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Income Tax Appellate Tribunal, LUCKNOW ‘B BENCH, LUCKNOW
Before: SH. SUBHASH MALGURIA & SH. NIKHIL CHOUDHARY
O R D E R PER NIKHIL CHOUDHARY, A.M. These two appeals have been filed by the assessee against the separate orders of the ld. CIT(A)-2, Kanpur, both dated 23.02.2004, in which the ld. CIT(A) has partly allowed the appeals of the assessee against the orders of the ld. Assessing Officer, passed under section 8(2) of the Interest Tax Act, 1974 on 1.03.2002. Since the issue involved in both these assessment years is similar and the cases were taken up for argument together, the same are disposed of by way of a common order. The grounds of appeal
1. preferred in the two assessment years are as under: - A.Y. 1995-96 “1. BECAUSE the notice under section 10 of the "Act" has not been validly issued, as the same is based on the view expressed by the Audit Party, without there being any independent satisfaction/approval of the "Authorities concerned".
2. BECAUSE in any case, the "reasons" reading as under :- "The assessee Co. earned income from interest on deposit/loans and advances to certain industries. In the A.Y. 1995-96, the assessee has received Rs. 10,90,23,742/- as interest income on deposits, loan and advances. The interest income of the assessee are assessable to interest tax. The assessee has not filed the interest tax & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd return for AY 1995-96 under section 17 of the Interest Act for the above interest income. Therefore, I have reason to believe that interest income of Rs. 10,90,23,742/- has escaped from assessment within the meaning of section 10 of the Interest Tax Act. Issue notice u/s 10 of the Interest Tax Act to the assessee for above mentioned escaping interest income." as given by the learned ACIT, do not constitute the requisite material for initiating the proceedings under section 10 (a) of the Act and view to the contrary as expressed by the learned CIT (Appeals), is wholly erroneous. 2.2 BECAUSE receipts shown under the head 'interest', by themselves do not bring an "assessee" within the ambit of taxation unless, the two conditions, viz, (a) the receipts are in the nature of "chargeable Interest" as defined in section 2(5) read with section 2(7) of the "Act"; and (b) the recipients of such income is a "Credit Institution' or 'any other financial company' as defined under the exhaustion definitions of the said terms as given in section 2(5A) and 2(5B) of the "Act". are cumulatively satisfied, and no such "satisfaction" being discernable from the "reasons" given by the learned "ACIT", the proceedings under section 10(a) of the "Act" are not maintainable. 3.1 BECAUSE the notice under section 10, being in the nature of jurisdictional notice, was liable to be served in accordance with the provisions of law and that being not so done undisputedly in the present case, there is no valid assumption of jurisdiction by the learned "ACIT" to pass the impugned assessment order. 3.2 BECAUSE the learned CIT (Appeals) has erred in holding that- (a) 'non-issuance of notice under section 10 in the name of the Principal Officer and non-service of the same on the "Principal Officer" and/or his agent or duly authorised representative is a mere procedural requirement, and (b) in view of the fact that after service of notice (in any manner), the appellant had duly participated in the proceedings, there remained no such infirmity either in the notice itself or in the matter of service thereof, which would go to vitiate the assessment itself. 3.3 BECAUSE various case laws as have been referred to and relied upon by the learned CIT (Appeals) are distinguishable on facts and in any case the preponderance of 'judicial view' (including the view expressed by the jurisdictional court) being in favour of the appellant, the learned CIT (Appeals) should have held that there was no valid assumption of jurisdiction by the Assessing Officer, even after the assessee's participation in the proceedings, and accordingly the assessment order dated 1.3.2002 as has been passed by the ACIT- VI, Kanpur was liable to be quashed. 3.4 BECAUSE issuance and service of a notice, in accordance with the provisions of law is a condition precedent for assumption of jurisdiction to pass the assessment order (in pursuance thereof) and any infirmity therein goes to the very & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd root of the assessment, and is not even curable so as to validate the assessment order itself.
4. BECAUSE wholly without prejudice to the contentions raised in the foregoing grounds, the appellant corporation is an "authority" as envisaged under section 10 (20A) of the Income-tax Act, 1961 by virtue of the judgement of the apex court in the case of Gujarat Industrial Development Corporation Ltd. Vs. NP CIT reported in 227 ITR page 414, and consequently it can neither be treated as a "credit Institution" nor "any other financial company" (as per the exhaustive lists as given in these two sections themselves) so as to make the provisions of the "Act" applicable in its case.. WITHOUT PREJUDICE TO THE AFORESAID 5. BECAUSE the learned CIT (Appeals) has erred in holding that, in principle, Interest Tax Act, 1974 is applicable in the case of the appellant, for the reasons that - (e) one of the important objectives of the appellant was to provide finances to the entrepreneurs and, therefore, it would fall in the ambit of "any other financial company" as defined in Section 2 (5A) (iv) read with Section 2 (5B) (iii) of the Act; and (f) it enjoys exemption under section 36 (1) (viii) of the Income tax Act, 1961, vide letter F.No.147(S)/73-TPL dated 30.5.1976 issued by the CBDT, as is available to a financial corporation, only.
