Income Tax Appellate Tribunal - Pune
Dy. Cit vs Kirloskar Leasing & Finance Ltd. on 13 March, 2001
Equivalent citations: (2002)74TTJ(PUNE)224
ORDER
B.L. Chhibber, A.M. The vital issue raised in this appeal by the revenue is whether the assessee is a leasing company or a finance company liable to interest-tax.
2. The assessee is a public limited company. The Reserve Bank of India has classified it as an Equipment Leasing Company (p. 11 of the paper book).
3. For the assessment year 1993-94, the company filed a return declaring chargeable interest at Rs. 1,08,33,540. But during the course of assessment proceedings, it claimed before the assessing officer that it is out of the purview of the interest-tax as it is not a loan company as envisaged in section 2(5B)(iv) of the Income Tax Act, 1974, It was submitted before the assessing officer that the principal business of the assessee was that of leasing and following bifurcation was furnished to prove this point :
Nature of activity Income in lakhs % to total income Leasing 627.42 72.36 Hire purchases 34.71
4.00 Discounting, interest, etc. 115.46 13.31 Other income 89.46 10.33 867.05 100.00 The assessing officer considered the claim of the assessee, but came to the conclusion that the assessee is a "Loan company" as it had earned interest on loans and advances and discount on promissory notes and bills of exchange, totalling to Rs. 1,08,33,540 (net).
4. The assessee appealed to the Commissioner (Appeals) and contended that the assessing officer erred in facts and in law in holding that the companys principal business was that of providing finances and in that sense, it was a "Loan company" as defined in section 2(5B)(iv) of the Interest Tax Act, 1974. It was further submitted that the assessee was a leasing company and from the analysis of the income, earned by the company during the year, it was clear that the principal business of the company was that of leasing. It was further brought to the notice of the Commissioner (Appeals) that the Reserve Bank of India, also while classifying the company as an Equipment leasing company had stated that the "predominant business activity of the company remains to be equipment leasing activity." On these facts, it was argued that Interest Tax Act, 1974, was not applicable to the assessee, The Commissioner (Appeals) found force in the submissions made before him and holding that the principal business of the assessee was leasing business and after giving an opportunity of being heard to the assessing officer whose report he has reproduced on per page 4 and 5 of his order, held that the assessee was not a finance company, but a leasing company and accordingly, it was not liable to interest-tax.
5. Shri K. Srinivasan, the learned Departmental Representative submitted that even leasing of equipments is financing activity and in support of this, he relied upon the Boards Circular No. 376, dated 13-1-1998, and Circular No. 378, dated 25-3-1996, He submitted that the Commissioner (Appeals) was wrongly influenced by the bifurcation of income and accordingly erred in holding that since the principal business of the assessee-company was leasing, the assessee was not liable to interest-tax. He further submitted that the assessee initially itself had filed return of income, disclosing interest, chargeable to Interest Tax Act and that proves that the assessee was liable to interest-tax.
6. Shri S.P. Joshi, the learned counsel for the assessee, strongly supported the order of the Commissioner (Appeals). He submitted that the fact that the assessee had filed return of income-tax disclosing some chargeable interest, cannot be held against the assessee. Similarly, the fact that the assessee may not have challenged the assessment to interest-tax for earlier years and subsequent years cannot be held against the assessee in deciding the appeal for the assessment year in question. He drew our attention to para 2 of the order of the Commissioner (Appeals) where the Commissioner (Appeals) has given bifurcation of income and pointed out that the principal business of the assessee is that of leasing equipment, i.e., over 72 per cent of the income of the year, whereas income from hire-purchase is only 4 per cent and that of providing finance little over 13 per cent. The learned counsel, therefore, argued that in the circumstances, the Commissioner (Appeals) was justified in holding that the assessee cannot be called a loan company having its principal business as that of providing finance, whether by making loans, advances or otherwise and hence, it cannot be a Finance company as contemplated in section 2(5B)(iv) of the Interest Tax Act, 1974 and interest income on loans and advances, etc. disclosed by the assessee-company in the return cannot be taxed to interest-tax. The learned counsel further drew our attention to the assessment, framed by the assessing officer under section 143(3) for the assessment year under appeal (copy placed on record), where the assessing officer has admitted that the assessee is a leasing company and has also granted depreciation on the leased equipments as per chart enclosed with the assessment and has given further depreciation on the entry-tax paid by the assessee on repossessed vehicles which were earlier leased, as addition to their cost. The learned counsel argued that this shows that the assessing officer has accepted that the ownership of the leased equipment was and is with the assessee. In view of the above facts, the learned counsel submitted that the Commissioner (Appeals)s decision deserves to be upheld.
