ORDER
R.P. Garg, Vice-President
1. These 21 appeals–17 by the assessee and 4 by the Revenue–arise under the Interest-tax Act, 1974. All these appeals are against the orders of the CIT(A)
for various assessment years. Since they involve common dispute, they are being disposed of by this common order for the sake of convenience. 1A. This Act after two eclipses was reintroduced by the Finance (No. 2) Act, 1991 as an anti-inflationary measure. Originally it provided for levy of tax on chargeable interest accruing or arising to scheduled banks. The tax is levied on gross interest income of credit institutions, that is banks including co-operative societies engaged in the business of banking, public financial institutions, State Financial Corporations and financial companies. It provides the levy of tax on every credit institutions for every assessment year commencing on or from 1st April, 1992 and interest-tax in respect of its chargeable interest of the previous year.
2. An interesting question in these appeals arise and that is with regarding to the scope of applicability of provision of Interest-tax Act, 1974 to a company which is not a financial company, in its ordinary meaning. The assessee in these cases are engaged in manufacture of bearing, rubber goods, wagons, textile machines and other engineering items; manufacturing sugar; tea plantation or growing agricultural produce, etc. These companies, however, issued debentures and received deposits from employees and in some case also from public to finance their day-to-day requirement of running the aforesaid businesses carried on by them.
3. The claim of the Revenue is that the assessee-company received deposits by way of contribution to debentures under a scheme or arrangement and, therefore, it is a residuary non-banking financial company and, consequently, a credit institution within the meaning of Section 2(5A), r/w Sub-section (5B)(va) of the Act and, therefore, liable to tax on their interest income earned on loans and advances given. In some of the cases, the deposits have been received from the employees of the assessee-company and on that ground too, these clauses are made applicable by the AO referred to the RBI’s guidelines and stated that the debentures have not been excluded from the definition of deposit under the said guidelines and, therefore, the debentures are to be treated as a deposit.
4. The claim of the assessee, however is that neither the debenture is a deposit nor the deposits received from the employees are covered by this clause and, nor, in any case, these activities are carried on as or constitutes a business or part of their business, and consequently, none of the assessee companies can not be treated as a residuary non-banking company within the meaning of Section 2(5A)/(5B) of the Act.
5. We have heard the parties and considered their rival submissions. Section 4 is a charging section. Sub-section (1) of this section provides for the charge, of tax on every scheduled bank in respect of its chargeable interest of the previous year, whereas Sub-section (2) provides for the charge of tax on every credit institution commencing on and from 1st day of April, 1992. This is the sub-section which is made applicable to these assessees. The term ‘credit institution’ is defined in Section 2(5A) of this Act as under:
“(5A) ‘credit institution’ means,–
(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 the Act);
(ii) a public financial institution as defined in Section 4A of the Companies Act, 1956 (1 of 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,”
Credit institution thus means the banking company, a public financial
institution, State Financial Corporation and any other financial company.
6. The term ‘finance company’ is defined in Sub-section (5B) of Section 2 and it includes in
its meaning seven categories of companies. For the sake of brevity it is
extracted as under:
“(5B) ‘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 carried on, as its principal business, the acquisition of shares, stock, bonds, 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 carried on, as its principal business, the business of the 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; (va) a residuary non-banking company [other than a financial company referred to in Sub-clauses (i), (ii), (iii), (iv) or (v)], that is to say, a company which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments or in any other manner; or (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;”
A finance company thus means a company other than the banking company, public financial institution or State Financial Corporation. This sub-section enumerates seven of such companies, viz., (1) a hire-purchase finance company, (2) an investment company, (3) a housing finance company, (4) a loan company, (5) a mutual benefit finance company, (6) a residuary non-banking company and (7) a miscellaneous finance company. Each of the 7 clauses in turn defines what is that company. Clause (i) defines a hire-purchase finance company as a company which carries on, as its principal business, hire-purchase transactions or the financing of such transactions; Clause (ii) defines an investment company as 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; Clause (iii) defines a housing finance company as a company which carries on, as its principal business, the business of the financing of acquisition or construction of houses, including acquisition or development of land in connection therewith; Clause (iv) defines a loan company as a company which carries on as its principal business, the business of providing finance, whether by making loans or advances or otherwise; Clause (v) defines a mutual benefit finance company as 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 Nidihi or Mutual Benefit Society; Clause (va) defines a residuary non-banking company as a company which receives any deposit under any scheme or arrangement, by whatever named called, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments or in any other manner; and Clause (vi) defines a miscellaneous finance company as a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses. Clause (va) is alleged to be applicable in the cases of these assessees.