5. BECAUSE on a due consideration of nature of activities actually carried on by the appellant and the nature of receipts as earned by it (from such activities), the appellant could not be held to be falling within the ambit of 'any other financial company' as has been classified in clause (iii) of Section 2 (5B) of the Interest Tax Act, 1974 reading as under :- "The housing finance Company that is to say a company which carries on, as its principal business, the business of financing of acquisition or construction of houses including acquisition or development of land in connection there with.” (emphasis added) 6.1 BECAUSE the mere fact that the appellant corporation has been held to be eligible for relief under section 36 (1) (viii) of the IT Act, 1961, by virtue of Notification No. F.No.147(S)/73-TPL dated 30.5.1976 issued by the CBDT, will not ipso facto mean that the appellant falls in the category of 'any other financial company' so as to bring the same within the applicability of the provision of Interest Tax Act, 1974. 6.2 BECAUSE the provisions of section 2 (5A) and Section 2 (5B) of the "Act" operate in an altogether different context and direction then the provisions of section 36(1)(viii) of the Income Tax Act, 1961 and the analogy drawn by the learned CIT (A), for the purposes of upholding the applicability of Interest tax Act, 1974 in the case of the appellant, is misconceived and wholly unfounded 7.1 BECAUSE in any case and wholly without prejudice to the aforesaid, the learned CIT (Appeals) has grossly erred, both on facts as well as in law in holding that the Interest tax is chargeable from the appellant on the following receipts:- 3 & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd (a) Rs.1,90,31,586: Received on "loans and others including UPSEB loans"; (b) Rs.8,13,36,341: in relation to premium payable by the allottees of Industrial Sheds/sites aggregating Rs.10,03,67,927/- and in upholding the liability of the appellant to that extent. 7.2 BECAUSE none of the two sums as mentioned above can be treated as 'chargeable interest' under section 2(5) of the Act read with the definition of interest under section 2(7) of the "Act".
8. BECAUSE the receipts amounting to Rs. 1,90,31,586/- by way of interest on "Loan and Others including UPSEB Loans" were referable merely to the advance payments/deposits made, mainly with UPSEB, to enable them to set up power stations for the industrial estate/sites of UPSIDC and also to undertake the works of upgrading the same and the same could not be held to be referable either to the 'Loans & Advances' simplicitor or to the activities referred to in clause (iii) of Section 2 (5B) of the "Act". 9.1 BECAUSE the learned CIT (Appeals) has erred in law and on facts in holding that in the transactions of leasing out industrial sites/ sheds to the entrepreneurs "the lesser became a financier and the lessee becomes a debtor of the amount" which is equivalent to advancing amount" and on that basis in upholding that the receipts amounting to Rs.8,13,36,341 are covered by the charging provisions of the "Act" and in upholding the levy of interest tax on the same. 9.2 BECAUSE the receipts amounting to Rs.8,13,36,341 as had been realized from the allottees/entrenurs of Industrial Sites/ Sheds on delayed payments of lease premia on allotment of industrial sites/sheds (as payable by them) can not be said to be attributable to any "loan or advances" given to entrepreneurs and the same can not be held to be covered by the definition of 'chargeable interest' as given in Section 2 (5) read with Section 2 (7) of the Act.
10. BECAUSE in any case the issue with regard to the applicability of charging provisions (as distinct from the applicability of Interest Tax Act, 1974 itself) has been decided on a wholly wrong premise and the sums aggregating Rs. 10,03,67,927/- can not be said to be representing "chargeable interest" under the "Act".
11. BECAUSE the impugned order as passed by the learned first appellate authority stands wholly vitiated as the same has been passed without appreciating/giving due consideration to the material and information that had been placed on record and various pleas as had been raised before him.
12. BECAUSE the order appealed against is contrary to the facts, law and principles of natural justice.
& 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd A.Y. 1996-97 1. BECAUSE the notice under section 10 of the "Act" has not been validly issued, as the same is based on the view expressed by the Audit Party, without there being any independent satisfaction/approval of the "Authorities concerned".
2. BECAUSE in any case, the "reasons" reading as under :- The assessee co. earned income from interest on deposit/loans & advances to certain industries. In the A.Y. assessee has received Rs.5,41,64,900/- as interest income deposits, loan & advances. The interest income of the assessee are assessable to interest tax. The assessee has not filled the interest tax return. I have reason to believe that interest income of Rs.5,31,64,900/- has escaped from assessment within the meaning of section 10 of the Interest Tax Act. Issue notice u/s 10 of the Interest Tax Act to the assessee for above mentioned escaping interest income." as given by the learned ACIT, do not constitute the requisite material for initiating the proceedings under section 10 (a) of the Act and view to the contrary as expressed by the learned CIT (Appeals), is wholly erroneous. 2.2 BECAUSE receipts shown under the head 'interest', by themselves do not bring an "assessee" within the ambit of taxation unless, the two conditions, viz, (a) the receipts are in the nature of "chargeable Interest" as defined in section 2(5) read with section 2(7) of the "Act"; and (b) the recipients of such income is a "Credit Institution' or 'any other financial company' as defined under the exhaustion definitions of the said terms as given in section 2(5A) and 2(5B) of the "Act". are cumulatively satisfied, and no such "satisfaction" being discernable from the "reasons" given by the learned "ACIT", the proceedings under section 10(a) of the "Act" are not maintainable. 3.1 BECAUSE the notice under section 10, being in the nature of jurisdictional notice, was liable to be served in accordance with the provisions of law and that being not so done undisputedly in the present case, there is no valid assumption of jurisdiction by the learned "ACIT" to pass the impugned assessment order. 3.2 BECAUSE the learned CIT (Appeals) has erred in holding that- (a) 'non-issuance of notice under section 10 in the name of the Principal Officer and non-service of the same on the "Principal Officer" and/or his agent or duly authorised representative is a mere procedural requirement; and (b) in view of the fact that after service of notice (in any manner), the appellant had duly participated in the proceedings, there remained no such infirmity either in the notice itself or in the matter of service thereof, which would go to vitiate the assessment itself. 3.3 BECAUSE various case laws as have been referred to and relied upon by the learned CIT (Appeals) are distinguishable on facts and in any case the preponderance of 'judicial view' (including the view expressed by the jurisdictional court) being in favour of the appellant, the learned CIT (Appeals) 5 & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd should have held that there was no valid assumption of jurisdiction by the Assessing Officer, even after the assessee's participation in the proceedings, and accordingly the assessment order dated 1.3.2002 as has been passed by the ACIT- VI, Kanpur was liable to be quashed. 3.4 BECAUSE Issuance and service of a notice, in accordance with the provisions of law is a condition precedent for assumption of jurisdiction to pass the assessment order (in pursuance thereof) and any infirmity therein goes to the very root of the assessment, and is not even curable so as to validate the assessment order itself.
