JUDGMENT
D.A. Mehta, J.
1. The following question is referred by the Income-tax Appellate Tribunal, Ahmedabad Bench ‘C’ under Section 256(1) of the Income-tax Act, 1961 (the Act) at the instance of the assessee:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee company was not a financial company within the meaning of clause (c) of Explanation to Sub-sec. 8 of Sec. 40A of the I.T. Act, 1961 and, therefore, the ITO was justified in making disallowance from expenditure by way of interest paid by the assessee on deposits ?”
2. The Assessment Year is 1982-83 and the relevant accounting period is calender year 1981. The assessee, a Private Limited Company, derives income from business of purchase and sale of shares. While finalizing the assessment on 31st March, 1983, the Assessing Officer held :
“2. Provisions of Sec. 40A(8) are not applied as the assessee company is a financial company (Investment Company) as defined in clause (c) of Sec. 40A(8).”
3. The Commissioner of Income-tax , Gujarat-I, Ahmedabad (CIT) felt that the assessee company was a trading company and provisions of Section 40A(8) of the Act were applicable and hence, 15% of the interest payment was liable to be disallowed and added to the total income. He, therefore, issued notice under Section 263 of the Act. The assessee replied on 20th March, 1985. It was contended that the assessee was a ‘financial company’ within the meaning of Explanation (c) to Section 40A(8) of the Act and hence, it was not liable to be hit by the main provision of Section 40A(8) of the Act. The assessee also invited attention to Section 45 of the Reserve Bank of India’s Non-banking Financial Companies (Directions), 1977 to point out that the assessee company was treated as an investment company under the said Directions, it had been so classified by Reserve Bank of India (RBI) and has been registered with RBI.
4. The CIT did not accept the explanation of the assessee and held that as the assessee had purchased the shares with an intention to sell the same on profit i.e. the shares were acquired as business assets and not as an investment, the assessee company could not be treated to be an investment company. He, therefore, held that as the Assessing Officer had failed to make disallowance of interest in accordance with Section 40A(8) of the Act, the assessment order was erroneous and prejudicial to the interests of Revenue. The assessment was, therefore, set aside for being made afresh in accordance with law.
5. The assessee carried the matter in appeal before the Tribunal. The Accountant Member accepted the stand of the assessee and held that Section 40A(8) would be applicable only if an assessee has income under the head “business”. If an assessee holds shares etc. as investments only there is no business and hence, the view of the CIT that because shares were treated as stock-in-trade, the case of the assessee was not to be considered under clause (c) of the Explanation to Section 40A(8) of the Act was incorrect. Thereafter, referring to the history of Section 40A(8) of the Act at the time of introduction in the statute by Finance Act, 1975 it was held that the intention of the legislature can be truly ascertained after taking into account totality of measures and the aim sought to be achieved. Thereafter, the view taken by RBI was taken into consideration and it was stated that the same had to be given due weightage since RBI took decision in consultation with Government of India. Lastly, reference was made to earlier assessments which had become final wherein the assessee had been treated as an investment company.
6. The Judicial Member did not agree with the view of the Accountant Member and held that the provision of sub-clause (ii) of clause (c) of Explanation to Section 40A(8) of the Act required that for a company to be treated as “investment company” major part of its income had to be from investments in contradistinction to the income from dealing or trading in shares, stock, debentures, etc. He also referred to various clauses of Memorandum of Association, with special reference to clause 66 and the meaning of term “invest”. It was further held that the income from investment should be in the nature of “unearned” income and should not partake the character of “earned” business income.He, therefore, held that regardless of whether the assessee company is treated as an investment company under the Companies Act, 1956 or by the RBI would be of no relevance and the distinction between dealing in investment and holding an investment had to be borne in mind. Accordingly, he upheld the view of the CIT. Referring to the past assessments wherein the assessee was treated as an investment company, the Judicial Member held that this would neither create a bar nor an estoppel against Revenue to ascertain the true character of the company for computation of its income for the year under consideration, as each assessment, was separate and independent.
