Income Tax Appellate Tribunal - Hyderabad
Suman Savings And Investments (P.) Ltd. vs Income-Tax Officer on 15 June, 1987
Equivalent citations: [1987]23ITD345(HYD)
ORDER
--Issue not the subject-matter of appeal.
Ratio:
Commissioner had jurisdiction to revise the issue regarding the disallowance of interest under section 40A(8) which was not the subject-matter of appeal.
Held:
The question of disallowance of 15% of the interest under section 40A(8) regarding which the Commissioner invoked his jurisdiction under section 263(1), was not a subject-matter of appeal before the appellate authorities. Therefore, at best there was only a partial merger of the order of the Income Tax Officer in the appellate order and it was not a total merger. The Commissioner had jurisdiction to revise the order of the Income Tax Officer on such issue.
Application:
Also to current assessment years as regards doctrine of merger however section 40A(8) is not applicable.
Income Tax Act 1961 s.263 ORDER G. Santhanam, Accountant Member
1. This is an appeal by the assesses against the order of the learned Commissioner of Income-tax Under Section 263(1) of the Income-tax Act, 1961.
2. The assessee, by name Suman Savings & Investments (P) Ltd., is engaged in the business of chit fund. In the course of its business, the assessee had to borrow funds from others and for the assessment year 1983-84, it had incurred an expenditure on interest amounting to Rs. 95,805.91 out of which Rs. 65,931.82 was referable to interest payments to Samyukta Commercial Corporation and a few others. The assessment was completed without applying the provisions of Section 40A(8), that is to say, 15 % of the interest payments was not disallowed. The assessee preferred appeals in respect of certain disallowances and the matter was decided by the Tribunal in ITA No. 545/Hyd./1984 in its order dated 27-3-1985.
3. The Commissioner of Income-tax felt that the assessee is not a financial company and does not come under any of the categories enumerated under sub-clauses (i) to (vi) of Clause (c) of Explanation to Sub-section (8) of Section 40A. He also noticed that a sum of Rs. 65,932 representing interest payments on deposits or borrowings had been allowed in full by the Income-tax Officer without disallowing 15% of such expenditure in terms of Section 40A(8). Besides, the Commissioner held that the assessee's principal business is that of conducting chits as will be evident from the fact that except for Rs. 3,58,611 being interest earned on advances, the major component of the total income of Rs. 31,11,079 comprised of commission from chit fund business, dividends from own chits and chits with other organisations and also miscellaneous receipts of Rs. 4,00,734. In this view of the matter, he was of the view that the order of the Income-tax Officer suffered from an error prejudicial to the interests of the revenue and, therefore, he directed the Income-tax Officer to modify the assessment by disallowing 15% of the expenditure on interest in accordance with the provisions of Section 40A(8).
4. Sri Ch. Parthasarathy, learned counsel for the assessee, submitted that the order of the Income-tax Officer had merged in the order of the Tribunal dated 27-3-1985 in ITA No. 545/Hyd/1984 and, therefore, the Commissioner was not empowered to invoke Section 263(1) in respect of this assessment. On merits, he submitted that the company provides loan to the subscribers to the chit fund by conducting chits. The idea behind the chit fund business is to provide finance. Apart from providing finance by organising chits, the assessee had also lent monies on which it had earned interest. A perusal of the Memorandum of Association of the company would disclose that the main object of the company is to carry on the business of chit fund and the objects incidental or ancillary to the attainment of the main object are as contained in paras 4 to 32 of the Memorandum of Association. In particular, he invited our attention to paras 4, 5 and 6 thereof. Thus, he submitted that the assessee's objects are to negotiate loans, to lend monies against securities and other property, to borrow or raise or secure the payment of money or to receive money in deposit at interest for any of the purposes of the company. Therefore, he submitted that the activities of the company are in the nature of a financial company as explained in Sub-claue (iv) of Clause (c) of Explanation to Sub-section (8) of Section 40A. He took us through the balance-sheet and the profit and loss account of the company for the year under appeal to buttress his point that the company was engaged in the business of providing finance. This business of providing finance could be by way of making loans or advances or otherwise. According to him, the term 'otherwise' occurring in the said sub-clause would certainly cover the kind of business carried on by the assessee, viz. chit fund business. It was his further submission that the Reserve Bank of India has classified the assesses as a financial company and in this connection he referred to the Notification of the Reserve Bank of India No. DNBC. 39/DG(H)-77 dated 20-6-1977.