BECAUSE wholly without prejudice to the contentions raised in the foregoing grounds, the appellant corporation is an "authority" as envisaged under section 10 (20A) of the Income-tax Act, 1961 by virtue of the judgement of the apex court in the case of Gujarat Industrial Development Corporation Ltd. Vs. CIT reported in 227 ITR page 414, and consequently it can neither be treated as a "credit Institution" nor "any other financial company" (as per the exhaustive lists as given in these two sections themselves) so as to make the provisions of the "Act" applicable in its case.. WITHOUT PREJUDICE TO THE AFORESAID 5. BECAUSE the learned CIT (Appeals) has erred in holding that, in principle, Interest Tax Act, 1974 is applicable in the case of the appellant, for the reasons that - (c) one of the important objectives of the appellant was to provide finances to the entrepreneurs and, therefore, it would fall in the ambit of "any other financial company" as defined in Section 2 (5A) (iv) read with Section 2 (5B) (iii) of the Act; and (d) it enjoys exemption under section 36 (1) (viii) of the Income tax Act, 1961, vide letter F.No.147(S)/73-TPL dated 30.5.1976 issued by the CBDT, as is available to a financial corporation only.
BECAUSE on a due consideration of nature of activities actually carried on by the appellant and the nature of receipts as earned by it (from such activities), the appellant could not be held to be falling within the ambit of 'any other financial company' as has been classified in clause (iii) of Section 2 (5B) of the Interest Tax Act, 1974 reading as under :- "The housing finance Company that is to say a company which carries on, as its principal business, the business of financing of acquisition or construction of houses including acquisition or development of land in connection there with" (emphasis added) 6.1 BECAUSE the mere fact that the appellant corporation has been held to be eligible for relief under section 36 (1) (viii) of the IT Act, 1961, by virtue of Notification No. F.No.147(S)/73-TPL dated 30.5.1976 issued by the CBDT, will not ipso facto mean that the appellant falls in the category of 'any other financial company' so as to bring the same within the applicability of the provision of Interest Tax Act, 1974.
& 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd 6.2 BECAUSE the provisions of section 2 (5A) and Section 2 (58) of the "Act" operate in an altogether different context and direction then the provisions of section 36(1)(viii) of the Income Tax Act, 1961 and the analogy drawn by the learned CIT (A), for the purposes of upholding the applicability of Interest tax Act, 1974 in the case of the appellant, is misconceived and wholly unfounded 7.1 BECAUSE in any case and wholly without prejudice to the aforesaid, the learned CIT (Appeals) has grossly erred, both on facts as well as in law in holding that the Interest tax is chargeable from the appellant on the following receipts:- (c) Rs.2,09,28,657: Received on "loans and others including UPSEB loans"; (d) Rs.9,66,47,048: in relation to premium payable by the allottees of Industrial Sheds/sites aggregating Rs. 11,75,75,706 and in upholding the liability of the appellant to that extent. 7.2 BECAUSE none of the two sums as mentioned above can be treated as 'chargeable interest' under section 2(5) of the Act read with the definition of interest under section 2(7) of the "Act".
BECAUSE the receipts amounting to Rs.2,09,28,657/- by way of interest on "Loan and Others including UPSEB Loans" were referable merely to the advance payments/deposits made, mainly with UPSEB, to enable them to set up power stations for the industrial estate/sites of UPSIDC and also to undertake the works of upgrading the same and the same could not be held to be referable either to the 'Loans & Advances' simplictor or to the activities referred to in clause (iii) of Section 2 (5B) of the "Act". 9.1 BECAUSE the learned CIT (Appeals) has erred in law and on facts in holding that in the transactions of leasing out industrial sites/ sheds to the entreprenurs "the lesser became a financier and the lessee becomes a debtor of the amount" which is equivalent to advancing amount" and on that basis in upholding that the receipts amounting to Rs.9,66,47,048 are covered by the charging provisions of the "Act" and in upholding the levy of interest tax on the same. 9.2 BECAUSE the receipts amounting to Rs.9,66,47,048 as had been realized from the allottees/entrenurs of Industrial Sites/ Sheds on delayed payments of lease premia on allotment of industrial sites/sheds (as payable by them) can not be said to be attributable to any "loan or advances" given to entreprenurs and the same can not be held to be covered by the definition of 'chargeable interest' as given in Section 2 (5) read with Section 2 (7) of the Act.
10. BECAUSE in any case the issue with regard to the applicability of charging provisions (as distinct from the applicability of Interest Tax Act, 1974 itself) has been decided on a wholly wrong premise and the sums aggregating Rs. 11,75,75,706/- can not be said to be representing "chargeable interest" under the "Act".
BECAUSE the impugned order as passed by the learned first appellate authority stands wholly vitiated as the same has been passed without & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd appreciating/giving due consideration to the material and information that had been placed on record and various pleas as had been raised before him.
