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IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 18TH DAY OF MARCH 2013
PRESENT
THE HON’BLE MR. JUSTICE N.KUMAR AND THE HON’BLE MR. JUSTICE B.MANOHAR
I.T.A. NOS.385-386/2009
BETWEEN :
M/s.Jai Bharath Mills Pvt. Ltd., Regd. Office: Syndicate House, Manipal – 576 104, Represented by its Director, Sri.Muddanna, Aged about 45 years, Son of Sri.Chandu Poojar. ...APPELLANT
(By Sri.S.Partha Sarathi & Sri.Vijaya Kumar Punna, Advs.)
AND :
The Asst. Commissioner Of Income-tax, Circle 1, Canara Towers, 4th Floor, Opp. Taluk Office, M.H.Road, Udupi – 576 101. …RESPONDENT
(By Sri.K>V.Aravind, Adv.) . . . .
These I.T.As. are filed under Section 260A of the Income Tax Act, 1961 praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore in I.T.A. No.7 &
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8/Bang/2008 dated 25.03.2009 in the interest of justice and equity.
These I.T.As. coming on for admission, this day, N.Kumar J., delivered the following:
JUDGMENT
The assessee has preferred these appeals against the order passed by the Income tax Appellate Tribunal, which has held that the assessee is liable to pay tax under the Interest Tax Act, 1974 and thus confirmed the orders passed by the Courts below.
The assessee M/s. Jai Bharath Mills Pvt. Ltd., is a Private Limited Company deriving income from leasing and finance. The Assessing Officer issued a notice under Section 10 of the Interest-Tax Act, 1974 (for short, hereinafter referred to as `the Act’) calling upon them for a return of chargeable interest for the years 1995-96, 1996-97, 1997-98, 1998-99 & 1999- 2000. The assessee filed Nil return. Subsequently, a notice under Section 8(1) of the Act was issued. The assessee filed its objection. The assessee contended that it is neither a Credit Institution nor a Finance Company
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as defined under Section 2(5A) and Section 2(5B) of the Act and accordingly, the said Act is not attracted. The Assessing Authority accepting the said stand dropped the proceedings. Subsequently, proceedings here under Section 19(1) of the Act was initiated by the Commissioner of Income-tax and an order came to be passed holding that the assessee is liable to pay Interest tax under the Act. The Revisional Authority set-aside the order of the Assessing Authority and remanded the matter back to the Assessing Authority to re-assess the tax payable in the light of the observations made by him. Thereafter, the assessing authority held that the assessee is a Credit Institution as well as a Finance Company and therefore was liable to pay tax under the Act. Aggrieved by the said order, the Assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Appellate Authority, dismissed the appeal upholding the levy of tax. Aggrieved by the same, the assessee preferred an appeal to the Tribunal. The Tribunal on consideration of all the grounds urged with reference to the statutory provisions and decisions
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relied on by the assessee upheld the order dated 15.04.2008 passed by the CIT(A) Mangalore and dismissed the appeal. Aggrieved by the order, the present appeal is filed.
This appeal pertains to only two assessment years 1997-98 and 1998-99. The substantial questions of law which arise for consideration are as under: 1. Whether interest received from the corporate like KCP Ltd., would fall within the charging Section under the Interest Tax Act for levy of Income tax?
Whether the transaction in question constitutes an inter-corporate deposit so as to be outside the purview of the Act?
If the assessee is only a conduit as contended by them and accordingly earn no interest/income, still whether tax is payable under the Act.
We have heard the learned counsel appearing for the parties.
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Before we answer the substantial questions of law it is necessary to set-out admitted facts in this case. The assessee is a Private Limited Company carrying on the business of Leasing and Finance. The Karnataka Consumer Products Ltd., (KCP), Rajmahal Hotels Pvt. Ltd., MOTCO Agency were in need of funds for their business. KCP approached M/s. Manipal Maharashtra Apex Corporation Limited which is a non- Banking Finance Institution for funds. KCP, being a subsidiary of MRACL, no direct advance could be made. Therefore, KCP approached the assessee for accommodation. On 30th March 1994, MRACL advanced Rs.2.45 crores to assessee. On the same day, the said amount of Rs.2.45 crores was advanced by assessee to KCP. For the amounts received by the assessee from MRACL, the assessee was liable to pay interest and accordingly, the assessee has paid interest. In order to pay the said interest, they collected the interest from KCP. Indeed the contention of the assessee is: (1) It is an inter-corporate deposit and not a loan or advance. Therefore the Act is not applicable.