5. Sri N. Santhanam, learned departmental representative, submitted that the principal business of the company was that of conducting chits and that is the main object of the company. It may be that the objects incidental or ancillary to the main objects are to obtain loans and to lend monies against securities and other property. But, they are only subsidiary objects but not main objects. A perusal of the profit and loss account would reveal that nearly 75% of the income was derived mainly from the chit fund business which is the main object of the company, the balance 25% being referable to the other objects of the company viz. making loans or advances. A perusal of the balance-sheet also would show that as against the assets relating to chit fund amounting to Rs. 3.47 crores, the assets referable to the subsidiary objects viz. making of advances and loans were only of the order of Rs. 0.07 crore. Thus, he submitted that the principal business was not that of making loans or advances and, therefore, the assesses cannot be classified as a financial company in terms of Section 40A(8), read with Explanation (c). Sri Santhanam further submitted that the term 'otherwise' occurring in Sub-claue (iv) of Clause (c) of Explanation to Sub-section (8) of Section 40A would not include each and every activity within its ambit but must be construed in the context of loans and advances. In other words, the principle of ejusdem generis should be applied in interpreting the term 'otherwise'.
6. Having regard to rival submissions and the materials on record, we uphold the order of the learned Commissioner. In the assessment for the assessment year 1983-84 for which the relevant previous year ended on 30-6-1982, certain disallowances were made by the Income-tax Officer in respect of customary hospitality, business promotion expenses and meeting expenses. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) and the Tribunal in respect of the above disallowances. The question of disallowance of 15% of the interest Under Section 40A(8) on which the Commissioner invoked his jurisdiction Under Section 263(1), was not a subject matter of appeal before the appellate authorities. Therefore, at best there was only a partial merger of the order of the Income-tax Officer in the appellate order and it was not a total merger. In the case of partial merger, it was held by the Honourable Andhra Pradesh High Court that the Commissioner had jurisdiction to revise the order of the Income-tax Officer on an issue which was not the subject matter of appeal before any-appellate authority. This decision was rendered in CIT v. Vegi Veerinaidu & Sons Case Referred No. 2 of 1932 dated 24-12-1084 (unreported), a copy of which is filed by the revenue before us. Accordingly, we hold that the Commissioner had valid jurisdiction in this case.
7. On merits also, the assessee should fail. The main objects of the company and therefore its principal business, as per its Memorandum of Association are as follows :
1. To carry on the business of Chit Fund in the State of Andhra Pradesh and anywhere in India.
2. To undertake Chit Fund business of all kinds allowed by law and to establish, undertake, conduct and carry on all kinds of Chits, Recurring Deposits and benefit schemes of various types for the benefit of the public.
3. To act as Foreman for any of the Chit Fund series or for the promotion of the Chits or any other schemes that may be devised for mutual benefit and to undertake any transaction, or operation commonls carried on by Chit Fund promoters and financiers.
Receiving loans and lending monies are only incidental or ancillary objects of the company and this is made clear in the Memorandum of Association itself as follows :
B. OBJECTS - INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF THE MAIN OBJECTS :
4. To negotiate loans, to lend money against securities and other property, to discount bills and securities, to become Sureties and. guarantors for any purposes and generally to carry on business as financiers and merchants and any other business, but the Company shall not carry on the business of Banking as defined in the Banking Regulation Act (X of 1949).
5. To draw, make, issue, accept and to endorse, discount and negotiate Promissory Notes, Hundies, Bills of Exchange, Bills of Lading, Delivery Orders, Warrants, Warehouse-keepers Certificates and other Negotiable or Commercial or mercantile instruments connected with the business of the Company.
