Act and therefore, the interest earned by the assessee is liable to tax under the said Act. The assessee's contention that out of the total interest earned, an amount of Rs.16.72 lakhs (rounded off) was received from the credit institutions and therefore, in any case, out Page 3 of 22 C/TAXAP/154/2007 JUDGMENT of the purview of the tax under the said Act, was rejected on the ground that the assessee has produced no material in support of such contention. 6. The assessee carried the matter in appeal. Before the Commissioner of Income Tax (Appeals), the assessee in addition to reiterating its stand taken before the Assessing Officer, took an additional ground. It was contended that the assessee had merely utilized the surplus funds by advancing money on which interest was earned and also had carried out the activity of trading in shares and security awaiting availability of good projects. We may record the assessee's assertions in this respect verbatim as found in the order of CIT(A). “This is the initial year and no good project was coming for and, therefore, in order to avoid the keeping funds idle, the assessee had advanced money and earned interest income and also carried out activity of trading in shares and securities. It is further argued in ground number 3 that the share of investments in total assets of the company is only 1.87%.” 7. This contention of the assessee would be relevant at a later stage when we examine the argument of the counsel for the assessee that Page 4 of 22 C/TAXAP/154/2007 JUDGMENT irrespective of the fact whether the assessee is a financial company or not, the interest earned by the company was not subject to tax under the said Act. 8. Be that as it may, the Commissioner of Income Tax (Appeals) rejected the assessee's appeal. He put considerable stress on the nature of activity carried out by the company during the year under consideration rather then the objects of the company contained in the Memorandum of Association. He recorded that the assessee had carried out the activity of investment and purchase and sale of shares and earned considerable interest. In his opinion, therefore, the assessee company was engaged mainly in the activities referred to in section 2(5B) of the Act. 9. The assessee carried the matter further in appeal before the Tribunal. Main ground that the assessee pressed before the Tribunal appears to be of the company not being the financial company. The objects of the company were once again pressed in contention. The Tribunal rejected the assessee's stand. After taking detail note of such objects, the Page 5 of 22 C/TAXAP/154/2007 JUDGMENT Tribunal observed that when a company has multiple main objects, an individual object may lose significance. The assessee company had listed three main objects which in the opinion of the Tribunal were sufficient to bring the company within the fold of financial company as defined in section 2(5B) of the Act. In the opinion of the Tribunal merely because during the year under the consideration the company carried out one or the other objects, would not be a determinative fact. Assessee's appeal was therefore dismissed, upon which, the present appeal has been filed. 10. Learned counsel for the assessee raised following contention: I. The assessee company was not a financial company. Neither the objects nor the activities actually carried out by the company would establish that the company was a financial company. II. Neither the Revenue authorities nor the Tribunal has come to any definite conclusion as to what was the precise category the company would fall Page 6 of 22 C/TAXAP/154/2007 JUDGMENT so as to qualify as a financial company. III. The principal object of the company was of rendering consultancy services for industrial projects. Even going by the activities carried out by the company it would not fall within the said definition. The company had surplus funds. Awaiting availability of a good project, the company parked its funds in deposits earning interest. Remaining funds were utilized for acquiring shares for the purpose of dealing in such shares. IV. Even if the company is held to be a financial company, the interest income was not generated out of any loan or advance made by the company. No tax can therefore be charged under the said Act on such interest income. 