Andhra HC (Pre-Telangana)
Suman Savings And Investments Private ... vs Commissioner Of Income-Tax on 1 July, 1997
Equivalent citations: [1998]229ITR727(AP)
Author: Syed Shah Mohammed Quadri
Bench: S.S. Mohammed Quadri, V. Rajagopala Reddy
JUDGMENT Syed Shah Mohammed Quadri, J.
1. This is a reference under section 256(1) of the Income-tax Act. At the instance of the assessee, the following question is referred to this court for opinion :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that the appellant-company is not a financial company within the meaning of section 40A(8) of the Income-tax Act, 1961 ?"
2. The assessee is a private limited company. Its business is that of carrying on a chit fund. The question relates to the assessment year 1983-84 for which the assessment was completed by the Income-tax Officer on October 24, 1983, without applying the provisions of section 40A(8) of the Income-tax Act. This was noticed by the Commissioner of Income-tax, who, in exercise of his power under section 263(1) of the Income-tax Act, held that the assessee's principal business was that of conducting chits and that it was not a financial company, therefore, the provisions of section 40A(8) of the Income-tax Act ought to have been made applicable and thus, by his order dated July 15, 1985, he directed the Income-tax Officer to redo the assessment. The assessee carried the matter in appeal before the Income-tax Appellate Tribunal, Hyderabad. On June 15, 1987, the Tribunal dismissed the appeal taking the view that the assessee is not a financial company within the meaning of the said provision. It is out of that order that the above question has arisen.
3. Sri K. V. S. Bhaskara Rao, learned counsel for the petitioner, strenuously contends that the assessee satisfies the requirement of section 40A(8), Explanation (c)(iv), of the Income-tax Act, and, therefore, the Tribunal erred in holding that the assessee is not a financial company.
4. Learned junior standing counsel submits that to bring the assessee within the meaning of financial company, it has to be shown that it is a loan company, which has its principal business of providing finance, but the principal business of the assessee is not that of providing finance, therefore, it is not a loan company.
5. To appreciate the contentions of learned counsel for the parties, it would be useful to read here section 40A(8), Explanation, (c)(iv), of the Income-tax Act on which reliance is placed by both the sides. That section had a life of 10 years as it was in force for the period commencing from April 1, 1976, to April 1, 1986. It reads as under :
"(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;"
6. A financial company among others, includes (1) a loan company which is explained to be a company not being a company referred to in sub-clauses (i) to (iii) of clause (c); (2) it must carry on the business of providing finance; (3) that must be its principal business; and (4) providing of finance may be either by making loans or advances or otherwise. That these are the ingredients of a financial company, is not in dispute. What is contended by Sri Bhaskara Rao is that in a financial company, loans are advanced, so also, in a chit fund company; further, submits learned counsel, the words "or otherwise" in sub-clause (iv) mean "providing of finance in any form" and as the chit fund company provides finance to the public, it has to be treated as a financial company provides finance to the public, it has to be treated as a financial company. We are afraid, we cannot accede to the contention of learned counsel. Sub-clause (iv) emphasises on three aspects : firstly, that the company must be a loan company; secondly, the principal business of the company must be that of providing finance; and thirdly, that providing of finance may be either by way of loans or advances or otherwise. The expression "or otherwise" has to be construed ejusdem generis, that means it must be construed in the same sense in which the words preceding the expression under interpretation are used. Now, in this case, providing of finance may be either by way of making loans or by giving advances; so, providing of finance must partake of the character of loan and/advance in which the loanee or the debtor does not have any proprietary interest. Where the loanee or debtor has proprietary interest in the money which he receives as in the case of a chit fund company when the chit is paid to the members, it does not fall within the meaning of sub-clause (iv). Therefore, the petitioner-chit fund company does not satisfy the requirement of the financial company as defined in section 40A(8), Explanation (c). It is nobody's case that this company falls within sub-clauses (i) to (iii).
7. Sri Bhaskara Rao next contends that the petitioner satisfies the requirements of the definition of financial institution contained in section 45-I(c)(v) of the Reserve Bank of India Act.
8. A perusal of section 45-I(c)(v) of the Reserve Bank of India Act shows that the definition contained therein was for the purpose of Chapter III-B of that Act. Obviously, that definition has no application for the purposes of the Income-tax Act. On this aspect, the Tribunal has rightly held so.
9. For the above reasons, we answer the question in the affirmative, that is, in favour of the Revenue and against the assessee.
10. The reference is answered accordingly.