7. We have considered the rival submissions and perused the facts on record. From the perusal of bifurcation of income of the assessee-company, as reproduced in para 3 supra, it is to be noted that 72.36 per cent of the business during the year under appeal was of leasing. Thus, it can be safely said that the principal business of the assessee during the year under appeal was leasing. The term principal business has nowhere been defined in the Act. One will, therefore, have to apply the rule of reasonable interpretation. As per Chambers Dictionary, the meaning of the word "principal" is "taking the first place; highest in rank; character of importance". Thus, ordinarily the word "principal" would mean, "main", "major", "substantial". The word "principal", therefore, envisages that other activities are less important than the principal one. In the case before us as is evident from the composition of income as well as from Reserve Bank of Indias clarification, principal business is that of leasing and none other. It has to be appreciated that the leasing income constitutes more than 72 per cent of the total income of the company. Income from hire-purchase activities is hardly 4 per cent. Bills discounting charges and interest charges put together constitute merely 13 per cent. In such a situation, we agree with the findings of the Commissioner (Appeals) that the principal business of the assessee is none other than that of leasing and accordingly, the assessee-company cannot be termed "Loan company" as envisaged in section 2(5B)(iv) of the Interest Tax Act, 1974.
8. Coming to the two circulars of the Central Board of Direct Taxes relied upon by the learned Departmental Representative, we find that the same are not applicable to the facts of the case before us. Circular No. 760, dated 13-1-1998, is about the hire-purchase activity and does not speak about the leasing activity. Even for the hire-purchase, the circular says "when a hirer is the real purchaser of the asset but does not pay full purchase price and the hire purchase company pays the price or a substantial part thereof on behalf of such hirer and the hire purchase agreement is entered into merely as an arrangement, then such agreement is a security for repayment of the loan and is essentially a loan transaction." In the case of the assessee-company, the lessee is not the real purchaser. The real purchaser is the lessor, i.e., the assessee-company and the assessee-company also remains the title owner of the equipments. The lease agreement is not entered into, as a security for repayment of the loan. It is an agreement for lease, retaining the ownership of the equipments with the assessee-company. This fact becomes clear from clause 7 of the lease agreement placed on page 15 of the paper book. In our opinion, ownership of an equipment is a deciding factor and where the equipment is sold and ownership is with the hirer, the agreement becomes a loan transaction and where the ownership is with the hiring company or with the leasing company and there is no sale of the equipment, it is a hire agreement and hire transaction or lease transaction. Even the Central Board of Direct Taxes in paras 2 and 5 of the circular say that the hire charges should not be treated as interest subject to tax. (Last 5 lines of para 3 of the circular).
Same is the position with Circular No. 738, dated 25-3-1996, as it also concerns with the hire-purchase transactions and not leasing transactions paras 3 and 4 of the circular read as under :
"3. Hire-purchase transactions are generally in the nature of finance transactions, entered into by the companies, engaged in the business of financing.
4 The Board are of the view that the finance charges accruing or arising to hire-purchase, finance companies are in the nature of interest as defined in section 2(7) of the Interest Tax Act and, therefore, chargeable to interest-tax."
Obviously, the above instructions of the Central Board of Direct Taxes do not apply to the facts of the present case because, as held by us supra, the principal business of the assessee is leasing and not hire-purchase transactions.
9. Again we find that the assessing officer, while making assessment under section 143(3) for the assessment year under appeal has admitted that the assessee is a leasing company and also granted depreciation on the lease equipments as per chart enclosed with the assessment order, a copy of which has been placed before us by the learned counsel of the assessee. We further find that the assessing officer has further granted depreciation on the entry-tax, paid by the assessee on repossessed vehicles which were earlier leased as addition to their cost. This clearly shows that the assessing officer has accepted that the ownership of the leased equipment was and is with the assessee-company.
10. In the light of above discussion, we hold that the Commissioner (Appeals) is justified in holding that the assessee-company is a leasing company and not a loan company as envisaged in section 2(5B)(iv) of the Interest Tax Act, 1974, and accordingly, it is not liable to interest-tax. We accordingly confirm his findings and decline to interfere.
11. In the result, the appeal is dismissed.