12. BECAUSE the order appealed against is contrary to the facts, law and principles of natural justice.
Subsequently, the assessee also filed an additional ground of appeal
as under:- A.Y. 1995-96 ADDITIONAL GROUND “BECAUSE the notice under section 10 of the Interest Tax Act, 1974 dated 9.2.2001 having been issued by the Joint Commissioner of Income-tax, Special Range, Kanpur, the assessment (in pursuance thereof) could not have been made by the "ACIT" and accordingly the assessment order dt. 1.3.2002 (passed by the ACIT in the present case) is wholly without jurisdiction.” A.Y. 1996-97 ADDITIONAL GROUND “BECAUSE the notice under section 10 of the Interest Tax Act, 1974 dated 9.2.2001 having been issued by the Joint Commissioner of Income-tax, Special Range, Kanpur, the assessment (in pursuance thereof) could not have been made by the "ACIT" and accordingly the assessment order dt. 1.3.2002 (passed by the ACIT in the present case) is wholly without jurisdiction.”
3. However, it was submitted that the said ground had already been set-forth in the memo of appeal itself under the heading, “Additional Ground”. Therefore, in view of Rule 11 of the Income Tax (Appellate) Tribunal Rules, 1963, the aforesaid ground did not represent an additional ground. The assessee had only filed the said petition as a matter of abundant precaution seeking admission of the said ground. It was further submitted that in case the same was held to be, “Additional Ground”, the assessee case was fully covered by a catena of case laws which have been elaborately dealt with by the Hon’ble Gauhati High Court in the case of Assam Co. (India) Limited vs. CIT 256 ITR 423 (Gau) and therefore, it was prayed that the said additional ground may be admitted.
4. The facts of the case are that on 1.03.2002, the ld. Assessing Officer passed an order under section 8(2) of the Interest Tax Act, 1974 disallowing the exemption & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd claimed by the assessee under the Interest Tax Act and made the following additions to the chargeable interest of the assessee for the A.Y.1995-96; i. Interest received on deposits Rs. 98,43,985/- ii. Interest received on loans and others Rs. 20,13,599/- iii. Interest received on UPSEB loan Rs. 1,70,17,987/- iv. Interest received on advances Rs. 8,25,427/- v. Interest received on premium Rs. 8,13,36,341/- Total Rs.11,10,37,339/- 5. In the assessment year 1996-97, the ld. AO held the following to be chargeable interest under section 5 and 6 of the Income Tax Act; i. Interest received on deposits Rs. 3,12,74,486/- ii. Interest received on loans and others Rs. 2,09,28,657/- iii. Interest received on advances Rs. 9,61,756/- iv. Interest received on premium Rs. 9,66,47,049/- Total Rs. 14,98,11,948/-
6. While making these additions, the ld. Assessing Officer held that M/s UPSIDC Limited was a financial corporation fully owned by the U.P. State Government, which was engaged in the acquisition and development of land for the purposes of promoting industrialization in the State of Uttar Pradesh. Industrial plots of land were given to entrepreneurs on long term finance basis and installments were recovered from the entrepreneurs alongwith interest. Interest was also recovered in cases of delayed payments of instalments (besides regular interest). In view of the above, the assessee corporation was liable for interest tax under the Interest Tax Act, 1974 and was fully covered within the ambit of sections 2(5A) (iv) as well as section 2(5B) of the Interest Tax Act, 1974. The ld. Assessing Officer also pointed out that for purposes of claiming deduction under section 36(1)(viii) of the Income Tax Act, 1961, the company had claimed to be a financial corporation and for these reasons, the ld. Assessing Officer had held that the & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd interest received by the assessee on the aforesaid, were chargeable to tax in its hands under sections 5 and 6 of the Interest Tax Act.
Aggrieved by the said assessment orders, the assessee went in appeal before the ld. CIT(A)-2, Kanpur. At the very outset, the assessee took the plea that the notices under section 10 were not served on the principal officer of the company. However, the ld. CIT(A) turned down this ground of appeal
by relying upon the decision of the Hon’ble Gujarat High Court in the case of CIT-1, Ahmedabad vs. Bhanji Kanji Shop
68. ITR 416 (Gujarat). Thereafter, it was argued that the assessee was not a credit institution as defined in section 2(5A) nor a finance company as defined in section 2(5B) of the Interest Tax Act and thus the Act did not apply to the assessee. It also argued that since it was a State Government Company, it should be treated like the State Government and no tax liabilities should be fastened on it under any taxing statute. However, the ld. CIT(A) did not accept these contentions of the assessee. He held that a public sector undertaking owned by the State cannot be equated with the State itself and immunity from taxation that was available to the sovereign would not be available to such an entity. Furthermore, he held, that one of the purposes of the creation of the UPSIDC was to provide credit to the entrepreneurs in the State of U.P. The functions and powers of the corporation were discussed in Chapter 3 of the U.P. Industrial Development Act, 1962. In section 13(h) and 13(k), it was clearly provided that the corporation would be financing industrial projects and would also be giving loans and advances. Therefore, in the opinion of the ld. CIT(A), one of the important objectives of the company was to provide finance and therefore, it would fall in the ambit of any other finance company as envisaged under section 2(5A) (iv). He further pointed out that one of the businesses of the assessee was to finance the acquisition and development of land in connection therewith and he held, that therefore it was covered under section 2(5B)(iii). The ld. CIT(A) held that another fact which was indicative that the assessee was covered under the Interest Tax Act, was that the assessee had been claiming deduction under section 36(1)(viii) of the Income Tax & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd Act, 1961 while computing its total income under the Income Tax Act. He drew reference to the fact that on 21.09.1973, the Managing Director of the assessee company had written a letter to the CBDT for getting approval under section 36(1)(viii) and he quoted from the said letter to demonstrate that the assessee was providing long term finance to industrial entrepreneurs and that the functions provided by the UPSIDC were akin to term loaning and made it a financial entity. The ld. CIT(A) pointed out, that it was on this basis that the assessee had obtained approval under section 36(1)(viii) from the CBDT. Having taken such stand, it could not be allowed to go back and take a different stand for the purposes of the Interest Tax Act. The ld. CIT(A) therefore, held that the ld. Assessing Officer was justified in bringing the assessee within the tax net for the