7. In light of the difference of opinion between the Accountant Member and Judicial Member, the appeal was referred on the following point of difference to the Third Member :
“Whether the Commissioner of Income-tax erred in setting aside the assessment for the asst. year 1982-83 on the ground that the Income-tax Officer failed to make the disallowance in accordance with section 40A(8) of the Income-tax Act, 1961?”
8. The Third Member, after hearing the parties, agreed with the view of the Judicial Member. While doing so he observed as under in relation to the object of Section 40A(8) of the Act :
“….. In so far as the object of Section 40A(8) is concerned, it is very clear that 15% of the interest expenditure incurred by a company other than a banking company or a financial company, shall not be allowed as a deduction. In other words, except banking and financial companies, the other companies receiving deposits are not to be allowed the entire amount of interest paid, except by undergoing the cut imposed by the section. The purpose is very clear to understand. A trend has developed in the country, particularly in the corporate sector to receive deposits by offering very high rates of interest sometimes rendering on usuriousness. This tendency had not only deprived the public financial institutions like Banks etc. from securing deposits but the public are being cheated into making deposits with those companies by the offer of high rates of interest without any proper security of refunding of the amounts. Instances where the depositors were cheated for refunds were not uncommon. The legislature stepped in to put an end to this unethical and deceptive practices. It has, therefore imposed a curb by disallowing the interest on the payments of interest offered to achieve a twin objective. One is to regulate the flow of funds into the companies which are not banking and financial companies and secondly, to ensure the repayment of the refunds by weeding out the unstable companies. Since banking and financial companies are excluded from the operation of this limitation, it became necessary for the legislature to define what is a financial company. Therefore, explanation c(ii) was added which said that a financial company means 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, etc. That is it must be an investment company, it must carry on the business of acquisition of shares and thirdly that business must be the principal business.”
9. Mr. J.P.Shah, learned advocate appearing on behalf of the assessee, read in extenso from the orders of the three members, with special reference to the order of the Accountant Member to submit that the majority had committed an error while holding that the principal business of the assessee was dealing in shares and not acquisition of shares. According to him, both the activities were necessary and acquisition of shares, was the requirement for the purpose of trading in shares. That it was an admitted fact that the shares were acquired by utilizing borrowed funds and considering the market rate of the shares and the dividend yield thereon, it was inconceivable that a person would carry on business of only investing in shares, because the difference in rate of interest qua the yield from the shares would always result in loss; and no person would, in the usual course enter into transaction for the purpose of incurring loss. The next submission was that in the earlier assessment years, on identical facts the activity which was identical in nature had been treated in hands of the assessee as business of investment and the assessee had been treated as an investment company. That the majority view of the Tribunal in brushing aside this aspect of the matter was an incorrect approach. Inviting attention to the documents, with special reference to the communication from RBI dated 22nd April, 1981 as well as the Directions issued by the RBI, it was submitted that the assessee company had already been held to be an investment company as defined in Paragraph No. 2(1)(i) of Notification dated 20th June, 1977; and the Tribunal had erred in ignoring this piece of evidence. Mr. Shah submitted that various decisions on which the Tribunal had placed reliance are in context of Section 23A of the Indian Income Tax Act, 1922 (the 1922 Act) and had no relevance as the language employed by the said provision was different from the one which was under consideration. He placed reliance on the following decisions :
(i) East India Prospecting Syndicate, Calcutta v. Commissioner of Excess Profits Tax, Calcutta, [1951] 19 ITR 571 (Cal.);
(ii) Bengal and Assam Investors Ltd. v. Commissioner of Income-tax, West Bengal, [1966] 59 ITR 574 (S.C.);
(iii) Commissioner of Income-tax v. Kanoria Investments (P.) Ltd., [1998] 232 ITR 7 (Cal.);
(iv) Lalludas Children Trust v. Commissioner of Income-tax, [2001] 251 ITR 50 (Guj.);
(v) Taraben Ramanbhai Patel and Anr. v. Income-tax Officer and Ors., [1995] 215 ITR 323 (Guj.);
(vi) Radhasoami Satsang v. Commissioner of Income-tax, [1992] 193 ITR 321 (S.C.); and
(vii) Distributors (Baroda) P. Ltd. v. Union of India and Ors., [1985] 155 ITR 120 (S.C.).