7. On a close reading of the definition of the financial company, we find that each clause includes the particular company in this definition of financing company only when the company carries on a business of that nature “as its principal business”, except in Clause (va), viz., in Clause (i) the principal business of hire-purchase transaction; in Clause (ii) the principal business of acquisition of shares, stock, etc.; in Clause (iii) the principal business of financing of acquisition or construction of houses; in Clause (iv) the principle business of providing finance by making loans and advances or otherwise; in Clause (v) the principal business of acceptance of deposits from members to be Nidhi or mutual benefit society; and in Clause (vi) the carrying on of two or more businesses referred to above either exclusively or almost exclusively. It is only Clause (va) which is silent about the requirement of carrying on the business. Normally, therefore, it should be taken that a company receiving deposits is covered by this clause, but if it is read with the other clauses, particularly Clause (vi), i.e., a miscellaneous finance company which carries on either exclusively or almost exclusively two or more classes of businesses referred to in the preceding sub-clauses which include Clause (va) as well, it gives an impression that unless the company referred to in Clause (va) receives any deposit under any scheme or arrangement as a business activity, it would not be a financial company.
8. What is a deposit is not defined in the Act. Its meaning, therefore, has to be culled out from the understanding in the commercial sense as the people in business understands. This Clause (va) is inserted by the Finance Act, 1999 w.e.f. 1st April, 1993 by referring to RBI’s guidelines, 1987 as is evident from the following extract from Memorandum explaining the budget:– “When the Interest-tax Act was received last year, the intention was to cover non-banking financial companies, it has, however, been found that there are a number of finance and investment companies which earn substantial income from interest on loans and advances and are yet not covered by the definition given in Section 2(5B). These companies receive deposits under schemes or other arrangements,
in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments. The Reserve Bank of India has, under Notification No. DFC.55/DG(0)-87, issued on 15th May, 1987, treated such financial companies as residuary non-banking companies. In view of the fact that the Government’s intention is to impose tax on the gross amount of interest earned by all banks, financial institutions and non-banking financial companies, in respect of loans and advances made in India, the Bill seeks to include in the definition of ‘financial company’, all residuary non-banking companies.”
9. RBI’s guideline in turn adopts the deposit for RBI Act Section 45~I(bb), which reads as under :–
“(bb) ‘deposit’ includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form, but does not include,–
(i) amounts raised by way of share capital;
(ii) amounts contributed as capital by partners of a firm;
(iii) amounts received from a scheduled bank or a co-operative bank or any
other banking company as defined in Clause (c) of Section 5 of the Banking Regulation
Act, 1949 (10 of 1949);
(iv) any amount received from-
(a) the Development Bank,
(b) a State Financial Corporation,
(c) any financial institution specified in or under Section 6A of the Industrial Development Bank of India Act, 1964 (18 of 1964) or,
(d) any other institution that may be, specified by the bank in this behalf, (v) amounts received in the ordinary course of business, by way of-
(a) security deposit;
(b) dealership deposit;
(c) earnest money; or
(d) advance against orders for goods, properties or services;
(vi) any amount received from an individual or a firm or an association of
individuals not being a body corporate, registered under any enactment relating
to money lending which is for the time being in force in any State; and
(vii) any amount received by way of subscriptions in respect of a chit.
Explanation I–‘Chit’ has the meaning assigned to in Clause (b) of Section 2 of the Chit
Funds Act, 1982.
Explanation II.–Any credit given by a seller to a buyer on the sale of any
property (whether movable or immovable) shall not be deemed to be deposit for
the purposes of this clause;”
The authorities have proceeded on this definition and since debenture is not excluded from the definition of deposit, like share capital, security deposit, dealership deposit, earnest money, advance for goods, etc., deposit and receipt would be deposit for the purposes of Interest-tax Act as well.
10. We are dealing with a case of a company and, therefore, the terms used in the Interest-tax Act have to be understood the way they are understood under the Companies Act, 1956 or by the people dealing with the companies. Under the Companies Act, the issues of deposit and debenture are dealt with separately. Section 58A of the Companies Act, 1956 deals with deposits, whereas the debentures are dealt within Part IV of the Companies Act covering Sections 82 to 123. They are, therefore, understood as different connotations under the Companies Act. We are, therefore, of the view that the observation of the Revenue authorities that because a debenture is not excluded from the definition of deposit under the RBI Act, 1934, therefore, it would be a deposit, for the purposes of Section 2(5B)(va) of the Act, would not be a proper way of interpretation. We, therefore, have our reservation as to the meaning of the word ‘deposit’ and whether the term ‘deposit’ includes debenture or not. In our opinion, a debenture is not a deposit either in the ordinary parlance or for the purposes of Interest-tax Act.