purposes of Interest Tax. Thereafter, the ld. CIT(A) considered the submissions of the assessee on the mistakes in the computation of chargeable interest by the Assessing Officer in the two orders passed by him. After considering the various judgments, he held that interest on bank deposits could not be called a loan or an advance. In the circumstances, he held that the interest on bank deposits should not be included in, ‘Chargeable Interest” and Interest Tax should not be levied on such interest. With regard to the interest received on loans given to UPSEB, the ld. CIT(A) held the same to be covered under the definition, “Chargeable Interest” and he confirmed the addition on this account. The ld. CIT(A) then considered interest received on advances to employees and came to the conclusion that since the same were in the nature of certain perquisites to the employees, the assessee did not act as a credit institution while giving such loans. Therefore, the interest on loans to employees was not to be included in chargeable interest. On the issue of interest received on allotment of lands to entrepreneurs, the ld. CIT(A) held that the assessee received premium in connection with the allotments with these industrial sites and when the premium was received in instalment, the assessee received interest on these amounts. He looked into the question of whether the interest on delayed payment of premium could be termed as interest on loans and advances and then relying upon the letter written by the Secretary, U.P. Government through the Chairman, CBDT dated & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd 8.05.1975, he held that the transaction entered into by the assessee was an amalgam of two transactions. The first was the leasing out the land for a premium and the second was to receive interest on payment by instalment. He held that by virtue of this second limb, in cases where it received instalment payments, the assessee (which was the lessor) also became a financer and the lessee became a debtor of the assessee of the value of the land. Therefore, he held that the interest received on instalments of premium should be included in the definition of chargeable interest and he based his decisions on the stand taken by the assessee while seeking recognition from CBDT for deduction under section 36(1)(viii).
8. Aggrieved by these orders of the ld. CIT(A), the assessee filed an appeal before the ITAT Lucknow Bench. Before the said Bench, it was argued that the UPSIDC was not a credit institution or a finance company and nor did it come under the definition of “any other financial company”. The ITAT held, that even though the assessee had represented itself before the CBDT as a financial institution, while applying for approval under section 36(1)(viii) of the Income Tax Act, there was merit in the submission of the assessee, that the treatment of the corporation as a financial institution under section 36(1)(viii) of the Income Tax Act, 1961 was different from its treatment as a financial company under section 2(5A) (iv) r.w.s. 2(5B) of the Interest Tax Act. The ITAT pointed out that the institution which was to be treated as a credit institution and or financial company, was specifically defined under the above sections on which the Interest Tax Act was applicable and on perusal of the clauses 2(5B) of the Act, the Tribunal observed that the activities of the assessee company did not fall in any of the clauses of section 2(5B) of the Act. Furthermore, it held that there was no dispute that the principal business of the assessee was not of financing loans to the entrepreneurs, but to promote and establish industrial sites in the State of U.P. and provide them to prospective entrepreneurs, to enable them to set up industry in the State. The interest income received by the assessee from the allottees was not on loans / advances given to them, but on account of delayed payments of instalments of lease rent / payment of & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd land price as agreed to. It also observed that interest received from UPSEB was on account of advances given by the assessee to the UPSEB for setting up a sub-station in the industrial area which was to be developed by it and not for the purposes of earning interest. The Department had not disputed the fact that the provisions of TDS were not applicable to this transaction and therefore, the Tribunal held that it was not an interest received by the assessee on loans/advances, within the meaning of section 2(7) of the Interest Tax Act. Therefore, it held that the provisions of section 5 of the Interest Tax Act were not attracted in respect of such interest. The Tribunal held that the assessee was neither a credit institution nor a finance company within the meaning of section 2(5A) or section 2(5B) of the Interest Tax Act. Therefore, it held that the provisions of the Interest Tax Act, 1974 were not attracted in respect of the interest income received by the assessee on either delayed payment of premium by allottees or on advances given to UPSEB.
Aggrieved by these orders, the Department carried the matter to the Hon’ble Allahabad High Court in Interest Tax Appeal No. 191 & 192 of 2006. The Hon’ble High Court required the counsel appearing on behalf of the UPSIDC to show how and in what manner it was constituted and what its memorandum of association and articles of association were. It noticed that such material had neither been placed before the Tribunal nor before it. It noticed that in paragraph 7 of the petition filed before it, it was mentioned that UPSIDC had been formed under the U.P. Industrial Development Act, 1962 but paragraph 11 showed that UPSIDC was already incorporated on 29th March, 1961. Thus, it held that UPSIDC could not have been constituted under UPID Act, 1962. Ongoing through the UPID Act, 1962, it observed that what was contemplated in that Act was a corporation named as the, “U.P. Industrial Development Corporation” while the assessee in question was incorporated as the, “U.P. State Industrial Development Corporation Limited”. It also observed that the U.P. Industrial Development Corporation as envisaged under the UPID Act, 1962 was to take over and employ all the existing staff of the UPSIDC and takeover and manage the industrial areas hitherto owned & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd and managed by the UPSIDC. The Hon’ble High Court therefore, held that the UPID Act, 1962 would not provide any assistance for the purposes of understanding the functions and objectives for which the UPSIDC was incorporated in 1961. The Hon’ble High Court, was therefore, of the view that whether interest tax was chargeable on loans etc., needed to be re-examined by the Tribunal after looking into the various documents relating to the establishment and incorporation of UPSIDC and also the details of its business activities. It, therefore, remanded the matter back to the Tribunal to look into this aspect of the matter and this is how the matter came to be listed before us for fresh consideration.