10. Mr. B.B.Naik, learned Standing Counsel appearing on behalf of Revenue, submitted that the Court should decline to answer the reference because whether the assessee was or was not a “financial company” was predominantly a question of fact as held by High Court of Calcutta in the case of Commissioner of Income-tax v. Kanoria Investments (P.) Ltd., [1998] 232 ITR 7 (Cal.). That the CIT and the Tribunal, per majority opinion, had recorded concurrent findings of fact after appreciation of evidence that the assessee company was a trading company and not a financial company. He referred to and read from the order of the CIT and the opinion of the Judicial Member in support of his submissions.
11. Section 40A of the Act as is relevant for the present purposes reads as under :
“Expenses or payments not deductible in certain circumstances.
40A.(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession”.
(2) to (7) x x x x x x x x
(8) Where the assessee, being a company (other than a banking company or a financial company), incurs any expenditure by way of interest in respect of any deposit received by it, fifteen per cent of such expenditure shall not be allowed as a deduction.
Explanation : In this sub-section,–
(a) “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1999), applies and includes any bank or banking institution referred to in section 51 of that Act;
(b) x x x x x x x
(c) “financial company” means– (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; or
(ii) 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; or
(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 (1 of 1956), to be a Nidhi or Mutual Benefit Society;
(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.]”
12. On plain reading of the aforesaid provisions, Section 40A of the Act can come into play only in case where an assessee is having income under the head ‘Profits and gains of business or profession’. Section 40A(1) of the Act makes it clear that the provisions of the Section shall have effect notwithstanding anything to the contrary contained in any other provision of the Act relating to computation of income under the head “Profits and gains of business or profession”. Therefore, only in case of an assessee who derives income under the said head, namely, “business” would the question of invoking Section 40A of the Act arise. The scheme envisages that an expenditure which is otherwise an allowable or a deductible expenditure while computing the income from business would be either partially or wholly disallowed on fulfillment of the conditions stipulated in various sub-sections that follow. Sub-section (8) of Section 40A of the Act provides for disallowance of 15% of expenditure by way of interest in respect of any deposit received by a company. The plain language requires that the said sub-section can be invoked only in case of a company, not being a banking company or financial company. In other words, a company which is not a banking company or a financial company and has accepted any deposit from any person and pays interest thereon, claims deduction of such interest as an expenditure incurred for the purposes of business, shall not be allowed deduction to the extent of 15% of such expenditure. However, by virtue of the bracketed portion certain exceptions are carved out and clause (a) below Explanation defines “banking company” while clause (c) defines “financial company”. Under clause (c) of the Explanation to sub-section (8) of Section 40A of the Act a “financial company” means – (i) a hire purchase finance company; (ii) an investment company; (iii) a housing finance company; (iv) a loan company; (v) a mutual benefit finance company; and (vii) a miscellaneous finance company. The present controversy centres around the definition of an “investment company” as stated in sub-clause (ii) of clause (c) of the Explanation.
