By TIOL News Service

AHEMDABAD, MAY 10, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether interest earned by a finance company by advancing funds for trading in shares and securities, are chargeable to tax under the Interest Tax Act, 1974. YES IS THE VERDICT.

Facts of the case:

The assessee company, had returned income for the relevant AY under the Income tax Act. However, the assessee stated that it was not a finance company and had not earned any interest which could be subjected to tax hence, it did not file any return under the Interest tax Act. During the assessment proceeding under Income Tax Act, the AO noticed that the company had earned interest income of Rs.1.70 crores on which tax under the Interest Act was payable but the company had not filed any return. Accordingly, a notice u/s 10 of Interest Act was issued to the assessee for reassessment of the company's liability under the Act. In reply, it was contended that the assessee was not an investment company and did not derive any income from investment. It was also pleaded that the assessee was trading in shares and securities and had derived income from such business which was duly offered to tax under Income Tax Act. The assessee had also submitted that out of the total interest earned, an amount of Rs. 16.72 lakhs was received from the credit institutions and therefore, out of the purview of Interest Act. But, since the assessee failed to produce any supporting material for its contention, the AO rejected the same. In addition, the AO, not being satisfied, had stated that assessee was covered u/s 2(5B) and therefore, the interest earned by assessee was liable to tax under the Interest Act.

On appeal, the FAA was of the opinion that the assessee was engaged mainly in the activities referred to u/s 2(5B) of Interest Act. On further appeal, the Tribunal observed that when a company had multiple main objects, an individual object might lose significance. The assessee 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 u/s 2(5B).

High Court held that,

++ from the perusal of MoA and AoA, it is seen that the main objects of the company 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, 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. Nevertheless, all three purposes were clearly in the nature of the investment business. 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. The third main object was also of purchasing for investment or resale and to deal in land and other immovable properties. As noted, the definition of term 'financial company' includes several subclauses. Subclause (ii) thereof refers to an investment company. In addition, 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 otherwise. As noted, subclause (vi) would bring within the fold of the term financial company, a miscellaneous finance company. Thus, very clearly, the assessee company was incorporated for carrying on exclusively the business of an investment company and a loan company;

++ the contention of the assessee's counsel 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 this contention 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 ignoring the objects for which the company is incorporated. This brings to the question whether the interest earned by assessee company can still be taxed under the Interest Act. In this context, it was the contention of Revenue's counsel that the interest was not earned by company on any loan, but was generated out of its deposits. It was argued that the year under consideration was an initial year of the company. Since no good project was coming forth, 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. In the result, the question is answered against the assessee.

(See 2018-TIOL-876-HC-AHM-IT)