ORDER
K.C. Singhal, Judicial Member
1. The only issue arising in this appeal is whether the assessee is liable to pay interest tax under the provisions of Interest Tax Act, 1974 (the Act).
2. Briefly stated the facts are that assessee is an investment company and is considered as Non-Banking Finance Company as per the guidelines of Reserve Bank of India (RBI). No return was filed by the assessee under the provisions of the Act since in its view, the assessee could not be considered as a credit institution within the ambit of definition Clause (5A) of Section 2 of the Act. However, the Assessing Officer was of the view that assessee was liable to pay interest tax under the provisions of the aforesaid Act and consequently, issued notice Under Section 10 of the Act directing the assessee to file the return of chargeable interest for the year under consideration. In response to the said notice, the assessee filed its return declaring chargeable interest at Nil. In the course of assessment proceedings, the assessee company was asked to show cause as to why the interest income of Rs. 6,28,56,000/- should not be assessed under the Act. The assessee contended before the Assessing Officer that it could not be treated as a Finance Company under either of the sub-clauses of the definition Clause (5B) of Section 2 and consequently, could not be treated as credit institution. Hence, assessee was not liable to be assessed under the provisions of the Act. However, the Assessing Officer was of the view that it can be treated as investment company as per Section 2(5B)(ii) in as much as it was engaged in the business of lease financing, trading in shares and securities. He was also of the view that assessee company can be considered as a loan company under the provisions of Section 2(5B)(iv) since the assessee itself admitted that they are in equipment leasing business. It was also observed by him that the principal activity could not be defined by the amount of income being raised in a particular year but has to be defined by the objects and the intention by which the company had been incorporated. Considering the relevant portion of the prospectus, it was also observed by him that the assessee company was a hire purchase finance company. Accordingly it was held by him that assessee company was falling under more than one category of Clause (5B) of Section 2 of the Act. Hence, it was liable to be charged under the provisions of the Act. On the facts, it was found by him that the chargeable interest was only Rs. 4,08,26,000/-.
3. The matter was carried in appeal before learned CIT(A) who has affirmed the order of Assessing Officer for the reasons given by him. The learned CIT(A) also analysed the Balance Sheet and Profit and Loss A/c alongwith the relevant schedules filed by the assessee company. Considering the relevant figures of incomes under various heads as well as employment of funds towards various activities, it was held by him that assessee company was covered by the definition of investment company as well as loan company under the Clauses (ii) and (iv) of Sub-section (5B) of Section 2 of the Act. It would be appropriate to reproduce the factual analysis made by the learned CIT(A) in this regard and therefore, the same is being reproduced as under:
3.6 Further, from the analysis of Balance Sheet and Profit and Loss Account alongwith relevant schedules filed by the appellant company at page No. 47 and 48 of the paperbook, it is seen that out of the total income of Rs. 1007 lakhs, the appellant was having interest income of Rs. 408 lakhs and other income in the form of profit on dealing in investment of Rs. 39.3 lakhs, dividend from subsidiary of Rs. 10 lakhs, dividend from others of Rs. 3.73 lakhs, dividend on current investment of Rs. 34.03 lakhs and miscellaneous income of Rs. 29.65 lakhs which shows that substantial/principal portion of the appellant’s income has been earned out of dividend income and interest income, as a result of which, the appellant company is automatically covered under the definition of an “Investment Company” under Clause (i) as well as in the definition of a Loan Company under Clause (iv) of Sub-section (5B) of Section 2 of Interest Tax Act respectively.