DATE : 13-04-2005
13. An investment company is a company which carries on the acquisition of shares, stock, bonds, etc. or securities issued by the Government or local authority, or other marketable securities of a like nature. Therefore, in other words, an investment company can carry on as its principal business the acquisition of shares, stock, etc.; or it could carry on as its principal business securities issued by the Government or a local authority; or it could carry on as its principal business the acquisition of other marketable securities of a like nature. Thus, for a Limited Company, to be governed by the definition of “investment company” it has to carry on as principal business acquisition of either any one or all the three categories of specified financial instruments. The question that would then arise is : does the term ‘acquisition’ mean only acquiring of securities and not sale thereof ? The Tribunal has answered the question in the affirmative so as to distinguish an investment company from a trading company and on a plain reading the said meaning might appear to flow from the provision. However, a closer scrutiny reveals that the same cannot be the legislative intent considering the context in which the provision appears and the scheme of the Act. Under sub-clause (i) a hire-purchase finance company means a company which carries on, as its principal business, hire-purchase transactions or the financing of such transactions; sub-clause (iii) deals with a housing finance company to mean 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; sub-clause (iv) defines a loan company to mean a company which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise, but does not include the earlier three categories of companies specified in sub-clauses (i) to (iii); similarly clause (v) provides for a mutual benefit finance company to mean 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 to be a Nidhi or Mutual Benefit Society under Section 620A of the Companies Act, 1956; lastly, sub-clause (vi) defines a miscellaneous finance company to mean a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses. In each of the categories of finance company there have to be multiple transactions, resulting in turnover of funds and financial instruments. In absence of such activity there can be no business. Turnover of funds and instruments by its very nature requires inflow and outflow of funds; buying and selling of instruments; floating and termination/maturity of investments or instruments. Thus, it can be seen that each of the categories of a finance company requires financing of transactions and for this purpose, it would need funds, which are acquired by making borrowings on which interest is paid. Such interest is otherwise allowable as a deduction while computing the taxable income under the head “Profits and gains of business or profession”. The stipulated percentage of interest is disallowable under Section 40A(8) of the Act but a company which is a financial company is kept out of the purview of the non-obstante provision by carving out the exception. Therefore, admittedly, each of the companies, which are financial companies, within the meaning of clause (c) of the Explanation would be a company which is carrying on one or the other business. On a conjoint reading of clause (c) with reference to different categories specified in the sub-clauses, it is apparent that a company can carry on business only if there are transactions. When one talks of an “investment company” in light of the definition which appears under sub-clause (ii) of clause (c) of the Explanation to sub-section (8) of Section 40A of the Act one has to bear in mind the placement of provision.
14. Under Chapter IV which deals with ‘Computation Of Total Income’, Section 14 of the Act lays down the heads of income. The Section provides that all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :
A. Salaries.
B. Interest on securities.
C. Income from house property.
D. Profits and gains of business or profession.
E. Capital gains.
F. Income from other sources.
14.1 Under Head ‘D’ which deals with ‘Profits and gains of business or profession’ Section 28 of the Act appears and it specifies the incomes which are chargeable to income-tax under the said head. The other heads except Head ‘F’ deal with different categories of income and the computation, including the deductions available under a particular head, has been laid down by providing various sections under each of the heads.
14.2. Under Head ‘F’ which deals with ‘Income from other sources’ Section 56 of the Act provides that income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in Section 14, items A to E.
15. The scheme of the Act, therefore, envisages that all residual income which is not chargeable to tax under any of the heads specified from A to E in Section 14 of the Act shall be brought to tax under the head ‘Income from other sources’ as provided in Section 56 of the Act. The exercise, therefore, has to be undertaken to ascertain in the first instance as to whether a particular income falls within any of the specified heads, namely, A to E; only if it is found that the prerequisite conditions for being assessed under any of the specified heads are not fulfilled, can an income be brought to tax under Section 56 of the Act.
16. In the present case, admittedly, the assessee company is chargeable under the Head ‘D’ ‘Profits and gains of business or profession’. In the circumstances, there is no question of going to the residual head. Once this is the position, the approach of both the CIT and the Tribunal in holding that an investment company cannot deal in shares is against the scheme of the Act. A company which makes investment only for the purposes of yield from the investments cannot be taxed under the head ‘Profits and gains of business or profession’ as the said item, namely, yield by way of dividend or interest from shares or securities would fall within either Head ‘B’ i.e. ‘Interest on securities’ or Head ‘F’ ‘Income from other sources’. Therefore, the approach adopted by the CIT and the Tribunal is against the basic scheme of the Act resulting in a situation whereby both of them have erred in law.
17. The assessee had placed on record the fact that it was treated and registered as an “investment company” by the RBI in light of the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, 1977 (Directions) but except for the Accountant Member, the Judicial Member and the Third Member failed to appreciate the true import of the said approval and registration. It is necessary to take into consideration as to in what circumstances the said provisions have been incorporated.
18. As can be seen from the preamble to the Non-Banking Financial Companies (Reserve Bank) Directions, 1977 the said Directions have been formulated by Reserve Bank of India (RBI) in exercise of powers conferred by Sections 45J, 45K and 45L of the Reserve Bank of India Act, 1934 (the RBI Act). The purpose and the object of issuing such directions is stated to be that RBI considered it necessary in the public interest and to enable RBI to regulate the credit system to the advantage of the country.