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(2) The interest was collected from KCP to pay it to MRACL and therefore, there is no surplus interest available on its hands and there is no liability to pay income tax on that score and therefore, there is no liability to pay income tax under the Act.
It is in the background of these facts and the grounds urged, we have to answer the substantial questions of law raised. Now we have to look into the provisions of the act.
The Parliament enacted the Interest-Tax Act, 1974 with the object of imposing a special tax on the total amount of interest received by Scheduled Banks on loans and advances made in this country. That tax will be levied at the rate of 7% on the chargeable amount of interest. However, tax will be levied on interest while computing the taxable income under the Income Tax Act, 1961.
Section 2(5A) of the Act defines `credit institution’ as under: “credit institution” means, –
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(i) a banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in Section 51 of that Act). (ii) a public financial institution as defined in Section 4A of the Companies Act, 1956; (iii) A State financial corporation established under Section 3 or Section 3A or an institution notified under Section 46 of the State Financial Corporations Act, 1951 and (iv) Any other financial company;
Section 2(5B) of the Act defines `financial company’ as under: "financial company" means a company, other than a company referred to in sub- clause (i), (ii) or (iii) of clause (5A), being- (i) a hire- purchase finance company, that is to say, a company which carries on, as its principal business, hire- purchase transactions or the financing of such transactions; (ii) an investment company, that is to say, a company which carries on, as its
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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 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 (i) to (iii)] 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 620A of the Companies Act, 1956 , to be a Nidhi or Mutual Benefit Society;
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(vi) 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;
Sub-Section (7) of Section 2 of the Act defines `interest’ as under: "interest" means interest on loans and advances made in India and includes- (a) commitment charges on unutilised portion of any credit sanctioned for being availed of 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 the Reserve Bank of India Act, 1934 ; (ii) discount on treasury bills;]
Section 4 of the Act is the charging section. It reads as under: Charge of tax. (1) Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the 1st day of April, 1975 , a tax (in this
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Act referred to as interest- tax) in respect of its chargeable interest of the previous year at the rate of seven per cent. of such chargeable interest: Provided that the rate at which interest- tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1983 , shall be three and a half per cent of such chargeable interest. (2) Notwithstanding anything contained in sub- section (1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from 1st day of April, 1992, interest- tax in respect of its chargeable interest of the previous year at the rate of three per cent of such chargeable interest.
Section 5 of the Act deals with the Scope of Chargeable interest.
From the aforesaid provisions, it is clear that when the assessee is not a Scheduled Bank but falls within the definition of Credit Institution, there shall be charge in respect of its chargeable interest for the
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previous year at the rate of 3% of such chargeable interest. The argument is the amount received is not interest because interest means interest on loans and advances whereas what the assessee has given to KCP is deposit. Therefore, it is necessary to have a clear distinction between a deposit and a loan. The Apex Court in the case of CIT V/s. Bazpur Co-operative Sugar Factory Limited reported in (1988) 172 ITR 321 has held that “the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfillment of certain conditions”.
The Bombay High Court in the case of Pennwalt India Ltd., V/s. Registrar of Companies reported in (1987) 62 Comp. Case 112 and in case of Durga Prasad Mandelia V/s. Registrar of Companies reported in (1987) 61 Comp Case 479 have held as under: “ `Deposit’ and `loan’ – these two are not identical in meaning – It is true that both in the case of a loan and in the case of a deposit
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there is a relationship of a debtor and a creditor between the party giving money and the party receiving money. But in the case of a deposit, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money- the benefit normally being earning of interest from a party who customarily accepts deposits. Deposits could also be for safe- keeping or as a security for the performance of an obligation undertaken by the depositor. In the case of a loan, however, it is the borrower at whose instance and for whose needs the money advanced. The borrowing is primarily for the benefit of the borrower although the person who lends the money may also stand to gain thereby by earning interest on the amount lent. Ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover while in the case of a loan, it is the borrower who is the prime mover. The other and more important distinction is in relation to the obligation to return the amount so received. In the case of a deposit which is payable on demand, the deposit would become payable when a demand is made. In the case of a loan, however, the obligation to repay the
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amount arises immediately on receipt of the loan. It is possible that in case of deposits which are for a fixed period or loans which are for a fixed period, the point of repayment may arise in a different manner. But by and large, the transaction of a loan and the transaction of making a deposit are not always considered identical.