3.7 It is further seen from the analysis of Balance Sheet of the appellant that out of total funds of Rs. 6845 lakhs available with the appellant company as on 31.03.1997, funds amounting to Rs. 488 lakhs were deployed in fixed assets like office premises, computers, furniture and fixtures, vehicle, etc. After excluding the said amount of funds locked up in fixed assets, the balance amount of deployable funds available with the appellant company works out to Rs. 6354 lakhs (Rs. 6845 lakhs (-) Rs. 488 lakhs). Out of the above amount of Rs. 6354 lakhs, the appellant company has made investment in shares, debentures and other Govt. securities of Rs. 1242 lakhs (Dividend yielding) and in current assets and loans and advances of Rs. 3419 lakhs (interest yielding), the aggregate of which works out to Rs. 4661 lakhs (Rs. 1242 lakhs + Rs. 3419 lakhs). From the above analysis, it is clear that the appellant company has deployed principal/substantial part of its funds for the purpose of earning dividend by investment in shares, debentures, etc. as a result of which it is automatically covered under the definition of an “investment company” and has also deployed the funds in the form of current assets and loans and advances from which it is earning interest income as a result of which, it is automatically covered in the category of a “loan company” as defined in Clause (iv) of Sub-section (5B) of Section 2 of Interest Tax Act, 1974. In view of the analysis of facts and figures as discussed above and from the contents of the prospectus as discussed by the Assessing Officer in the assessment order, it is evident that the principal business of the appellant company is that of an investment company as well as a loan company. Further, various case laws relied upon by the appellant does not come to its aid as the facts of the appellant’s case are different.
Aggrieved by the said order, the assessee has preferred the appeal before the Tribunal.
4. The learned Counsel for the assessee has assailed the order of learned CIT(A) as well as the Assessing Officer by contending that on the facts of the case, the assessee cannot be considered as ‘Financial Company’ within the ambit of Section 2(5B) of the Act. He drew our attention to the scheme of the Act. It was pointed out by him that Section 4 is a charging section under which chargeable interest is the subject matter of assessment to Interest Tax. Section 5 defines the scope of chargeable interest according to which the interest accruing or arising to the credit institution would form part of the chargeable interest. The credit institution has been defined in Section 2(5A). Clause (i) refers to Banking Company, Clause (ii) refers to public financial institution as defined in Section 4A of the Companies Act, 1956, Clause (iii) refers to State Financial Corporation and Clause (iv) refers to any other financial company. It was submitted by him that the first three clauses are not applicable to the assessee and there is also no dispute on this aspect. Therefore, the question arises whether the assessee can be said to be a ‘Financial Company’. He drew our attention to Section 2(5B) which defines ‘Financial Company’. Clause (i) refers to Hire Purchase Finance Company. According to him, the assessee is not engaged in the business of Hire Purchase Finance and the Assessing Officer had wrongly observed that assessee is engaged in the hire purchase finance. It was clarified by him that assessee is engaged only in the finance lease business which is entirely different from hire purchase finance. Clause (ii) refers to Investment Company and Clause (iv) refers to loan company which have been invoked by the Assessing Officer as well as learned CIT(A) in order to assess the assessee company. Clauses (III), (v) and (va) are not relevant since neither the Assessing Officer nor the learned CIT(A) has relied on these clauses. Proceeding further, it was submitted that it is the principal business which is relevant for invoking the Sub-clauses (ii) and (iv) of Clause (5B) of Section 2. According to him, it is the main or chief activity of the assessee which should be considered for holding that assessee is engaged in the principal business of an activity either falling under Clause (ii) or under Clause (iv). It was also submitted by him that principal business cannot be defined by taking into consideration two activities together. Accordingly, it was submitted by him that Assessing Officer was not justified in observing that the two activities constituted the principal business for bringing the assessee into the net of taxation. Proceeding further, he referred to the statement of accounts for the year under consideration to point out that the main activity was leasing of equipment which does not fall under either of the categories specified in Clause (5B) of Section 2. It was pointed out by him that the major income was from leasing of equipment. Similarly, the employment of funds was mainly towards leasing business. If the main activity is of leasing business then it cannot be said that the principal business of the assessee was either of granting of loans and advances under Clause (iv) or acquisition of shares, stock, bonds etc under Clause (ii) of Clause (5B) of Section 2. At this stage of hearing, the attention of the assessee’s counsel was invited to the decision of the Special Bench in the case of Venkateswar Investment and Finance Pvt. Ltd. 93 ITD 177 (SB) wherein it was held that the issue regarding principal business will have to be decided on the facts and circumstances of each case and various factors like objects of the company, past history of the company, current employment of the capital, break-up of the income earned, etc. would be relevant in deciding such issue. The learned Counsel for the assessee submitted that even if this test is applied, the assessee company cannot be said to be a finance company. The assessee’s counsel was directed by the Bench to furnish a statement showing the break-up of income, employment of funds in respect of each activity carried on by the assessee.