6. To borrow or raise or secure the payment of money or to receive money in deposit at interest, for any of the purposes of the Company and at such time or times as may be thought fit, by Promissory Notes . . .
We take up for consideration whether the asseaesee's Chit Fund business can appropriately be classified under the activities of "loan company" as defined in the Act. The learned counsel for the assessee pleads that it is a loan company because it provides finances to the prized subscriber whether or not chit subscriptions have been collected from the subscribers ; in other words, even if the chit subscriptions are in arrears, it is the responsibility of the assessee to pay the prized subscriber ; thus it is a loan company. This is an attractive argument but, nevertheless, it cannot succeed. The assessee company is governed by the Andhra Pradesh Chit Funds Act, 1971 (9 of 1971), read with the rules thereunder.
According to Sub-section (2) of a. 2 of the said Act:-
'chit' means a transaction, whether called chit fund, chitty or by any other name, by which its foreman enters into an agreement with a number of subscribers that every one of them shall subscribe a certain sum of money or a certain quantity of grain or other commodity, by instalments for a definite period and that each subscriber in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement, shall be entitled to a prize amount, whether payable in cash, kind or any other article of value.
According to Sub-section (3):-
'chit agreement' means a document containing the articles of agreement between the foreman and the subscribers relating to the chit and filed Under Section 6;
The assessee can be described only as a 'foreman' of the chit which term is defined in Sub-section (10) as follows :-
'foreman' means the person who under the chit agreement is responsible for the conduct of the chit and includes any other person discharging the functions of the foreman Under Section 30 ;
As a matter of fact, one of the objects of the company in terms of clause 3 of the Memorandum of Association quoted above, is to act as foreman for any of the Chit Fund series. The foreman of the ohit has the right, among others, "to receive and realise all subscriptions from the subscribers." (Section 13(1)(o) of the Andhra Pradesh Chit Funds Act). In case of default by a subscriber, the foreman has the right to remove the name of the defaulting subscriber and substitute any person in his place and realise all arrears of subscriptions from the substituted subscriber (Sections 20 & 21 ibid.). Unlike the lender or giver of loans, whose sweet will it is to determine the quantum of loan qua the borrower selected by him among the several aspirants for loan, the foreman of a chit has no such options. He is bound to pay the prize amount (which means "the difference between the chit amount a,nd the discount") to the prized subscriber (which means a subscriber entitled to receive the prize amount) who is ascertained either by lot or by tender or by the highest bid offered or by any other mode prescribed in the chit agreement. For these reasons, we hold that the foreman, or for that matter the promoter of a chit, cannot be said to be loaning his or others' funds and, therefore, the assessee company is not a "loan company" in.respect of chit business.
8. In terms of Explanation to Section 40A(8), financial company means -
(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 ; or
(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 ; or
(iii) a housing finance company, that is to say, a company which carried 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 carried 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 ;
(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.
Sri Parthasarathy contends that the assessee's case would fall under sub-clause (iv). He lays emphasis on the word 'otherwise' occurring in the said sub-clause. Sri Santhanam for the revenue lays emphasis on the fact that the activities mentioned should form part of the assessee's principal business and also pleads for the application of the principle of ejusdem generis in interpreting the term 'otherwise'. We uphold the contention of the learned departmental representative. The sub-clause starts with the words "a loan company". It is further explained as one providing finance whether by way of "making loans or advances or otherwise". It has also another ingredient viz. that the making of loans or advances or other means of providing finance should form part of its principal business. On a perusal of the profit and loss account, we notice that the major part of the assessee's income is derived only from its chits business as will be seen from the following details :-
Rs. Ps. Rs. Ps.