Sh. Pankaj Shukla, Advocate and Sh. Shubham Singh, C.A. (hereinafter referred to as the ld. ARs) took us through the facts of the case and submitted copies of the un-authenticated memorandum of association and articles of association. It was submitted before us that authenticated copies of memorandum of association and articles of association were not available with the assessee, mainly because there had been large scale retirement of the personnel looking after tax matters. Furthermore, there had been no response from the Registrar of companies to their petition for obtaining certified copies of the said documents. However, they were submitting unauthenticated copies of the memorandum of association and articles of association supported by an affidavit from the financial controller of the U.P. State Industrial Development Authority pointing out that the authenticated records were not readily available with the UPSIDC and / or its successor, UPSIDA, and even efforts to obtain the same from the Registrar of Companies Kanpur had not borne fruit as the matter was nearly 64 years old. However, a copy of memorandum of association as available with UPSIDC / UPSIDA was being submitted. The ld. AR, therefore, pleaded that the issue may kindly be decided on the basis of these unauthenticated copies of memorandum of association and articles of association which, they submitted to be true and full in their belief. The ld. ARs then took us through the said memorandum of association and invited our attention to Articles 3, 8, 24 and 40 of the said Articles, which in their opinion pertained to advancing of & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd any amounts by the assessee corporation. It was submitted that Article 3 pertained to aiding, assisting and financing any industrial undertaking project or enterprise, whether owned or run by the Government, statutory body, private company, firm or individual with capital, credit, means or resources for prosecution of its work or business. Article 8 pertained to developing and turning to account, any land acquired by the company, by laying out and preparing the same for business purposes and for the purpose, advancing money to and entering into contracts and arrangements of all kinds with builders and others. It was submitted that Article No. 24 related to the grant or guarantee of loans or advances to any company, association or concern engaged in any industry or to assist in its development or expansion, so as to enable it to undertake and start a new industry approved by the company, while Article 40 pertains to the object of lending money to such persons or companies on such terms as may seem expedient, and in particular to customers and others having dealing with the company and to guarantee the performance of contracts by any such persons or companies. On a reference from the Bench, the ld. ARs agreed that Article 4 of the memorandum of association also pertained to the making of advances for procuring capital or to provide machinery or equipment and other facilities to any other company for the purpose of carrying into effect any objects connected with the industrial development of Uttar Pradesh and to subscribe or underwrite or otherwise deal with the share debenture and securities of such companies or associations. However, the ld. ARs submitted that such clauses within the objects of the UPSIDC, as reflected in the memorandum of association, would not make the company a financial company within the meaning of section (5A) or (5B) of the Interest Tax Act. Inviting our attention to section (5A), the ld. ARs argued that, “credit institution” was clearly defined as; i. A banking company to which the Banking Regulation Act applied ii. A public financial institution as defined in section 4A of the Companies Act, 1956 iii. State Financial Corporation under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporation Act, 1951 or iv. any other financial company & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd Inviting our attention to section (5B) of the Act, wherein the definition of, “financial company” was given, the ld. ARs submitted that it meant any company other than a company referred to in clauses (i), (ii) or (iii) of clause (5A) including; i. a hire purchase company ii. an investment company iii. a housing finance company iv. a loan company v. a mutual benefit finance company v(a). residuary non-banking company vi. a misc. financial company It was submitted that the corporation would not be a housing finance company but the same had been defined within the Interest Tax Act as a company which carries on, as its principal business, the business of financing of acquisition or construction of houses, including acquisition or development of land in connection therewith. It was further submitted that the company could not be called as a loan company because the same had been defined as a company which carried on, as its principal business, the business of providing finance whether by making loans or advances or otherwise. The ld. ARs submitted that the principal business of the assessee company was not the business of financing or construction of houses or acquisition or development of land in connection therewith nor providing finances. Its principal business, as laid down in the memorandum of association was to promote, establish and execute industries, projects or enterprises for manufacture and production of plant, machinery, implements, accessories, tools, materials, substances, goods or things of any description, which in the opinion of the company were likely to promote or advance the industrial development of Uttar Pradesh and it was for this purpose that the company was to promote and establish companies and AOPs, for the execution of industrial undertakings works, projects and enterprises of any description, whether of a public or a private character, which in the opinion of the company, would contribute & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd to the industrial development of Uttar Pradesh. The ld. ARs therefore, submitted, that aiding and assisting by way of finance of any industrial undertaking project or enterprise was for the specific purpose of advancing the industrial development of Uttar Pradesh and no interest component was associated with this activity. With regard to clause 4 of the memorandum, which related to procurement of capital for or providing of machinery, equipment and other facilities to any company, it was submitted that no interest relating to these particular activities had been held to be chargeable under the Income Tax Act in respect of the assessee. With regard to clause 8, it was submitted that the advances of money to builders and others was also for the specific purpose of developing and turning around any land acquired by the company and the grant or guarantee of loans and advances to any company under clause 24 was for assisting it in its development or expansion or to start a new industry as approved by the company. The ld. ARs pointed out that no such interest had been held to be ‘chargeable’ in the particular assessment years. Referring to clause 40, it was pointed out that clause 40 which spoke of lending money to persons or companies on such terms as may be expedient was for guaranteeing the performance of contracts by such