19. The credit system referred to by RBI is part and parcel of the financial system of the country. The financial system comprises of various institutions engaged in the financial market of the national economy. The constituents are all India level financial institutions like IFCI, IDBI, ICICI, NABARD, NHB, other investment institutions like LIC, GIC, UTI, etc., and State level financial and investment institutions like State Financial Corporations, State Industrial Development Corporations etc; then there are the commercial cooperative banks, mutual funds and various non-banking financial institutions like leasing and hire purchase companies, housing finance companies, chit funds, investment and loan companies, etc. The entire financial system is thus closely interwoven in which non-banking financial companies (NBFCs) play an important role and occupy significant position. The funds, which form the basis of operation of such NBFCs are sourced from the subscription by way of shareholders funds, directors deposits, loans from other financial institutions like banks, etc. and deposits solicited from public at large.
20. Commercial banks are governed by the Banking Regulation Act, 1949 but there is no specific statute governing non-banking financial institutions. For the purposes of providing law and regulatory frame work for such non-banking institutions with special reference to regulation of fixed deposit mobilization from public Chapter III-B of the RBI Act is incorporated and pertains to ‘PROVISION RELATING TO NON-BANKING INSTITUTIONS RECEIVING DEPOSITS AND FINANCIAL INSTITUTIONS’.
21. Under Section 45I of the RBI Act various definitions are given including definition of the terms ‘business of a non-banking financial institution’, ‘company’, ‘deposit’, ‘financial institution’, ‘non-banking institution’, ‘non-banking financial company’, etc. The definitions which are relevant for the present purpose are that of “business of a non-banking financial institution”, “financial institution”, “non-banking institution” and “non-banking financial company” which respectively read as under :
45-I[(a) “business of a non-banking financial institution” means carrying on the business of a financial institution referred to in clause (c) and includes business of a non-banking financial company referred to in clause (f);]
45-I[(c) “financial institution” means any non-banking institution which carries on as its business or part of its business any of the following activities, namely:-
(i) the financing, whether by way of making loans or advances or otherwise, of any activity other than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature;
(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972 (26 of 1972);
(iv) the carrying on of any class of insurance business;
(v) managing,conductingor supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person;
[but does not include any institution, which carries on as its principal business, —
(a) agricultural operations; or
(aa) industrial activity; or]
[Explanation.– For the purposes of this clause, “industrial activity” means any activity specified in sub-clauses (i) to (xviii) of clause (c) of section 2 of the Industrial Development Bank of India Act, 1964 (18 of 1964);]
(b) the purchase, or sale of any goods (other than securities) or the providing of any services; or
(c) the purchase, construction or sale of immovable property, so however, that no portion of the income of the institution is derived from the financing of purchases, constructions or sales of immovable property; by other persons;]”
45-I(e) “non-banking institution” means a company, corporation, [or co-operative society]”
45-I[(f) “non-banking financial company” means–
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
(iii) suchother non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.]
22. Therefore, a non-banking financial institution may be a company, corporation or a cooperative society. The definition of financial institution means any non-banking institution which carries on as its business or part of its business any of the specified activities and one of them is as provided by sub-clause (iii) (the acquisition of shares, stock, bonds, debentures, or securities issued by a government or local authority or other marketable securities of a like nature).
23. Under Section 45-IA it is provided that no NBFC shall commence or carry on the business of a non-banking financial institution without obtaining a certificate of registration under Chapter IIIB of RBI Act and having the net owned fund as specified. Under Section 45-IB every NBFC is required to invest and continue to invest in India in unencumbered approved securities as per valuation and prescribed percentage. Similarly, Section 45-IC provides for creation of a reserve fund and maintenance thereof.
24. Under Section 45J of the RBI Act Reserve Bank has power to regulate or prohibit issue of prospectus or advertisement soliciting deposits of money and under Section 45JA, Reserve Bank is empowered to determine policy and issue directions if it is satisfied that it is necessary to do so in the public interest or to regulate the financial system of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in a manner detrimental to the interest of the depositors, etc.