5. On the other hand, the learned D.R. has vehemently supported the order of learned CIT(A) and further submitted that even if the assessee does not fall in either of the above categories, then it would fall within the ambit of Clause (vi) of Section 2(5B) which defines a Miscellaneous Finance Company. According to this clause, Miscellaneous Finance Company means a Company which carries on exclusively or almost exclusively two or more classes of business referred to in the preceding sub-clauses. According to him, the Assessing Officer was justified in holding the assessee company as finance company since two or more activities of the assessee company taken together bring the case of assessee within the ambit of Miscellaneous Finance Company. In reply, the learned Counsel for the assessee has submitted that there is an anomaly in invoking such sub-clause since activity which is not the principle activity would be outside the sub-clauses of Clause (5B) & therefore the same cannot be brought within the scope of Miscellaneous Finance Co. If principal activity falls under any of the preceding sub-clauses, then the question of applying Sub-clause (vi) would not arise, further, if any activity does not fall in the preceding sub-clauses and the same is considered for the purpose of Sub-clause (vi) then every company would fall within the ambit of Miscellaneous Finance Company which cannot be the intention of the Legislature.
6. Rival submissions of the parties have been considered carefully. There is no dispute to the legal position that if the assessee company falls within the ambit of ‘credit institution’ then, it will be liable to pay interest tax on the chargeable interest earned by it. ‘Credit Institution’ has been defined in Clause (5A) of Section 2 of the Act which reads as under:
(i) a banking company to which the Banking Regulation Act, 1949 (10 of 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 Corporation Act, 1951 (63 of 1951): and
(iv) any other financial company;
7. There is no dispute that assessee company does not fall in either of the Sub-clauses (i) to (iii) mentioned above. The stand of the Assessing Officer is that assessee is Financial Company under Sub-clause (iv). The Financial Company has been defined in Sub-clause (5B) of Section 2 of the Act which reads as under:
(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 principal business. The acquisition of shares, stock bonds, debentures, debentures 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 acquisitions 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-clause (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; or
(vi) a miscellaneous finance company, that is to say, a company which carries on exclusively or almost exclusively. Two or more classes or business referred to in the preceding sub-clauses;
8. The stand of the Revenue is that assessee can be said to be financial company as it is ‘Investment Company’ as well as ‘Loan Company’ as specified in Sub-clause (ii) and (iv) respectively of Clause (5B) of Section 2 of the Act. Alternatively, it is the stand of Revenue that both the activities mentioned in above two sub-clauses, considered together, would bring the assessee company in Sub-clause (vi) i.e. Miscellaneous Finance Company. We are unable to accept the stand of the Revenue for the reasons given hereafter.
9. The perusal of definition clause 5B shows that Sub-clauses (i) to (v) refer to the specified activities carried on as principal business. The expression ‘Principal business’ has not been defined in the Act. As per the Oxford Dictionary, the word ‘principal’ means – first in rank or importance, chief, main leading etc. If the assessee carries on various business activities then, it would mean the predominant activity out of the various activities carried on by the assessee. Therefore the principal business would refer to only one activity. If one activity is the principal activity then other activities would be outside the scope of the principal activity. Thus, two activities of business taken together cannot be characterized as principal business. Therefore, in our humble opinion, both the lower authorities were not justified in considering two activities together and then holding that principal business of assessee was that of investment company and loan company as per Sub-clauses (ii) & (iv) of definition Clause (5B). The view taken by us is also fortified by the following observations of their Lordships of the Apex Court in the case of Distributors (Baroda) P. Ltd. 83 ITR 377 at page 382:
If a company engages itself in two or more equally or nearly equally important business activities, then it cannot be said that the company’s business consists “wholly or mainly” in dealing in a particular thing. Further, even in cases where a company has more than one business activity and one of its activities is more substantial than the others, unless that activity is the primary activity of the company, it cannot be said that the company is engaged in “wholly or mainly” in any one of its business activities.
10. At this stage, it may also be appropriate to refer to the provisions of the Explanation to Section 73 of the I.T. Act, 1961 which refers to the principal business of banking or granting of loans and advances. The expression ‘principal business’ in the above Explanation was the subject matter of the consideration of Special Bench of the Tribunal in the case of Venkateswar Investment and Finance Pvt. Ltd. (supra). The Special Bench held “what constitutes principal business will depend on the facts and circumstances of each case. The Memorandum and Articles of Association of the company, past history of the Company, current deployment of the capital of the company, break up of the income earned during the relevant year would all help in determining the principal business of the company.” Therefore in the absence of any statutory definition of the expression ‘principal business’, the test laid down by the Special Bench would be relevant.