persons towards the company and therefore it too could not qualify the company to be a finance company. Therefore, it was submitted that since the assessee company was not covered withing the definition of a credit institution under section (5A) or financial company under section (5B), interest tax was not chargeable upon it within the terms of section 5 or section 6. It was submitted that the reference to the letter written by the company management to the CBDT seeking the exemption under section 36(1)(viii) was not a proper reference point for earmarking the company as a financial company within the meaning of the Interest Tax Act because the definition of financial company was clearly spelt out within the Interest Tax Act and the assessee did not fall under any of those definitions. Furthermore, the interest that had been received from entrepreneurs on account of, “deferred payments” of instalments had been received on allotments made only to promote an establish industrial sites in Uttar Pradesh for the purposes of industrial growth and there was & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd no relationship as that of lender and borrower between UPSIDC and the allottees. With regard to the interest income received from UPSEB, it was submitted that such advances had been made only to aid and assist UPSEB for setting up sub-station in industrial areas in accordance with clause 40, and no part of such advances was made for the purposes of earning interest income. Thus, the interest received on both these transactions by the assessee corporation did not qualify to be considered as, “interest income” as defined in section 2(7) of the Interest Tax Act, 1974. It was reiterated that the UPSIDC had never been a finance company / credit institution as per the provisions of the Interest Tax Act, 1974. The definition of financial company in the Interest Tax Act was specific while the definition of financial corporation in the Income Tax Act was exhaustive. The State Industrial Development Corporation was covered under the explanation to section 36 of the Income Tax Act but not covered under the Interest Tax Act. Therefore, it was submitted that it was the definition as given in the Interest Tax Act which had to be looked into, to calculate liability for ‘chargeable interest’ under the Interest Tax Act and in this context, it was pointed out that advancing of money was not the principal business of the assessee corporation. On the specific observations of the Hon’ble High Court that the U.P. Industrial Development Corporation was to take over the personnel and the properties of the UPSIDC after its creation, the ld. ARs submitted that the UPIDC did not come into existence before 2013 and the personnel and properties of the UPSIDC continued to remain with it till that date and business continued to be performed by the UPSIDC, prior to 2013. Thus, the arguments were summed up by stating that the assessee did not fall within the ambit of section 2(5A)(iv) r.w.s. 2(5B) of the Interest Tax Act, 1974 and the interest earned by it did not fall within the ambit of section 2(7) of the Interest Tax Act, 1974. Therefore, the interest earned by it could not be chargeable under the Interest Tax Act, 1974.
11. On the other hand, Sh. Puneet Kumar, CIT DR (hereinafter referred to as the ld. DR) pointed out that the assessee received interest in the assessment year 1995- 96 and 1996-97 and the said interest was chargeable to tax under the Interest Tax & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd Act. The ld. CIT DR submitted that one of the objects of the assessee company was to give financial assistance and he referred to the various clauses in the objects that dealt with this and which had earlier been pointed out by the Authorized Representatives for the assessee. It was submitted that interest income of the assessee in the assessment years under consideration was one of the principal sources of income of the assessee and therefore the assessee was a finance company under section 2(5A) r.w.s. 2(5B) of the Interest Tax Act. Therefore, the receipt of interest income by the assessee in the assessment years under consideration, was as per the normal business of the assessee and the interest received by the assessee was interest as per section 2(7) of the Interest Tax Act. The ld. CIT DR further submitted that while seeking approval under section 36(1)(viii) of the Income Tax Act, the assessee had represented itself as a financial corporation and the CBDT had also accorded its approval to the assessee under that section considering it to be a financial corporation. The ld. CIT DR submitted that the definition of the financial company in section 2(5B) of the Interest Tax Act was wide enough to cover the assessee’s activities and therefore the ld. CIT(A) was right in upholding the decision of the ld. AO to tax chargeable interest in its hands on account of interest received on deferred payments and interest received from UPSEB.
We have duly considered the facts and circumstances of the case and the matter as restored to us by the Hon’ble High Court. Perusal of the memorandum of association of the assessee company reveals that out of the 51 objects for which the company is established, around five deal with advancing of money in any manner. Section (5A) of the Interest Tax Act, 1974 defines a credit institution. Among those defined as a credit institution are any other financial company, which has further been defined in section (5B) to mean a company other than a company referred to in clause (i)(ii)(iii) of clause (5A) and specifically, hire purchase finance companies, investment companies, housing finance companies, loan companies, mutual benefit finance companies, residuary non-banking company or a misc. finance company. The basic underlying condition, which is imposed by section (5B) of the Interest & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd Tax Act, 1974, is that, to be considered a financial company, within the meaning of section (5B) of the Interest Tax Act, 1974, the said company must carry out that identified business i.e. hire purchase, investment, housing finance, loaning, mutual benefit finance or non-banking company, as its principal business. Perusal of the memorandum of association of the UPSIDC, shows that the advancing of money that is done is not the principal business of the corporation, but it is done with a view towards furthering the principal object of the company, which from a perusal of all the objects appear to be promoting or advancing the industrial development of Uttar Pradesh. Therefore, it would appear from a perusal of section (5B) of the Interest Tax Act alongwith the memorandum of associations of the assessee company that the assessee does not qualify to be regarded as a financial company within the meaning of the Interest Tax Act, 1974. The fact that it may qualify for benefits under section 36(1)(viii) of the Income Tax Act, 1961, in view of the definition of specified entity as per the explanation to the said section, would not necessarily make it a financial corporation under the Interest Tax Act, 1974 unless it fell within the parameters as laid down under the Interest Tax Act, 1974. Furthermore, “interest” under the Interest Tax Act has been defined to mean interest on loans and advances made in India