25. Similarly, under Section 45K, Reserve Bank has power to collect information from non-banking institutions as to deposits and to give directions and under Section 45L to call for information from financial institutions and to give directions. It is not necessary for the present to deal with other provisions of Chapter III-B of the RBI Act but it is necessary to take note of Section 45Q which provides that provisions of Chapter-IIIB of the RBI Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. In other words, the powers which are available to RBI under the RBI Act with special reference to Chapter IIIB are overriding qua all other laws. The scope and extent of such powers has been laid down by the Apex Court in the case of Peerless General Finance and Investment Co. Ltd. and Anr. v. Reserve Bank of India and Ors., [1996] 85 Company Cases 808.
26. The NBFC Directions, 1977 define ‘investment company’ and ‘non-banking financial company’ under Clause 2(1)(i) and 2(1)(l) respectively as under:
(i) “investment company” means any company which is a financial institution carrying on as its principal business the acquisition of securities;
(l) “non-banking financial company” means any hire-purchase finance, investment, [***] loan or mutual benefit financial company and [an equipment leasing company] but does not include an insurance company or a stock exchange or stock broking company;
Clause 2(2) reads as under:
“(2)(a) If any question arises as to whether a company is a financial institution or not, such question shall be decided by the Reserve Bank in consultation with the Central Government.
(b) If any question arises as to whether a company which is a financial institution is a hire purchase finance company, investment company, [* * *] a loan company [or an equipment leasing company] such question shall be decided by the Reserve Bank having regard to the principal business of the company and other relevant factors.
[Explanation. — The principal business of a financial company, engaged in both hire purchase financing as well as equipment leasing, will be decided after taking together the volume of both these types of business.]
Therefore, on plain reading it become apparent that any decision by RBI which has been arrived at after consultation with the Central Government as to status of a company, namely, whether it is a financial institution or not; and whether a company which is a financial institution is an investment company or not, would be final in so far as the financial system is concerned. The other parts of the Directions indicate that the powers exercised by RBI relate not only to the procedural aspect of functioning of NBFC but more importantly, in relation to its existence as a NBFC and its categorization and sub-categorization.
27. The Directions have been issued by the RBI by exercise of powers available under the RBI Act and as noticed, Chapter IIIB of the RBI Act has an overriding effect. In these circumstances, what would be the effect of a company registered as NBFC, treated as an investment company by RBI has to be taken into consideration.
28. The question that would then require to be addressed is whether there is any conflict between the provisions of the Act and the RBI Act as well as the NBFC Directions which have been issued by RBI in exercise of powers available under the RBI Act. The definition of a “Non-Banking Financial Company” under the RBI Act as well as the NBFC Directions, 1997 would make it clear that there is no inconsistency or conflict between the said provisions. In fact under Section 45-I(c)(ii) the definition of “financial institution” to mean any non-banking institution which carries on as its business the acquisition of shares etc. or securities issued by a government or local authority or other marketable securities of a like nature would go to show that under both the Acts, namely, the RBI Act as well as the Income Tax Act the definitions are identically worded and, therefore, it cannot be successfully urged that the decision by RBI would have no bearing or relevance while resolving the controversy at hand.In these circumstances, the authorities ought to have taken into consideration the factum of the assessee being classified under the category of an ‘investment company’ as defined in Paragraph 2(1)(i) of Notification No. DNBC38/DG(H)-77 dated 20th June, 1977 as well as being registered with RBI as such. It is also necessary to take note of the fact that the assessee is required to comply with the Directions contained in the Notification and to submit every year, a copy of annual accounts and a return furnishing the information specified in the First Schedule of the return in respect of the business within a period of 15 days from the date of the general meeting in which annual accounts are passed. Therefore, the Tribunal and the CIT committed an error in law in not taking into consideration the factum of classification and registration of the assessee by RBI.
29. This i.e. Registration by RBI becomes all the more relevant when one considers the object of enacting Section 40A(8) of the Act. The Third Member has referred (relevant extract reproduced hereinbefore) to the object in his order, but failed to appreciate the same in light of the contentions and evidence on record. Hence, apart from overriding effect of Section 45Q of the RBI Act, even if the import of the object of Section 40A(8) (including the Explanation thereto) is borne in mind it is apparent that Tribunal has erred in law. Not only there is no conflict between the provisions of RBI Act, Directions issued by RBI and Section 40A(8) of the Act, but they are enacted to achieve the same object. They are part and parcel of the larger scheme under the financial system/credit system of the national economy and dovetail into each other to attain a common goal.