11. Before applying the test of principal business, we would first deal with the issue whether the activity of equipment leasing can be said to be business of providing finance, whether by making loans or advances or otherwise within the ambit of Sub-clause (iv) of definition Clause (5B). In the case of lease, the equipment is owned by the lessor, which is given on lease for a specific period against lease rent and after the expiry of lease period, the equipment is returned to the lessor. Therefore, such activity, by any stretch of imagination, cannot be treated as an activity of financing. Such lease is called ‘Operational lease’. Scope of Finance lease is, however, different. Therefore, question may arise whether finance lease can be brought within the scope of ‘Loan Company’ as per Sub-clause (iv) of clause 5B. This issue arose before the Tribunal in the case of Union Bank of India 108 TTJ 720 (Mum) wherein it has been held that Finance Lease, though a mode of financial accommodation, is a step short of loan or advance. It has also been held that a loan or advance has to be a direct monetary transaction while finance lease is an alternate to loan or advance and therefore finance lease business would not fall within the scope of Sub-clause (iv) of definition Clause (5B). No other decision has been brought to our notice taking contrary view. Therefore, following the same, it has to be held that finance lease activity also cannot be brought within the ambit of Sub-clause (iv) of definition Clause (5B) of the Act.
12. The analysis made by the learned CIT(A) in para 3.6 and 3.7 of his order on the basis of financial statement for the year under consideration also does not lead to the conclusion that the principal business of the assessee is in respect of an activity of loans and advances falling under Clause (iv) or in respect of an activity of acquisition of shares, stocks, bonds, debentures, securities etc., so as to fall under Clause (ii) of Clause (5B) of Section 2 of the Act. It is pertinent to note that there is a basic fallacy in the approach adopted by the learned CIT(A) in as much as he has taken into consideration the relevant facts together in respect of two activities mentioned above. As already observed by us, the issue regarding the principal business should be decided considering the facts relating to each activity independently and therefore, the facts relating to two activities cannot be combined together.
Let us examine the analysis made by the learned CIT(A) with reference to each activity independently. First we take up the activity of loans and advances. The learned CIT(A) has noted that total income of the assessee amounted to Rs. 1007 lakhs out of which the interest income amounted to Rs. 408 lakhs which is around 40.5% of the total income. On the other hand, it is noticed by him that total funds employed in various assets amounted to Rs. 6,845 lakhs out of which the funds employed in loans and advances and current assets amounted to Rs. 3419 lakhs. In deciding whether the assessee is loan company or not, the employment of funds has to be seen only with reference to loans and advances and therefore learned CIT(A) was not justified in including the amount of current assets. The perusal of the Balance Sheet shows that current assets amounted to Rs. 1,237 lakhs which has nothing to do with the activity of loans and advances. If this amount is excluded then the amount of loans and advances would be Rs. 2182 lakhs. Further, the details of loans and advances has been given in Schedule ‘H’ which shows that 166 lakhs is on account of advance income tax, Rs. 720 lakhs is on account of Sundry deposits and Rs. 234 lakhs is on account of loan to Subsidiary. It has been clarified by the assessee that Sundry deposits does not relate to the activity of loans and advances since such deposit was given as security deposit to the lessor of immovable property which was taken on lease by the assessee. Therefore, this amount cannot be considered as part of loans and advances. The nature of transaction of deposit is entirely different from the nature of transaction of loans and advances as held by the Tribunal in the case of Oriental Insurance Co. Ltd. 89 ITD 520 (Del.) According to this decision, interest tax under the Interest Tax Act, 1974 cannot be levied in respect of interest on deposits. Therefore, such amount of deposit cannot be included. Regarding loan to subsidiary, it is clarified that it is the interest free loan which is also not part of the business activity and therefore the same also cannot be taken into consideration. Admittedly, the advance income tax cannot be considered as loans and advances. If these three figures are excluded then the actual loans and advances are to the extent of Rs. 1061 lakhs out of the total assets of Rs. 6354 lakhs (after excluding Rs. 488 lakhs in respect of Fixes Assets). Thus, percentage wise, the employment of funds in the activity of loans and advances comes to 17% (approx.). In view of these figures, either relating to income or relating to employment of funds, it cannot be said that the principal business of the assessee was that of an activity of loans and advances. Consequently, the learned CIT(A) was not justified in holding that assessee company fell within the scope of a Loan Company under Clause (iv) of Clause (5B) of Section 2 of the Act.