and includes (a) commitment charges on unutilized portion of any credit sanctioned for being availed off in India and (b) discount on promissory notes and bills of exchange drawn or made in India, but does not include; i. Interest referred to in sub section (1B) of section 42 of the Reserved Bank of India Act, 1934 or (ii) discount on treasury bills. As per section 4(2) of the Interest Tax Act, the interest tax is to be charged in respect of the chargeable interest of a credit institution @ 3% of such chargeable interest. Section 5 of the Interest Tax Act defines chargeable interest as the total amount of interest accuring or arising to the credit institution in that previous year (other than interest on loans and advances made to other credit institutions or to any cooperative society engaged in carrying on the business of the banking). Thus, the necessary pre-condition for holding the interest to be chargeable, is that the institution on which interest tax is leviable, & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd must be a credit institution. However, what emerges from a perusal of the memorandum of association of the U.P. State Industrial Development Corporation Limited that has been presented before us, is that the overall thrust of the objects of the company are to promote and advance the industrial development of State of Uttar Pradesh and for this purpose, the company may undertake various activities including advancing money to such persons or companies for helping them to start a business; for facilitating development of land by it; for enabling expansion of business and; for guaranteeing the performance of contracts by such persons or companies. Thus, as the making of advances and loans are not the principal business of the assessee company, as per its memorandum of association, it cannot be regarded as a credit institution or a financial company within the meaning of section (5A) (iv) and section (5B) of the Interest Tax Act, 1974. We further note that the imposition of interest upon allottees for deferred payment of instalments, cannot be regarded as interest on loans or an advance as it is in the nature of compensatory payment for deferred payment of the cost of allotted land. Therefore, in our view, the interest received on account of deferred payment would not qualify within the definition of interest as laid down under section 2(7) of the Interest Tax Act, 1974. We further note that the coordinate Bench of the ITAT in its order dated 30.11.2005 has elaborately dealt with the issues of the status of the assessee within the meaning of financial company under the Interest Tax Act and the inapplicability of interest tax to the interest received by the assessee company from the UPSEB, which are as under:- “18. We have carefully considered the submissions of the Id. Representatives of the parties and have perused the orders of the authorities below. We have also gone through the relevant provisions of Interest Tax act. We agree with the Id. D.R. that the assessee itself represented before the C.B.D.T/Ministry of Finance, while applying for approval to treat it as a Financial Institution u/s 36(1)(viii) of the Income-tax Act, 1961, as a Financial Corporation. However, we find substance in the submission of the Id. Authorized Representative of the assessee that the purpose of treating the corporation as a Financial Institution u/s 36(1)(viii) of Income-tax Act, 1961, is different than a financial company to be considered for the purpose of Interest Tax Act u/s 2(5A)(iv) read with Section 2(5B) of the Act. The institution which is to be treated as a credit institution and/or a financial company is specifically defined under the & 4/LKW/2004 A.Ys. 1995-96 & 1996-97 M/s U.P. State Industrial Development Ltd above section on which the Interest Tax Act is applicable. On perusal of the clauses of Section 2(5B) of the Act, we observe that the activities of the assessee company do not fall in any of the clauses of Section 2(5B) of the Act. Further, on perusal of the object clause of the assessee company, there is no dispute to the fact that the principal business of the assessee is not of financing loans to the entrepreneurs but to promote and establish the industrial sites in the State of U.P. and to provide the site/sheds to the prospective entrepreneurs to enable them to set up industry in the state. The Industrial sites/sheds are either allotted on the basis of down payments or by way of deferred payment of instalments over a period of time. In case the allottees make delay in payment of the premium, as per the agreement entered into, the allottees pay the interest on the delayed payments. Therefore, the interest income received by the assessee from the allottees is not on the loans/advances given to them, but on account of delayed payment of instalments of lease rent/payment of land price as agreed to. Now coming to the other source of interest income that is interest received from UPSEB on the advances were given by it, we deserve that the advances given by the assessee to UPSEB for setting up sub-station in the industrial area, which is to be developed by it and the said advance given by the assessee to UPSEB is not for the purpose of earning interest. The Department has not disputed the fact that the provision of TDS is not applicable in relation to the payments made to the assessee by UPSEB and/or by the allottees. Considering the above facts and the nature of the transactions on which the assessee has received interest, we are of the considered view that it is not an interest received by the assessee on loans and advances within the meaning of Section 2(7) of the Interest Tax Act. Therefore, the provisions of Section 5 of the Interest Tax Act for levy of interest tax is not attracted. The Id. Authorized Representative of the assessee during the course of his submission submitted that the Department has only initiated the proceedings for levy of interest tax for the assessment years 1995-96, 1996-97 and 1998-99 and not for any preceding or succeeding assessment years, although the activities of the assessee remained the same. This fact also supports the contention of the assessee that the activities of the assessee is not of financing loans and advances, but is only to promote industries in the State of U.P. and during the course of its above activities, the assessee has received interest on delayed payments and/or advances given by the assessee to UPSEB for creating, development and infrastructure in the industrial estate being developed by it. Hence, we hold that the assessee is neither a credit institution nor a finance company within the meaning of Section 2(5A) and/or Section 2(5B) of the Therefore, We allow grounds no. 5 to 10 of the grounds of appeal taken by the assessee for both the assessment years that the provisions of interest Tax Act, 1974 are not attracted in respect of the interest income received by the assessee on account of delayed payment of premium payable by the allottees of the Industrial sites/sheds and also interest paid on the advances given by the assessee to UPSEB.”
13. Therefore, after perusing the memorandum of association of the assessee corporation, we see no reason to differ with the views of the coordinate Bench in its order dated 30th November, 2005 and accordingly we also allow ground nos. 5