30. The question that remains to be answered, despite the aforesaid legal position, is as to what is the distinguishing line which can be drawn in case of investment and trade simpliciter, considering the language employed by the provisions, namely, acquisition of shares or securities, etc. An inherent indication is available in the provision itself. Sub-clause(ii) of clause (c) of the Explanation to Section 40A(8) of the Act which defines an “investment company” states that one of the principal business could be acquisition of marketable securities of a like nature. In other words, securities which are in the nature of shares, stock, debentures, etc. or securities issued by a Government. Furthermore, such securities have to be marketable. The concept of marketability cannot be lost sight of when one talks of acquisition of marketable securities. To put it differently, any kind of security as specified in sub-clause (ii) of clause (c) of the Explanation to Section 40A(8) of the Act when acquired has to be marketable. It would be a paradox if one ascribes the narrow view adopted by the Tribunal to the term ‘acquisition’ of shares etc. so as to mean acquiring of shares and securities only for the purposes of receiving dividend or interest therefrom. In these circumstances, there would be no business.
31. In the case of Bengal and Assam Investors Ltd. v. Commissioner of Income-tax, West Bengal, 1966 [59] ITR 547, the Apex Court was called upon to answer the following question which was in the first instance referred to the High Court of Calcutta under Section 66(1) of the Indian Income-tax Act, 1922 by the Appellate Tribunal.
“Whether, in the case of the assessee, an investment company, its dividend income is part of its profits and gains chargeable to tax under section 10 of the Indian Income-tax Act, 1922 ?”
31.1 The High Court held that “when the assessee company held shares on which dividends were received tax has to be computed under section 12 and the assessee cannot say that this being its main activity the income received was its ‘business income’ under Section 10.” The assessee challenged the aforesaid decision of High Court before the Apex Court and the Hon’ble Supreme Court, after referring to various decisions laid down the following legal proposition :
” It seems to us that on principle before dividends on shares can be assessed under section 10, the assessee, be it an individual or a company or any other entity must carry on business in respect of shares; that is to say, the assessee must deal in those shares. It is evident that if an individual person invests in shares for the purpose of earning dividend he is not carrying on a business. The only way he can come under section 10 is by converting the shares into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares as did the assessee in Commissioner of Income-tax v. Bai Shirinbai K. Kooka.
Mr. Desai laid a great deal of stress on the argument that the very fact that a company is incorporated to carry on investment shows that the company is carrying on business. We are unable to agree with this contention. Bhagwati J. observed in Lakshminarayan Ram Gopal and Son Limited v. Government of Hyderabad that “when a company is incorporated it may not necessarily come into existence for the purpose of carrying on a business.” He further observed that “the objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business.”
Apart from showing mere investment, no facts have been brought out in this case to show that the company was in any way carrying on business in respect of shares. Its position, on the facts placed before us, is in no way different from an individual merely buying shares with a view to holding them for the purpose of earning dividends. No authority has been cited before us that in the case of an individual to acquire and hold shares with the object of receiving dividends is to carry on business. We are unable to hold that if a company does the same, it carried on business within section 10 of the Act.”
32. Therefore, applying the aforesaid principles to the facts of the case, it is apparent that merely because the investments are held as stock-in-trade it would not debar the assessee from being treated as an investment company. Provisions of Sections 10 and 12 of the 1992 Act are similar to provisions of Sections 28 and 56 of the 1961 Act. To the contrary, as held by the Apex Court if the shares were merely bought and held for the purposes of earning dividends it cannot be stated that they were acquired and held with the object of carrying on any business within the meaning of Section 10 of the 1992 Act, i.e. Section 28 of the Act.