With reference to the activity as that of an investment company, the analysis made by the learned CIT(A) shows that income from the activity of acquisition of shares, stocks, debentures, etc., amounted to Rs. 87.6 lakhs only i.e. profit on dealing in investment of Rs. 39.3 lakhs, dividend from subsidiary of Rs. 10 lakhs, dividend from other investments of Rs. 3.73 lakhs and dividend on current investments of Rs. 34.03 lakhs. In comparison to the total income, it is a negligible amount i.e. less than 10% of the total income. If we examine the employment of funds in such activity, such investment as per para 3.7 of the learned CIT(A) order amounts to Rs. 1242 lakhs which amount to almost 20% of the total assets. Therefore, it cannot be said that the principal activity of the assessee company was that of an investment company under Sub-clause (ii) of Clause (5B) of Section 2 of the Act. Thus, the conclusion of the learned CIT(A) that assessee company falls within the scope of Sub-clause (ii) of clause 5B of Section 2 is also unwarranted.
As compared to the above two activities, it is seen from the financial statement of the year under consideration that income from leasing business was Rs. 456 lakhs which amounted to 45% of the total income. Similarly, the employment of funds in the leased assets amounted to Rs. 1610 lakhs which amounts to around 25% of the total funds. This shows that the income as well as employment of funds in the activity of leasing of equipment is much more than the activity of granting loans and advances or the activity of investment in shares, debentures, securities etc.
In view of the above discussion, we are of the opinion that learned CIT(A) was not justified in holding that the principal business of the assessee was either as that of an loan company or that of an Investment company on the basis of financial statement pertaining to the year under consideration.
13. Let us now examine whether the assessee can be said to carry on the principal business either as an Investment Company or as a Loan Company within the ambit of Sub-clauses (ii) and (iv) of definition Clause (5B) of Section 2 of the Act on the basis of the test laid down by the Special Bench of the Tribunal in the case of Venkateswar Investment and Finance Pvt. Ltd. (supra). We have gone through the Memorandum of Association appearing at page 5 of the paper book wherein the main object of the company is stated which is to carry on the trading business in various items mentioned in the object clause as well as the business of financing of industrial or other companies and enterprises as well as to lend or advance money to builders and their persons on securities or to grant loans on mortgage of immovable properties and to lend money in all other manners but shall not carry on the business of banking, as defined under Banking Regulation Act, 1949. The Memorandum also refers to various businesses which can be carried on by the assessee by way of incidental or ancillary to the attainment of main objects. Then the Memorandum specifies various businesses under the head ‘Other Objects’ which is likely to include all kinds of businesses. It is the settled legal position that Memorandum of Association by itself is not sufficient to adjudicate upon the nature of business carried on by the assessee. Such objects are to be considered alongwith the actual activities carried on by the assessee. As per the direction of the Bench, the assessee has furnished necessary details showing the income earned from various activities carried on by the assessee as well as the details of funds employed by the assessee towards such activities. The Special Bench has observed that in considering the issue regarding the principal business of the assessee, not only the details of income and employment of funds for current year are to be taken into consideration but also the details in respect of income and employment of funds pertaining to the preceding year as well as the succeeding year should also be considered. The necessary details in this regard are being reproduced hereunder:
INCOME STATEMENT
———————————————————————
Particulars A.Y. 1995-96 A.Y. 1996-97 A.Y. 1997-98
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Interest Income 477.71 408.26 220.39
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Lease Income 409.08 456.04 231.88
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Other Income
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Merchant 151.07 26.00 51.69
Banking
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Profit on dealing 135.20 39.30 62.99
in Investment
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Dividend 51.14 47.82 5.65
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Miscellaneous 1.49 29.65 0.73
Income
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Professional &
Consultancy fees
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338.90 142.77 125.05
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Total 1225.69 1007.07 577.32
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STATEMENT OF APPLICATION OF FUNDS
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A.Y. 1996-97 A.Y. 1997-98 A.Y. 1998-99
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Particulars Amount Amount Amount
(Rs. in lakhs) (Rs. in lakhs) (Rs. in lakhs)
