By TIOL News Service

AHMEDABAD, JUNE 30, 2016: THE issue is - Whether when the main activity of the assessee is to provide loan and main source of its income is interest which is more than the income earned by way of service charges, it can be contended that the company is a finance company. YES is the verdict.

Facts of the case

The assessee is a credit Institution. It had submitted that the assessee was not a financial company as per Clause (v) of Section 2 (5B) of the Act, and it cannot be said that the principal activity of the assessee was disbursement of loan. It had further submitted that income of the assessee from the interest was only Rs.4,86,162/- for the A.Y. 1994-95, it was Rs.3,25,237/- for the A.Y. 1995-96 while service charge received for the same A.Ys. were Rs.5,40,132/-, Rs.3,95,405/- and same was the position for other AYs. It had, therefore, submitted that the Tribunal had committed an error in passing the impugned order.

Held that,

++ while passing the impugned order, the Tribunal has observed that on the basis of above chart, the assessee claims that interest income is less than service charges in first three years and, therefore, assessee's principal business is not that of granting loans and consequently, not a finance company in view of the decision in the case of Kirloskar Leasing & Finance Ltd. 2003-TIOL-05-ITAT-PUNE and Rajesh Leasing & Finance Ltd. 89 ITC 289 (Rjt). We do not find any merit in the contention of the assessee. Looking to the amount of interest received by the assessee, it cannot be said that the assessee was not doing it as a business venture. The interest income is regularly there in all the years under consideration which is the main source of income of the assesseee and in these circumstances, it cannot be said that the principal business was not granting loan. The decision in the case of Tara Finvest Ltd. is of no help to the assessee because in that case a finding has been given by the Tribunal that the assessee's principal business was paper trading company and loans and advances have been made to the companies or firms in which the directors were interested which was not the business of the company. Interest income in the three years is Rs.14,97,441/-, Rs, 11,15,533 and Rs.4,46,972/- whereas the service charges are only Rs.5,40,132/-, Rs. 3,95,405/- and Rs.2,95,098/-. From the balance sheet it is clear that the assessee had given Rs.89,95,449/- towards unsecured loan. Therefore, in view of clause (v) of Section 2 (5B) of the Interest Act, the main activity of the assessee is to provide loan and main source of its income is interest. In view of all these, the questions of law framed for our consideration are required to be answered against the assessee and in favour of the department. Accordingly, all these appeals are dismissed and the impugned order is confirmed.

(See 2016-TIOL-1246-HC-AHM-IT)