11. Out attention was drawn to the following judgments: I. In case of Commissioner of Income­Tax v. Amritlal and Co. Ltd. reported in [1995] 212 ITR 540 (Bom), in which, while deciding whether the Page 7 of 22 C/TAXAP/154/2007 JUDGMENT assessee company was an “investment company” it was observed that the nature of primary activities of the company must be taken into account. II. In case of Commissioner of Income­Tax v. Sahara India Savings and Investment Corporation Ltd. reported in [2010] 321 ITR 371 (SC), in which, the Supreme Court was mainly concerned with section 2(7) of the Act on term 'interest'. The Court held that interest on investments is not taxable under the said Act since section 2(7) read as a whole focuses only on interest accruing on loans and advances, commitment charges and discount on promissory notes and bills of exchange. III. In case of Commissioner of Income­Tax v. State Bank of Travancore, reported in [1997] 228 ITR 40 (Ker), in which, the Division Bench of Kerala High Court held that the said Act would get altercated only in respect of loans and advances and not on the interest on overdue bills. It was held that the amount demanded and calculated Page 8 of 22 C/TAXAP/154/2007 JUDGMENT by bank in the event of default in regard to overdue bills would not fall within the definition of term 'interest'. IV. In case of Commissioner of Income­Tax v. Golden Investments Ltd. reported in [2014] 369 ITR 544 (Mad), the question arose whether the interest earned by a company on debentures would be subjected to tax under the said Act. The Court answered the question in negative and in favour of the assessee. V. In case of Commissioner of Income­Tax v. Visisth Chay Vypapar Ltd. reported in [2011] 339 ITR 157 (Delhi), the Division Bench of Delhi High Court in the context of the said Act, interpreted the term 'loan' referred to in section 2(7) of the Act. It was the case in which the assessee had placed intercorporate deposits of Rs.22 crores at the disposal of one SWC, also a company. The Commissioner (Appeals) had held that the nomenclature of intercorporate deposit was used ornamentally. In order to decide the real nature of transaction, the contract between the parties Page 9 of 22 C/TAXAP/154/2007 JUDGMENT was looked into and it was held that the transaction was not one of a deposit but of a loan. The Tribunal reversed these findings, upon which, the Revenue was in appeal before the High Court. The Court culled out three distinctions between a deposit and a loan as under: “(i) A loan is payable immediately on receipt thereof as per the directions of the lender, while a deposit has a term for repayment, which may be a fixed date or it may be as per terms and conditions of the agreement, (ii) The loan is obtained at the request of the borrower while a deposit is made at the instance of the depositor and (iii) The limitation period in case of a loan starts from the date of the loan, while it starts from the date of repayment in the case of deposit.” On facts, the Court held that the monies given by the assessee to SWC did not fulfill the said criteria as to bring it within the expression 'loan' and therefore the question of applicability of section 2(7) did not arise. Resultantly, Revenue's appeal was dismissed. 12. On the other hand, learned counsel Shri Bhatt for the Revenue opposed the appeal contending that Page 10 of 22 C/TAXAP/154/2007 JUDGMENT three authorities have concurrently held that the assessee is a financial company. This conclusion is based on analysis of the assessee's primary objects and the activities undertaken by the assessee. Even when the assessee was trading in shares, such shares would have been acquired. Thus, the assessee was engaged in the activity of acquisition of shares. No error can be found with the judgment of the Tribunal. Counsel further submitted that the contention that interest was earned from deposits and not through loan or advances made by the company was never raised before the Tribunal or the Revenue authorities. In fact, the contention of the assessee was that the surplus funds of the company awaiting availability of a good project were utilized for the purpose of advancing a loan which led to the generation of the interest income. Said interest therefore would squarely fall within the definition contained in section 2(7) of the Act. 13. To resolve the controversy, we may note the statutory provisions applicable. The said Act was enacted in the year 1974. The statement of objects and reasons provides that the tax would be levied at Page 11 of 22 C/TAXAP/154/2007 JUDGMENT the rate of 7% on the chargeable amount of interest. Such tax will be allowed as a deduction in computing the taxable income under the the Income Tax Act, 1961. Such tax was expected to have both monetary and fiscal impact as it will raise the cost of borrowed funds and supplement Government revenues. Section (5A) defines the term credit institution as under: [(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) [ x x x x ] (ii) a public financial institution as defined in section 4A of the Companies Act, 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 and (iv) any other financial company; 14. Clause (iv) of sub­section (5A) refers to any other financial company. Since the case of the Revenue is that assessee is a financial company and therefore becomes credit institution, we may refer to the definition of 'financial company' contained in sub­section (5B), which reads as under: “(5B) “financial company” means a company, other Page 12 of 22 C/TAXAP/154/2007 JUDGMENT than a company referred to in sub­clause (i), (ii) or (iii) of clause (5A), being— (i) a hire­purchase finance company, that is to say, a company which carries on, as its principal business, hire­purchase 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 sub­clauses (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; [x] [(va) a residuary non­banking 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 lumpsum or in installments by way of contributions or subscriptions or by sale of units or certificates or other instruments or in any other manner; or] Page 13 of 22 C/TAXAP/154/2007 JUDGMENT (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;]” 15. Term 'interest' is defined under section 2(7) as under: 2(7) “interest” means interest on loans and advances made in India and includes— (a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India, but does not include— (i) interest referred to in sub­section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills;] Term 'chargeable interest' has been defined in section 2(5) as to mean the total amount of interest referred to in section 5, computed in the manner laid down in section 6. 16. Section 4 of the Act pertains to charge of tax. Sub­section (1) thereof prescribes charging of tax on the chargeable interest at the rate of 7% from every scheduled bank. Sub­section (2) of section 4 provides for charging of tax on the chargeable interest from Page 14 of 22 C/TAXAP/154/2007 JUDGMENT every credit institution at the rate of 3%. 17. Section 5 of the Act pertains to scope of chargeable interest. Section 6 pertains to computation of chargeable interest. 18. In background of the above noted statutory framework, the question is whether the Tribunal was correct in coming to the conclusion that the assessee was the financial company and that the interest earned by the assessee company was chargeable to tax under the said Act. 01.03.18 19. As noted, sub­section (2) of section 4 of the Act provides for levy of interest tax at the rate of 3% on the chargeable interest on every credit institution. Term 'credit institution' is defined in sub­section (5A) of section 2 of the Act which includes various banking companies and financial institutions. Clause (iv) which is in the nature of residuary clause refers to “any other financial company”. In turn, term “financial company” is defined under sub­section (5B) of section 2. This Page 15 of 22 C/TAXAP/154/2007 JUDGMENT definition brings within its fold various companies such as higher purchase finance company, investment company, housing finance company, loan company etc. Clause (vi) thereof pertains to 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 sub­clauses. 20. In this context, we may peruse the objects of the company. These objects were divided in two parts. Category­A objects which were the main objects and category­B objects were those which were incidental and ancillary objects to the main objects. The main objects of the company are as under: “Category “A” Under this category, the objects of the assessee­company have been termed as main objects and the same are as under :­ “[A] Main objects as to be pursued by the Company on its incorporation are:­ (1) To carry on the business of an Investment Company and for that purpose to invest in, acquire, underwrite, subscribe for, hold shares, bonds, stocks, securities, debentures stocks issued or guaranteed by any Company constituted and carrying on business in India or elsewhere, any Government, state, dominions, sovereign, Central or Page 16 of 22 C/TAXAP/154/2007 JUDGMENT Provincial Commissioners, Port Trust, public body or authority, supreme, municipal, legal or otherwise where in India or elsewhere. 2. To invest money (not amounting to banking business) on personal security or on the security, leasehold, and freehold land, shares, securities, stock, merchandise and other property and assets and generally to lend and advance money to such persons, firms or Companies and upon such terms and subjects to such conditions as may seem expedient. 