THE COMMISSIONER OF INCOME TAX, COCHIN vs. HARRISONS MALAYALAM FINANCIAL SERVICES LTD.,

The further question arising from the order of the Tribunal is as to whether the assessee is liable to pay interest tax on the interest received on a loan made to a broker. The facts as we discern from the orders of the first appellate authority is that the assessee had engaged a broker to make investments in shares and securities, the assessee being a company engaged in the purchase and sale of securities. The assessee had advanced an amount of Rs.1,30,00,000/- to the broker for the purpose of making investments on the assessee's behalf in the stock market. The advance was made on 25.10.1990. The broker made investments for the value of Rs.1,20,00,000/-. There was a balance of Rs.10,00,000/- remaining with the broker for which -4- the assessee charged interest @ 18%. In the subject assessment year, the assessee obtained interest of Rs.1,80,000/-, on which the levy was made.

The learned Senior Counsel, Government of India (Taxes) would contend that the interest liability would specifically come under clause (a) of Section 2(7) of the Act. The learned counsel appearing for the assessee would, on the contrary, submit that at the time of making the advance, there was never an intention for the assessee to levy interest. The entire advance was for the purpose of making investments in the stock market. The retention of the balance amounts after making investments with the broker, was also for the purpose of making further investments in the stock market. The learned counsel would also rely on the decision of the Madras High Court in (2011) 339 ITR -5- 391 (Mad) [Commissioner of Income Tax v. Integrated Finance Co. Ltd.].

Having gone through the decision cited, we find that the assessee therein was also a finance company. However, the advance made was to a manufacturer of goods with whom the assessee had regular trading transactions. The assessee was involved in the business of hire purchase and lease of various equipments, some of which were manufactured by the manufacturer. The advance was in lieu of such manufacture. Hence, there is a specific trading activity and it was hence the Division Bench of the Madras High Court held that a trading advance would not fall within the parameters of a loan. The Tribunal also in the present case, deleted the levy under the Act on the premise that it is a trading advance made by the assessee to the broker.

We do not discern any trading between the broker and the assessee. The assessee engages -6- the broker for making investments in the stock market and there is only a service rendered by the broker through whom alone the assessee could make such investments. There being no trading activity between the assessee and the broker, it cannot be said to be a trading advance. The advance was made for making investments and after such investments were made what was retained with the broker was levied with interest by the assessee thus giving it the character of a loan. The assessee's intention at the time of advance is not at all relevant, since the character of the amounts retained with the share broker underwent a change, insofar as the levy made for interest. It is also clear that the amount remained with the broker for one year and hence the receipt of Rs.1,80,000/- as interest on a loan of Rs.10 lakhs @ 18% per annum. We hence answer the second question in favour of the Revenue -7- and against the assessee. We partly allow the appeal leaving the parties to suffer their respective costs. K.VINOD CHANDRAN JUDGE ASHOK MENON JUDGE -8-