33. Despite the aforesaid legal position, a further issue might arise in the circumstances as to what would amount to a business of investment in contradistinction to a business of trading, with special reference to the nature of the goods, namely, shares and securities. One sure test in this regard could be as to whether the shares and securities are in fact acquired; in other words, whether an assessee has taken delivery of the scrip. In a case where the shares or securities are merely traded so as to earn margin by way of profit without taking actual delivery thereof it will amount to trading simpliciter or a speculative transaction, and cannot be termed to be a business of investment. Therefore, for an assessee to show that it is carrying on trading activity as an investment company it will have to establish that the company is taking physical delivery of the scrips and thereafter sells the same i.e. after the point of acquisition of the shares. In other words, the shares and securities have to be transferred in the name of the person, namely, the company acquiring such shares or securities. In absence of such a relevant entry the company cannot successfully urge that it is an ‘investment company’.
34. During the course of hearing both the learned advocates, appearing on behalf of the assessee and the Revenue, have placed reliance on the decision of the Commissioner of Income-tax v. Kanoria Investments (P.) Ltd. (supra); the learned advocate for the assessee, for the purposes of showing that even speculative business in shares has been held to be a principal business carried on by the company and the assessee in the said case treated as a financial company; while the learned counsel for the Revenue for the purpose that the Hon’ble Calcutta High Court has held this controversy to be basically a question of fact.Having gone through the said judgement, it is necessary to record a note of dissent only qua the finding that even a speculative business would amount to a business of investment. If, after the various tests as applicable, on the facts and circumstances of a given case, stand satisfied, the question whether a company could be treated an investment company or not can be urged to be a question of fact in light of the findings recorded by the authorities.
35. The Tribunal while dealing with the controversy has placed reliance on various decisions dealing with the definition of “investment company” within the meaning of Section 23A of the 1922 Act and hence adopted an incorrect approach. As held by the Hon’ble Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India and Ors. (supra), it is most unsafe to try to arrive at the true meaning of a statutory provision by reference to an interpretation which might have been placed on an earlier statutory provision which is not only couched in different language but is also structurally different. Thus, the various decisions on which reliance has been placed by the Tribunal cannot carry the case of the Revenue any further.
36. In the case of Hoystead v. Commissioner of Taxation, [1926] AC 155 (PC), it has been held that :
“Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle. Thirdly, the same principle – namely, that of a setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.”
[The above paragraph has been quoted with approval and relied on by the Hon’ble Supreme Court in the case of Radhasoami Satsang v. Commissioner of Income-tax, [1992] 193 ITR 321].
36.1 Applying the aforesaid principle to the facts of the case it is apparent that the Tribunal has committed an error in law in brushing aside the past history of assessment of the assessee as an “investment company” without bringing any distinguishing material on record. The Revenue has not been able to show any change of circumstances and merely because each assessment year is different that by itself would not be sufficient for the parties being allowed to change the position in a subsequent year where a fundamental aspect permeating through all the assessment years remains the same.
37. Therefore, in the facts and circumstances of the case, it is apparent that the Tribunal has committed an error in law in holding that the assessee company was not a “financial company” within the meaning of clause (c) of Explanation to sub-section (8) of Section 40A of the Act. At the same time, it is necessary to take note of the fact that the communication dated 22nd April, 1981 produced by the assessee apparently pertains to the period prior to 30th August, 1980 or 30th December, 1980. The relevant accounting period for the assessment year is calender year 1981. As per the Directions of RBI, a NBFC is required to furnish the relevant information by way of return accompanied by annual accounts. In these circumstances, it is necessary that before finally deciding as to whether for the year under consideration any portion of interest is required to be disallowed under Section 40A(8) of the Act, the assessee is permitted an opportunity to place on record the relevant details and information, including certificate from RBI for the relevant period. It will also be open for the Tribunal to consider the nature of transactions entered into by the assessee company in light of the principles laid down by the Court pertaining to the acquisition and holding of shares and securities i.e. whether the same have been transferred in the name of the assessee company before the assessee company dealt with such shares and securities during the relevant accounting period.
38. In the result, the question is decided accordingly in light of the principles set out hereinbefore and the Tribunal shall decide the appeal and adjust its decision in light of the aforesaid principles while finalizing the appeal under Section 260(1) of the Act.
39. The reference stands disposed off accordingly. There shall be no order as to costs.