3. To purchase for investment or resale and to deal in land and house, other property of any tenure and any interest therein, and to create, sell and deal in freehold and leasehold ground.” The main objects of the company thus were to carry on the business as an investment company and for that purpose to invest in and acquire, hold shares, bonds, stocks, securities etc. To invest money in personal security and on other securities, shares etc and to lend and advance money to such persons, firms, companies etc. as found expedient and to purchase for investment or resale and to deal in land, house and other properties. As correctly observed by the Tribunal, the main objects of the company may have been divided in three parts. Page 17 of 22 C/TAXAP/154/2007 JUDGMENT Nevertheless, all three purposes were clearly in the nature of the investment business of the company. The first object directly referred to the business of an investment company which would include investment in and acquisition of shares, bonds, stocks, securities, etc. The second object again was directly in the nature of investing money in personal securities, in land, shares, etc. Such investment can be with individuals, firms, or companies. In the process, if the company would lend money and give advances to such persons to whom the company found expedient. The third main object was also of purchasing for investment or resale and to deal in land and other immovable properties. 21. As noted, the definition of term 'financial company' includes several sub­clauses. Sub­clause (ii) thereof refers to an investment company i.e. a company which carries on its principal business of acquisition of shares, stocks, bonds, debentures etc. The term 'loan company' is included in sub­clause (iv) which would include a company which carries on, as its principal business, the business of providing finance, whether by making loans or advances or Page 18 of 22 C/TAXAP/154/2007 JUDGMENT otherwise. As noted, sub­clause (vi) would bring within the fold of the term financial company, a miscellaneous finance company, viz. a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub­clauses. Very clearly, the assessee company was incorporated for carrying on exclusively the business of an investment company and a loan company. All the three principal objects fitted within these two categories. The Tribunal therefore correctly held the assessee company to be a financial company. The contention of the counsel for the assessee that not the objects of the company but its real activities during a financial year which should be used as a parameter to decide the status of the company, cannot be accepted. Firstly, his contention was that awaiting other projects, the company has parked its available funds in shares and stocks and yet further surplus was invested in fixed deposits. Accepting the contention as presented before us would lead to a situation where for the purpose of ascertaining whether a company is a financial company or not, its category from year to year would have to be examined Page 19 of 22 C/TAXAP/154/2007 JUDGMENT ignoring the objects for which the company is incorporated. This, in turn, would mean for a particular year the company would be a financial company whereas during the later year, it may not fit the description. Clearly something that cannot be easily envisaged. 22. This brings us to the question whether the interest earned by the assessee company can still be taxed under the said Act. In this context, the contention of the counsel for the Revenue, we may recall that the interest was not earned by the company on any loan or advance made but was generated out of its deposits. We are conscious of a clear distinction between a loan or an advance and a deposit. This has been elaborately discussed by Delhi High Court in case of Visisth Chay Vypapar Ltd. (supra). Had adequate facts being brought on record, in this respect, we would have analyzed such material. However, this appears to be an argument raised for the first time. In fact, the stand of the assessee before the lower authorities was evidently different. We have reproduced the portion of the contention of the assessee before the Commissioner of Page 20 of 22 C/TAXAP/154/2007 JUDGMENT Income Tax (Appeals), recorded by the Commissioner of Income Tax (Appeals). It was argued that the year under consideration was an initial year of the company. No good project was coming­forth and therefore in order to avoid keeping the funds idle, the assessee had advanced money and earned interest income and also carried out activities in trading in shares and securities. Thus, clearly even according to the assessee, the interest was earned by advancing its funds. The case now put up before us that such investment was in the nature of a deposit and not by way of advance was never raised earlier. We do not dispute that the term “interest” defined under section 2(7) of the Act would mean interest on loans and advances and if therefore in a given case it is established that the interest earned by the assessee was not out of either loan or advance but through some other source, the interest tax would not apply to such interest. However, when no such factual dispute was raised, no material on record to hold contrary to what the assessee itself had contended before the Commissioner of Income Tax (Appeals), the contention of the counsel for the assessee must be Page 21 of 22 C/TAXAP/154/2007 JUDGMENT rejected. 23. In the result, question is answered against the assessee. Tax Appeal is dismissed. (AKIL KURESHI, J.) (B.N. KARIA, J.) ANKIT SHAH Page 22 of 22 "