11. Be that as it may even if debentures are deposits as understood by the Departmental authorities and the issue of debenture which were contributed by the public under a scheme or arrangement and the receipt by the assessee is, the issue is not resolved. The issue of debenture by the companies by itself is not their business. These were not issued for the purpose of carrying on the business of issuing debentures but they were issued for raising loan which is to be utilised by the assessee in its own business of manufacturing and sale of bearings, rubber goods, textile machines, sugar etc. Similarly, the deposits received by the assessee from its employees are not by itself a business activity. These were received to finance the business of the assessee-company or to help the employees. When neither the issue of debentures nor the receipt of deposits were assessee’s business as such i.e. of issuing debenture or of receiving deposits, Clause (va) to Section 2(5B), in our opinion, would not be applicable. It is to be restricted to those, companies which are basically or practically finance companies, to those who receive deposits as a business activity to financing others or to granting loans and advances in order to earn income from such deposits as a business activity.
12. If we carefully note the term used in Clause (vi), i.e. “two or more classes of business referred to in the preceding sub-clauses”, which includes Sub-clause (va) as well and read the provision of Clause (va) as covering a company irrespective of the fact whether it carries on the activity of receiving deposits as part of its business, it would make Clause (vi) unworkable. In other words, if Clause (va) does not talk of a business, then how Clause (vi) can include the activity of Clause (va) in its ambit, the activity being not carried on exclusively or almost exclusively as the business. In our opinion, therefore, the various enumerations of business in other clauses of Section 2(5B), and more particularly Clause (vi) gives an indication of a proposition that there must be business of receiving deposits under a scheme or arrangement referred to in Clause (va).
13. As Clause (va) to Section 2(5B) was inserted by Finance Act, 1992 w.e.f. 1st April, 1993 and a reference to the RBI’s guidelines has been made by the Finance Minister and in the Memorandum explaining the budget, let us understand the meaning of the term ‘finance company’ as understood by RBI or its meaning given in. RBI Act, 1934, Section 45-I(c) defines it as under;
“(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, any activity other than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by 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;
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or 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 hereto;
(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 –
(i) is an industrial concern as defined in Clause (c) of Section 2 of the Industrial Development Bank of India Act, 1964, or
(ii) carries on as its principal business,–
(a) agricultural operations; or
(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 or immovable property by other persons;”
[Emphasis, italicised in print, supplied by us]
Clause (vi) has been bodily lifted and placed in Clause (va) of the Interest-tax Act. Mark the underlined words (italicised in print) “institution which carries on as its business or part of its business”. So construed contextually, the assessee though received deposit or might have received deposit under a scheme or arrangement by way of contribution by the pubic to its debentures would not be a ‘residuary non-banking company’ and, consequently, would not be subjected to charge under the Interest-tax Act; the issue of debenture or the receipt of deposit by way of contribution to debentures is not being part of its business. The assessees in the present appeals, as aforesaid, are sugar manufacturing company, engaged in manufacturing bearings, textile machinery or other engineering goods, etc. Some of them are carrying on the activity of agriculture. That it is almost an admitted fact that none of these companies are carrying on the business of receiving deposits by issue or subscription to debentures or of receiving of deposits from the employees. They have raised loans by issuing’ debentures or by accepting the deposits from the employees for the use of the money for carrying on their sugar or other goods manufacturing business or to carry on the activities of agricultural operations.
14. In the Revenue’s appeals in Interest-tax Appeal Nos. 23 to 25/Cal/1999 and 13/Cal/2000 in the case of Nilgiri Plantations Ltd., the CIT(A) had granted relief to the assessee on the ground that the agricultural profit was much more than that the other income and on the basis of this criterian the investment in shares or advancing loans could not be termed as assessee’s principal business. He further held that assets held in agricultural activities were much more than those relating to non-agricultural activities could not be treated as principal business. Therefore, the assessee did not fulfil the conditions for being an investment company or a loan company as defined in Clauses (ii) and (iv) of Section 2(5B) of the Interest-tax Act. In other words, the assessee could not be treated as a financial company so that the assessee could not be treated as a financial company so that the assessee could not come under the purview of Interest-tax Act, 1974.
15. Agreeing with the CIT(A), on this ground as well, we hold that the assessee is not a financial company under Sub-section (5B) and, accordingly, not a credit institute within the meaning of Section 2(5B) and, consequently, the charging provision of Section 4 would not be applicable.
16. In the result, the Departmental appeals are dismissed and the assessee’s appeals are allowed.