In the absence of necessary and relevant fact some questions are unanswered

IN THE INCOME TAX APPELLATE TRIBUNAL,

SPECIAL BENCH ‘A’, AHMEDABAD

Before Shri G C GUPTA, HON’BLE VICE PRESIDENT,

Shri D. K. TYAGI, JUDICIAL MEMBER and

Shri A. K. GARODIA, ACCOUNTANT MEMBER

Interest Tax Appeal No.36 / Ahd/2004

(Assessment year 1999-2000)

Gujarat Gas Financial Services Ltd.,

2, Shantisadan Society,

Near Parimal Crossing,

Ellisbridge, Ahmedabad

(APPELLANT)

Vs.

ACIT, Circle 4,

Ahmedabad

(RESPONDENT)

PAN/GIR No.: AAACG5584E

C.O. No.48/Ahd/2004

(Assessment year 1999-2000)

ACIT, Circle 4,

Ahmedabad

(APPELLANT)

Vs.

Gujarat Gas Financial Services Ltd.,

2, Shantisadan Societ,

Near Parimal Crossing, Ellisbridge,

Ahmedabad

(RESPONDENT)

Appellant by: Shri S N Soparkar,

Ms. Urvashi Shodhan, ARs,

Respondent by: Shri Ravinder Kr., CIT DR,

Shri Rahul Kumar, Sr. DR

Date of hearing: 08.03.2013

Date of pronouncement: 17.04.2013

O R D E R

PER SHRI A. K. GARODIA, AM:

As per the order of the Hon’ble President, ITAT, the following question was referred to the Special Bench for its decision:

 “Whether on the facts and in the circumstances of the case, the assessee company is a financial company under the Interest Tax Act, 1974, liable to tax there under and if yes, then which portion of the income/receipts of the assessee company can be considered ‘chargeable interest’ under Interest Tax Act, 1974.

2. We feel it proper that we should note down the history of this case. From the records, it is seen that initially, reference was made by a Division Bench to Hon’ble President, ITAT for constitution of Special Bench in only one appeal under Interest Tax Act being Interest Tax Appeal No.36/Ahd/2004 for the assessment year 1999-2000 dated 22.09.2006. Thereafter, Special Bench was constituted by Hon’ble President, ITAT and the following question was referred to it:

“Whether in the facts and in the circumstances of the case, the assessee company, a non banking financial company (NBFC) u/s 45-I(f) of the Non Banking Finance Companies Act, 1997, is a financial company under the Interest Tax Act, 1974, liable to tax there-under on the revenue income earned on its financial transactions ?”

3. Subsequently, there was a request from the Revenue as per application dated 01.05.2007 and 19.06.2007 requesting for clubbing and fixing one more interest tax appeal and three income tax appeals along with this appeal for which Special Bench has already been constituted. As per the order passed by the Hon’ble President, ITAT on 28.6.2007, it was the direction of the Hon’ble President, ITAT that ‘Special Bench may club if deem it proper’. Thereafter, all these four appeals were also clubbed in Special Bench along with Interest Tax Appeal No.36/Ahd/2004 but the question before the Special Bench remained the same which was referred to the Hon’ble President, ITAT for formation of Special Bench in Interest Tax Appeal No.36/Ahd/2004, which is already reproduced in para 2 above. The special bench decided all these five appeals as per order passed by it on 19.09.2008. Thereafter, the assessee filed appeal before Hon’ble Gujarat High Court against this decision of the Special Bench of the Tribunal and as per the judgement of Hon’ble Gujarat High Court rendered on 13.04.2010, the order of the Special bench of the Tribunal was set aside and the entire matter was restored back to the file of the Tribunal for afresh decision with the following direction:

“The Court considered the alternative of deciding those appeals which could be decided independently. However, on going through the impugned order of Tribunal, it is not possible to state to what extent the order of the Tribunal stands vitiated by application of wrong principles by referring to provisions under a different Statute. Hence, without formulating any question in any of the appeals, the impugned order of Tribunal dated 19lh September, 2008 is hereby quashed and set aside and all the appeals being Interest Tax Appeal No.36/Ahd/2004 with interest Tax Appeal No.48/Ahd/2004 and Income Tax Appeal No.35/Ahd/2005 with Income Tax Appeal No.l095/Ahd/2006 with Income Tax Appeal No.515/Ahd/2005 are restored to file of the Tribunal for being decided afresh independently as separate groups under two different statutes. The appeals stand disposed of accordingly. The questions formulated in Tax Appeals No.153/2009 and 154/2009 are, therefore left unanswered.”

4. Subsequently, as per the order passed by Hon’ble President, ITAT, Special Bench was constituted for all these 5 appeals which included two appeals under Interest Tax Act and 3 appeals under Income Tax Act. As per the subsequent development and as per subsequent order of Hon’ble President, ITAT, 3 income tax appeals were de-linked from Special Bench and were referred to Division Bench and the question originally framed was also revised and as per such order, the present question before the Special bench of the Tribunal has come into picture.

5. At the time of hearing, it was submitted by the Ld. A.R. that on page 82 of the departmental paper book is the provisions of Section 2(5B) of Interest Tax Act, 1974. For the sake of ready reference, we reproduce the provisions of Section 2(5B) of Interest Tax Act, 1974, which read as under:

“(5B) "financial company" means a company, other than a company referred' to in sub-clause (/), (if) or (Hi) of clause (5A), being—

(i) a hire-purchase finance company, that is to say, 'accompany which carries on, as its principal business, hire-purchase transactions or the financing of such transactions; (if) 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;

(iii) a housing finance company, that is to say, .a company which carries on, as its principal business, the business of the 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 (/) to (Hi)] 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 carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620 A - of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society; [(va) a residuary non-banking company [other than a financial company referred to in sub-clause (/), (H), (Hi), (iv) or (v)], that is to say, a company which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments or in any other manner; or]

 (v) 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;].”

6. He further submitted that the principal activities of the assessee company is leasing which is not covered u/s 2(5B) and, therefore, the assessee company is not liable to Interest Tax. At this juncture, a query was raised by the Bench that as per clause (iv) of sub-section (5B) of Section 2 of the Interest Tax Act 1974, it is provided that a loan company which carries on as its principal business, the business of providing finance whether by making loan or advances or otherwise is also a financial company. Hence, even if the assessee’s principal activity is leasing and such leasing is financial leasing then how the same is not covered under this clause (iv) of Section 2(5B) of Interests Tax Act 1974. In reply, it was submitted by the Ld. A.R. that this aspect was never examined at any level as to whether the leasing activities undertaken by the assessee was operating leasing or financial leasing. His submission was this that the assessee is engaged in operating leasing. Ld. A.R. also relied on the following judicial pronouncements:

i) 296 ITR 126 (Del.) CIT Vs Eicher Good Earth Ltd.

ii) 74 ITR 01 (Cal.) Nirmala Bala Sarkar Vs CIT

7. As against this, it was submitted by the Ld. D.R. that on page 28 of the decision of Special bench of the Tribunal in assessee’s own case, it was noted by the tribunal in para 39 that the assessee vide his letter dated 06.12.2006 has submitted that the assessee was engaged in only financial leasing and not operational leasing. He further submitted that the contents of this letter were reproduced by the Tribunal on the same page.

He also submitted written submission of 10 pages, which are reproduced below:

“Government of India

office of the

Commissioner of Income-tax (DR),

(ITAT) -I 2ND floor, neptune tower,

Ashram road, ahmedabad.

________________phone No. (079) 26581651________________

No. CIT(DR)/ITAT-I/Gujarat Gas/2012-13 Date: 08.03.2013

To

The Hon'ble Members,

Income Tax Appellate Tribunal,

'A' Bench (Special Bench), Ahmedabad.