`Loan’ and `deposit’ are not identical in meaning and cannot always be inter- changed. Some loans made by deposits and some deposits may be loans. But all loans are not deposits or vice versa. The dividing line between a loan and deposit is undoubtedly thin: the two, however, are not synonymous.”
The Madhya Pradesh High Court in the case of Sharda Talkies V/s. Smt.Madhulata Vyas reported in AIR 1996 MP 68, 71, has observed as under: “There is a subtle distinction between a deposit and a loan. In the case of a loan, the amount is given by the creditor to the debtor at the request of and for the requirements and dues of the debtor under certain terms and conditions. In the case of a deposit, the depositee received money at the instances of
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the depositor. In the case of a deposit, the requirement of the depositee is neither relevant nor material. The depositor has to go (sic.) the depositee for depositing the amount or the depositee may go and collect the amount. But in case of a loan, the debtor has to request the creditor to advance certain amount for meeting his requirement for using the amount.”
From the aforesaid judgments, it is clear that the loan/advances and deposit are not identical in meaning. In the case of a loan, it is the borrower who approaches for the loan as he needs the money advanced. Ordinarily, though not always, in the case of deposit it is the depositor who is the prime mover who deposits the money with the intention of getting interest on such deposit. In the case of a loan, the obligation to repay the loan arises either immediately on receipt of the loan or in terms of the agreement of loan. In the case of deposit, the period for which the debtor has received the deposit is fixed and only after the expiry of the said period, it is repayable. Normally, the rate of interest paid on deposit would be less when compared
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to the rate of interest on loans. The loan transaction would be commercial transaction whereas in the case of deposit the object being though to earn interest, there should be security for the amount deposited. Therefore, whether the particular advance is a loan or deposit has to be arrived at by looking into the facts of that particular case.
In the instant case, it is not in dispute that it is the KCP which approached the MRACL for Financial accommodation. As the said company being a subsidiary company, they could not advance money directly. Therefore, the assessee contends that it is a conduit to overcome the said obstacle in law. It is on the request of KCP, MRACL advanced money to the assessee with a specific understanding that the assessee has to repay the money with interest. The payment of interest was not made dependent upon the payment of interest by KCP to the assessee. On receipt of the said amount, the assessee has made available the funds to the KCP with a specific understanding that it has to be repaid with interest. Admittedly, interest has
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been paid. Therefore, the question is whether the interest paid by KCP to the assessee falls within the tax net under the Act. If the amount paid by the assessee to KCP under these circumstances cannot be construed as a deposit as understood in common parlance, because what was paid to KCP is not their money. It is the money belonging to MRACL. In the case of deposit, the person making the deposit has to deposit the money with Debtor so as to earn interest. Therefore, rightly the authorities have concurrently held that the transaction in question cannot be construed as a deposit as it is not deposited by the assesses. Once it ceases to be a deposit, either it has to fall under the heading of loan or advances. Admittedly, interest is paid on this loan or advance and therefore, it falls within the definition of interest as contained in Section 2(7) of the Act. The assessee is a Credit Institution. Therefore, once a Credit Institution receives interest for the loans and advances made, they shall be charged tax under the Act in respect of its chargeable interest of the previous year. Therefore, the liability to pay tax on
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interest under the Act is not absolved. Therefore, the Tribunal has taken pains and has written a considered order giving cogent reasons negating all the contentions urged by the assessee. We do not find any error in the said reasoning and therefore, there is no merit in these appeals. Accordingly all the three substantial questions of law framed in these appeals are answered in favour of the Revenue and against the assessee.
Appeals stand dismissed.
SD/- JUDGE
SD/- JUDGE
SPS