Commission 20,29,000.00
Dividends earned on own chits 2,99,602.28
Dividends earned on chits with other
organisations 23,131.71
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23,51,733.99
Misc. receipts 4,00,733.84
Interest 3,58,610.96
We have already indicated that the business of conducting chits is not a business of loaning funds. If the principal business is that of financing by way of 'making loans or advances or otherwise', the interest income should outweigh any other income. This is not the case before us. A glance at the balance-sheet would reveal that the Schedule of Current Assets as on 30-6-1982 amounted to Rs. 3.47 crores. It consisted mostly of items referable to chit subscriptions due from prized members, subscriptions in arrears and company's investments on own chits, on vacant chits and on chits with other organisations. A small portion of this total is represented by stock of stationery and stamps and cash and bank balances. Even the Schedule of Loans and Advances amounting to Rs. 0.07 crore (Rs. 6,56,832.11 to be exact) consisted mainly of chit loans of the order of Rs. 0.04 crore (Rs. 4,41,435 to be exact). Thus, on a perusal of both the profit and loss account and the balance-sheet, the conclusion is irresistible that the principal business of the assessee was not that of making loans or advances or providing finance otherwise.
9. We are nob persuaded by the contention of Sri Parthasarathy that the term 'otherwise' occurring in Sub-claue (iv) of Clause (c) of Explanation to Sub-section (8) of Section 40A would cover the chit fund. business. The Legislature in its superior wisdom has used the term 'otherwise' in juxtaposition with loans' and 'advances'. There is force in the contention of the learned departmental representative that the principle of ejusdem generis should be applied and the term should be interpreted in the context in which it is used. There are several methods of financing in addition to making loans or advances, as for instance, by making deposits for a fixed term, by underwriting or standing as surety or guaranteeing the loan for a fee or a commission. In our view, in the context in which the term 'otherwise' occurs in the said Sub-claue (iv), it is only such other modes of financing which are envisaged but not the chit transactions which are totally alien in this context.
10. Sri Parthasarathy contended that the assessee is a non-banking financial company and its activities are covered by Notification No. DNBC. 39/BG(H)-77 dated 20-6-1977 issued by the Reserve Bank of India. We have perused the said notification. This was issued in public interest with a view to regulate the credit system to the advantage of the country and it contained directions applicable to every financial institution carrying on certain categories of business. The nature of the assessee's business would fall under para 2, sub-paras (2) and (3), of the notification cited supra, which are as follows [A. Remaiya-Guide to the Companies Act, Ninth edition, 1980] :-
2. Extent of the directions.-These directions shall apply to every financial institution which is a company and which carries on any of the following types of business :-
** ** ** (2) managing, conducting or supervising as a promoter, foreman or agent of any transaction or arrangement by which the company, enters into an. agreement with a specified number of subscribers that every one of them shall subscribe a certain sum in instalments over a definite period and that every one of such subscribers shall in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement be entitled to the prize amount ;
Explanation :-For the purposes of this sub-paragraph, the expression "prize amount" shall mean the amount, by whatever name it be called, arrived at by deduction from out of the total amount subscribed at each instalment by all subscribers, (a) the commission charged by the company or service charges as a promoter or a foreman or an agent and (b) any sum which a subscriber agrees to forego, from out of the total subscriptions of such instalment, in consideration of the balance being paid to him.
(3) conducting any other form of chit or kuri which is different from the type of business referred to in sub-paragraph (2) above.
In part II of the said directions, certain conditions or restrictions are imposed on the receipt or renewal of deposits and for maintenance of certain registers and also for provision of information in regard to such deposits or the renewals thereof in the report of the Board of Directors of the company. On a perusal of these directions, it can be said that the assessee-company was treated as a financial company for the purpose of the notification, but the question before us is whether it is a financial company as explained in the provision of Clause (c) of Explanation to s. 40A(8) of the Income-tax Act, May be it is a financial concern for the purpose of notification of the Reserve Bank of India cited above, but certainly, for the purpose of Income-tax Act, it is not a financial company in the sense of a loan company for the reasons stated in the preceding paragraphs. If the term 'financial company' had not been denned or explained in the Income-tax Act, perhaps recourse can be had to the notification issued by the Reserve Bank, but when a definition is staring at us in the Income-tax Act, it is not permissible for us to look elsewhere. In this view of the matter also, we reject the contentions of the assessee.
11. In the result, the appeals dismissed.