Respected Sirs,

Sub:- ITA No. 36/A/2004 & 48/Ahd/2004 for A.Y. 1999-2000 in the case of Gujarat Gas Financial Services Ltd., Ahmedabad.

Kindly refer to the above.

2 The CIT(A) has directed that the sum of Rs. 2,78,98,000/- being receipt of lease rental Income are excluded from income chargeable to interest tax. In this regard, it is pointed out that the lease income can be considered to be lease income as such, only if the lease is an Operating Lease. In case of a financial lease the transaction has to be treated as a loan transaction. The most important issue in this case is to determine the true nature of transaction before any conclusion can be drawn. The question of form over substance is vital to decide whether the lease transactions are operating leases or finance lease which are actually like loan transactions. The importance of substance over form is clearly brought in the following judgments of Hon'ble Supreme Court of India.

(i) CIT Vs. Durga Prasad More - 82 ITR 540 (SC) - Page No. 1 to 6 of paper book,

(ii) Controller of Estate Duty Vs. Aloke Mitra - 126 ITR 599 (SC) - Page No. 7 to 18 of paper book,

(iii) Lalsingh Estate Finance Ltd. Vs. CIT - 216 ITR 644 (Gau.) - Page No. 199 to 203 of paper book.

3 The Supreme Court in the case of Asea Brown Boveri Ltd. Vs. Industrial Finance Corp. of India reported in (2006 )154 Taxman 512(SC) has made a distinction between an operating lease and a financial lease and held that in case of finance lease, it is lessee who for all practical purposes is the owner of the assets and not the lessor. In fact, the financial lease is more like a loan (page no. 58 to 63 of paper book).

4 In that case the assessee took 56 cars on lease from Fair Growth Financial Services Ltd. for which, it deposited total security of Rs. 20,97,447/- with the lesser. The total rent payable for 5 years period amounted to Rs. 85,80,6634/- As per the terms of lease finance agreement, the assessee was required to pay 25% of the purchase price of the cars as security deposit carrying interest @ 5% per annum. In pursuance to the terms of this agreement the assessee had to deposit Rs. 20,97,447/- as mentioned above and against the balance amount, the assessee was required to pay Rs.85,35,379/- as lease during the period of 5 years. Fair Growth become a notified party under Sub-Section 2 of section of Special Court (Trial of offences Relating to Transaction in securities Act, 1962 due to certain illegal transactions and the and the Industrial Finance Corp. of India(IFCI) became the custodian of the assets belonging to Fair Growth . The assessee company continued to make the payment to IFCI in place of Fair Growth as per the Lease Finance Agreement. An amount of Rs. 30,96,948/- was paid by the assessee to Fair Growth till December, 1992 while the amount of Rs. 44,612,273/-was paid to the custodian IFCI. The assessee made a communication to the custodian clarifying that the assessee would be entitled under the agreement to the amount on account of security deposit and interest accrued thereon at the time of buy-back of purchase of leased assets. Accordingly, it forwarded a cheque of Rs. 17,800/- in their favour and final settlement of the dues under the lease agreement. The Special Court u/s. 10 passed an order to handover the possession of all the 56 cars to the custodian within one week from date of the order since the assessee has failed to make the payment as per the lease agreement. The assessee has taken a plea before the Special Court that it was a case of lease finance but the said plea had been rejected on the ground that in the pleadings the assessee had termed the agreement as "lease agreement". The matter was carried in appeal. In appeal the Supreme Court posed the question for adjudication whether the agreement between the parties was a $finance lease or not. Various meaning of the term finance lease etc. were referred to and discussed:

(i) Accounting and Finance by R. Brockkington (Pitman publishing Universal Book Trder, 1996 at page 136) "A Finance Lease is one where the Lessessee uses the asset for Substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan. SSAP 23 required that assets held under a finance lease be treated on the balance sheet in the same way, as if they had been purchased and a loan had been taken out to enable this"(Emphasis supplied)

Please find the full Judgment in the attached file.