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Fixed Assets (Annexure A)
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Leased Assets 1,660.64 1,610.57 1,169.92
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Other fixed assets 930.57 940.30 1,108.35
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Investments (Annexure B) 583.67 1,242.06 1,9017.79
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Loans & Advances
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On which interest recd. 1,653.91 1,061.16 641.41
(Annexure C)
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Other 1,852.29 1,121.03 780.40
(Annexure D)
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Net Current Assets 328.69 789.59 -90.22
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Miscellaneous Expenditure 100.12 80.67 61.22
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Total 1 7,109.89 6,845.38 5,572.87
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OTHER LOANS & ADVANCES (NON-INTEREST BEARING)
(ANNEXURE 'D')
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A.Y. 1996-97 A.Y. 1997-98 A.Y. 1998-99
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Particulars Amount Amount Amount
(Rs. in lakhs) (Rs. in lakhs) (Rs. in lakhs)
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Loan to Subsidiary 573.22 234.43 -
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Times Bank Ltd. 499.66 - -
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Bills of Exchange - - -
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Sundry Deposit
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Deposit with BSE 9.00 - -
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Security Deposit 0.23 20.23 -
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Security Deposit - Office 700.00 700.00 700.00
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Sundry Deposit - - 20.38
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Advance Income Tax
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TDS 65.38 72.41 -
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Advance Tax 4.80 0.30 0.30
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TDS Receivable - - 1.05
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TDS Receivable 1996-97 - 93.66 93.56
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TDS Receivable 1997-98 - - 19.11
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TDS Receivable 1999-2000 - - -
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Less: Provision for taxation - - (-) 54.00
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Total 1,852.29 1,121.03 780.40
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The above details can be summarized as under:
SUMMARY OF INCOME & APPLICATION OF FUNDS
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Income Percentage Employment of Percentage
(in Lakhs) (%) Funds (%)
(in lakhs)
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As Investment Company
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A.Y. 1996-97 186.34 15% 583.67 8.21%
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A.Y. 1997-98 87.12 9% (approx) 1242.06 18.14%
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A.Y. 1998-99 68.64 12% (approx) 1901.79 34.13%
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As Loan Company
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A.Y. 1996-97 477.71 38.97% 1653.91 23.26%
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A.Y. 1997-98 408.26 40.54% 1061.16 15.50%
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A.Y. 1998-99 220.39 38.17% 641.41 11.51%
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As Leasing Company
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A.Y. 1996-97 409.08 33.38% 1660.64 23.36%
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A.Y. 1997-98 456.04 45.28% 1610.57 23.53%
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A.Y. 1998-99 231.88 40.16% 1169.92 20.99%
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14. The perusal of the above financial statement shows that none of the activities can be said to be the principal business activity carried on by the assessee. The details regarding investment in shares, debentures and securities shows that by no standard, the assessee can be said to be in the business of investment so as to fall within the ambit of Sub-clause (ii) of Section 2(5B) of the Act in as much as the income in each year is below 15% while the investment is below 34%. The other two activities are running parallel to each other income wise as well as on the basis of employment of funds. The Hon’ble Supreme Court in the case of Distributors (Baroda) P. Ltd. (supra) has clearly held that if the company carries on two or more equally or nearly equally important business activities than it cannot be said that the company is engaged wholly or mainly in a particular activity. Relevant observations of Their Lordships have already been quoted by us in para 9 of the order and therefore need not be repeated. In our opinion, the said observations of the Hon’ble Supreme Court would equally apply in determining the principal business activity carried on by the assessee. Therefore, following the said judgment, it is held that none of the business activity can be said to be the principal business activity of the assessee company.
15. Before parting with this issue, it is clarified that while considering the figures of employment of funds in loans and advances, we have ignored the figures of interest free loans and advances under the head ‘Others’ since the same are neither part of the business activity nor in the nature of loans and advances. Such details have been given in Annexure ‘D’. The security deposits are outside the scope of the expression ‘loans and advances’ as held by the Tribunal in the case of Oriental Insurance Co. Ltd. (supra). Advance income tax also cannot be treated in the nature of loans. Loans to subsidiary company are given as interest free loan to meet the financial crises. Though, it is in the nature of loan but the same cannot be said to be part of the business activity within the ambit of Sub-clause (iv) of Section 2(5B) of the Act since it is a interest free loan.
16. Let us now consider the contention of the Revenue that the case of the assessee would fall within the ambit of Miscellaneous Finance Company defined in Sub-clause (vi) of Section 2(5B) which reads as under:
2(5B)….
(i) ….
(ii) ….
(iii) …
(iv) …
(iv) ….
(v) …
(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
According to the learned D.R., if two or more activities referred to in the preceding sub-clauses which are carried on by the assessee are considered together then such activities taken together would constitute principal/pre-dominant business of the assessee which would bring the case of the assessee within the definition of Miscellaneous Finance Company. We are unable to accept such contention of the learned D.R. for the reasons given hereafter.
The perusal of Sub-clause (vi) mentioned above shows that the Legislature has not used the expression ‘Principal business’ as referred to in the preceding sub-clauses. On the contrary, the Legislature has used the expression ‘exclusively or almost exclusively, two or more classes of business referred to in the preceding sub-clauses’. The word ‘exclusively’ has been defined by the Oxford English Dictionary as ‘excluding or not admitting other things’. According to the Webster’s Comprehensive Dictionary, it means – (i) intended for or possessed by a single group or individual; not shared (ii) restricting membership or patronage; fastidiously reluctant to accept outsiders (iii) singly devoted; undivided (iv) not including, not comprising etc. In view of the above definition, the word ‘exclusively’ would restrict only to those business activities which are referred to in the preceding sub-clauses, meaning thereby the entire business must consist of the activities referred to in the preceding sub-clauses. That means, if the company carries on various activities, but some or either of the activities do not fall in the preceding sub-clauses, then it cannot be said that assessee company is Miscellaneous Finance Company. It is also pertinent to note that the Legislature has also used the words ‘almost exclusively’. In our opinion, such words would include the company whose most of the activities fall in the preceding sub-paras and such company would not cease to be a Miscellaneous Finance Company merely because an activity of insignificant magnitude is also carried on by the assessee. Impliedly, it means that the activities carried on by the assessee may not be 100% activities referred to in the preceding sub-clauses but must be nearer to the 100%. Further, the expression ‘two or more classes of business’ referred to in the preceding sub-clauses means the nature of activities specified in preceding sub-clauses. For example, take a case of a company which is exclusively carrying on three activities namely hire purchase financing business, investment in acquiring shares, debentures etc. and activity of granting loans and advances which are specified activities in the preceding sub-clauses.. Independently, each activity may not be treated as principal business of the assessee company but considered together would amount to carrying on the business exclusively in two or more activities referred to in the preceding sub-clauses. In such cases, the company would be considered as Miscellaneous Finance Company. Further, there may be a case where in addition to above three business activities, the assessee may be carrying on an insignificant activity which is not referred in the preceding sub-clauses. In such cases, it would be a case of a company which carries on almost exclusively two or more classes of the business referred to in the preceding sub-clauses. However, if the fourth activity is not insignificant but is a substantial activity then such company would not fall within the ambit of Miscellaneous Finance Company. In the present case, the activity of lease financing is a substantial activity carried on by the assessee since substantial earning is made from such activity after employing substantial funds. The income from leasing business was around 40% to 45% and employment of funds in the leasing business was around 20% to 23%. Thus, the activity of leasing was substantial activity carried on by the assessee and therefore it cannot be said that assessee was a miscellaneous finance company.
16. In view of the above discussion, we are of the opinion that assessee company cannot be said to be a ‘Credit Institution’ as defined by the provisions of Clause (5A) of Section 2 read with Clause (5B). Consequently, the interest earned by the assessee would not form part of the chargeable interest. Thus, the assessee would be outside the scope of charging provisions contained in the Act. Consequently, the orders of learned CIT(A) as well as Assessing Officer are therefore, quashed. The tax paid by the assessee, if any, shall be refunded.
In the result the appeal of the assessee is allowed.
Pronounced in the open court on 4th February, 2008.